What does a refinance cost?

There’s no such thing as a free refinance. Just as with a purchase mortgage, you will have to pay closing costs when refinancing your home loan.

Closing costs are what you will pay to obtain your new mortgage. Keep in mind, of course, that the more it costs you to refinance, the longer it will take to recoup the closing costs, so there may be some finite limits on what you want to pay.

Three ways to pay

There are three ways to pay refinancing fees and costs:

Pay them out of pocket
Add them onto your existing mortgage balance (known as a "low cash-out" refinance)
Have your lender pay them in exchange for a slightly higher interest rate

Deciding how to pay

The method that is best for you will depend on:

How much cash you wish to spend on the transaction (if any)
Whether you have equity available to use
If your needs can handle a slightly higher interest rate
How long you expect to be in this new mortgage, and other factors

How to estimate your closing costs

While some closing costs are standard -- that is, you'll find them all over the country -- there are some that may be specific to your local market or to your state (see the section on "taxes" below). Estimating your closing costs will take a little research, but it's important to do this research because your closing costs will equal about 2 percent of your loan amount. Along with the time-frame factor (how long you plan on staying in your home), closing costs determine your savings (if any) when you refinance.

A good place to start is by reviewing your existing mortgage documents to get a sense of how much you paid in closing costs when you purchased your home. Locate your existing mortgage documents; if your existing loan was originated before October 2015, you'll find a list of actual costs you paid broken out on a form called the "HUD-1" Settlement Statement.

If your loan is more recent than that and was originated after October 2015, you'll have a more modern set of forms in your file. For mortgages a new "Loan Estimate" form replaced the old Good Faith Estimate of closing costs, and the old HUD-1 Settlement Statement has turned into a new document called the "Closing Disclosure" form.

As this list of charges is what you actually already paid to get a loan for the property you are refinancing, this will give you a good working estimate of your loan costs for the refinance, since the fees for your new loan will likely be similar.

If you can't locate your existing documents, you'll have to compare fees the old fashioned way by talking to lenders. Some lenders list basic fees along with their mortgage offers on their websites; others don't. You can always ask a lender to give you a working estimate or even a Loan Estimate, but please know that they have no obligation to do so until you actually apply for a loan -- and even then have three business days to provide it.

‘Points’: The major closing costs in a refinance

The major closing costs in obtaining any mortgage, whether a refinance or a purchase, are referred to as "points" (they are often referred to as either "discount" points or "origination" points).

A point is equal to 1 percent of the mortgage amount. One point on a $100,000 mortgage would be $1,000, for example. Discount points are simply interest that is paid up-front, and are used to lower the interest rate of the loan (Some states limit the number of discount points a lender can charge in the making of a mortgage loan, and certain federal laws can impose total fee limits, too). Most lenders offer mortgages with several combinations of points and interest rates; generally, more points means a lower interest rate, less points means a higher rate.

How many discount points you want to pay, or whether you want to pay any at all, depends upon how much cash you have available at closing, and whether you need to lower the loan's rate to make your refinance work for your purpose.

Origination points are a different matter, since they technically are a fee charged by the lender, and may have no effect whatsoever on the interest rate you can obtain. Some lenders will change an origination fee as a kind of "catch-all" for a range of common fees.

Other important refinance costs

Of course, points are only one of the costs involved with refinancing. Here are some of the other items that contribute to the cost of your refinance:

Property appraisal costs
Researching your title to the property
Title insurance
Credit checks
Attorney review fees
Home inspection
Others

If you're getting a mortgage from a new lender, you'll probably need to lay out some cash for funding escrow accounts, but this isn't a fee, it's a deposit. Plus, any funds remaining in escrow accounts managed by the old lender will of course be returned to you, usually within 60 days.

Ways to save on refinance costs

These refinance costs can easily add up to a few thousand dollars, but there may be ways you can reduce these costs.

For example, if the lender who originated your mortgage still holds it, you might be able to simply update your title insurance policy instead of taking out a new one. Or, if your original mortgage required Private Mortgage Insurance (PMI) because you put less than 20 percent down, and your new mortgage will be 80 percent or less than the appraised value, you won't need PMI coverage, saving you fees that range the equivalent of 0.25 percent to more than 1 percent of your mortgage amount each year. Shopping around and comparing offers can also help you save on these fees.

Don’t forget about taxes

One other possible cost, depending upon where you live, is taxes. Some states have surcharges known as mortgage taxes, realty transfer taxes, mortgage recording fees and others. It is very important to find out if your area is one that charges these fees since they can add as much as 2 percent or more of the mortgage amount (the equivalent of two points) to your closing costs, and significantly lengthen your cost-recovery time.

What about a "no-cost refinance"?

No-cost refinance? No matter what you've heard, there's no such thing. Every loan originated has legitimate costs that need to be paid by someone. Generally, you'll pay them, whether out-of-pocket or by using some of your home equity. However, there can be a "no-out-of-pocket-cost-refinance"; in it, you accept a slightly-higher than market interest rate and the lender pays the loan closing costs for you. Of course, that higher interest rate will mean higher total loan costs over time, so there are still closing costs... you just pay them off in interest over time.

A refinance calculator: The best place to start

The three different methods of paying refinance fees will have different total costs, both today and over your expected time horizon. To see what will work out best for your situation, plug your numbers into HSH.com’s Tri-Refi refinance calculator, which allows a side-by-side comparison to show you how paying out of pocket compares against a using larger loan balance or a higher interest rate to cover the refinance charges.

For lots more on refinancing, see HSH's wide range of articles covering virtually every aspect of mortgage refinancing.

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