Many homeowners have been refinancing their mortgage to take advantage of the historically low interest rates. Aside from getting a low-interest rate, it makes sense to refinance your mortgage if you want to adjust the length of your mortgage term, change from an adjustable-rate mortgage to a fixed-rate mortgage, or if you want to cash out your home equity. However, if this is your first time to do refinancing, you need to be aware of the typical fees associated with it. Refinancing fees could go between 3 to 6 percent of your outstanding principal in addition to any prepayment penalties or other costs for paying off any mortgages you might have.
Below is a list of the upfront typical refinancing fees and their respective average costs:
- Application ($75 to $300) – This will cover initial loan processing costs and credit report checking. You need to pay this fee regardless if your loan application is approved or denied.
- Loan origination (0% to 1.5% of loan principal) – Lenders or brokers usually charge this fee to cover the evaluation and preparation of your new mortgage.
- Points (0% to 3% of the loan principal) – You may need to pay loan discount points to reduce your loan interest rate and points to earn money on the loan. Each point is equivalent to 1 percent of your mortgage loan amount. Keep in mind that you can negotiate to lower the points charged by the lender.
- Appraisal ($300 to $700) – Lenders and brokers charge this fee to determine if your property has enough value to secure the new loan. In some situations that you have had a recent appraisal, the lender could give you the opportunity to avoid appraisal fees when refinancing your mortgage.
- Inspection(s) ($175 to $350) – Lenders charge this fee to determine the structural condition of your property. An inspection may include termite inspection, septic system and water tests, and other specific inspections that your state may require.
- Attorney review/closing ($500 to $1,000) – Lenders charge this fee to cover the attorney or the closing company responsible for closing your loan.
- Government-backed, or private, mortgage insurance – Depending on who insures your loan, you will be required to pay for insurance fees to protect the lender if you fail to repay the loan. Check out with your lender how much Mortgage Insurance Premium or Private Mortgage Insurance you have to pay as these costs vary.
- Homeowner’s insurance or sometimes called Hazard insurance ($300 to $1,000) – This will cover the insurance policy that lenders require to protect the property against any damage. As someone refinancing, you’ll just need to prove to your lender that you’re current with your policy.
- Title search and insurance ($700 to $900) – Lenders charge this title search fee to determine that you’re the true owner of the property and to find out if there are existing liens. Title insurance fee, on the other hand, protects the lender from errors in the results of the title search. You can reduce these fees by asking your current title insurance provider how much it will cost to reissue the policy when refinancing.
- Survey ($150 to $400) – Lenders require this fee to determine the exact location of your property and if there were improvements done. In some situations, survey fees could go higher if a lender requires a comprehensive survey. You may not need to pay this fee if a survey was recently done on your property.
- Prepayment penalty (1 to 6 months’ worth of interest payments) – If you have a prepayment penalty on your current mortgage, you’ll need to settle this fee if you will refinance with another lender. Typically, you don’t have a prepayment penalty if your loan is insured or guaranteed by either the FHA, VA, or USDA. Moreover, some states even prohibit prepayment penalty fees.
Be cautious when a lender offers “no-cost” refinancing
Some lenders may use the term “no-cost” as a marketing strategy to encourage you to refinance your loan. “No-cost” means you don’t have to pay upfront fees when you refinance your loan, and the lender will either charge you a higher loan interest rate or it will just be added to your principal instead. So, you may not pay the upfront cost, but you might end up paying more as you repay the new loan. If you’re considering this option, it is often a good idea to ask the lender for all the fees associated with the “no-cost” refinancing before you move forward with your application.
Final thoughts about upfront refinancing costs
There are fees that you need to pay upfront if you plan to refinance your mortgage. Refinancing fees are likely the same when taking a mortgage to buy a home.