Refinancing your home can save you thousands of dollars per year! When you extrapolate that savings over the lifetime of your loan, it’s no secret why refinancing seems like an attractive option for millions of homeowners.
However, it’s important to note refinancing your mortgage comes with fees. Before you decide if refinancing is right for you, be sure to do all the math on the various fees associated with refinancing.
Mortgage Refinance Fees
Mortgage refinance fees cover a wide range of expenses associated with refinancing your loan. Some of the most common fees are:
The Appraisal Fee
Before a bank is willing to lend you money, or refinance your existing loan, they want to be sure the property is actually worth the money you’re asking for. If the property does not appraise for the loan value you’re requesting, you may have to make a larger down payment and bridge the gap between the appraised value and requested loan value. These fees range from $300 on the lower end to $700+ on the high end.
Credit Report Fees
All lenders will want to check your credit score and credit history before they agree to lend you money. Banks will send your information to a big credit report agency, who will do a deep dive into your credit score. This fee is typically between $30 and $50.
A home inspection is designed to identify anything that could be wrong with the home. Home inspectors will check the condition of the roof, exposed plumbing, appliances, heating and cooling systems, and the foundation. They’ll also make sure none of the windows are broken, the doors are all functioning and undamaged, and the carpet or hardwood floors are in good condition.
Banks do not want to lend money to a house that’s falling apart, and an unbiased professional home inspector will complete a review accordingly. The size of your home will influence what your inspection fee is, but expect to pay between $300 and $500.
Although this fee is not applicable to all vendors, some banks or lenders do have an application fee. Before you can even begin the refinancing process, the application fee must be paid. On average this is between $75 - $200.
This fee is what a lender charges to properly set up the loan. These fees are negotiable, and on average range from 0.50 - 1.5% of the total loan value. For example, if your loan is for $300,000, expect to pay anywhere between $1,500 and $4,500.
Considering how important a mortgage is, and the various legal jargon found within your loan paperwork, working with an attorney is always a smart idea. Each attorney or law office has their own fees, but it’s common for these fees to cost between $500 and $1,000.
Should You Refinance?
Refinancing your mortgage has a tremendous amount of benefits. Now more than ever (February 2021), is a great time to refinance!
There are an endless number of reasons why someone may consider refinancing, but these reasons certainly make the top of any list.
Refinance your mortgage to receive a lower interest rate. Due to COVID-19, the government slashed the interest rates on mortgages. The current interest rate is 2.74%, whereas the January 2020 rate was 3.62% and the rate in January of 2019 was 4.46%! The lower your interest rate is, the less money you’ll pay each month. Cutting your interest rate by 100 basis points can save you tens of thousands of dollars over the lifetime of your mortgage!
Changing the terms and conditions of the loan. Perhaps you were a first time homebuyer and purchased a home via an FHA mortgage. These mortgages could be a great option for those just starting out, or for your first home, but as you become more financially established, you may be interested in converting your mortgage to a conventional loan to avoid making private mortgage insurance (PMI) payments. Similar to the above, changing your loan terms and conditions has the potential to save you thousands of dollars!
You need the money to pay for a major life expense. You may be looking to send your kids to college, or even remodeling your home. No doubt, both of these can be expensive. You can convert the equity you have in your home to cash through refinancing - which can help you achieve the other life goals/desires you want to achieve.
How to Lower Your Refinance Fees
Understandably, the fee list outlined above may seem intimidating, but there are ways to lower your refinance fees.
The best way to lower your refinancing fees is to shop around for the most competitive rate possible. The borrower has the right and freedom to secure financing from a lender of their choice. Be sure to work with a lender who provides the most competitive package, taking interest rates, customer service, and refinance fees into consideration.
Some lenders also have lender specific fees. As the borrower, give the lender pushback to get a lower fee. For instance, if the lender is charging an application fee, ask for that fee to be waived. You’d be surprised what someone is willing to give just to earn your business.
Consult Mortgage Professionals
Considering a mortgage is likely the largest financial obligation one will have over their life, you must be very careful and aware of what you’re getting yourself into. Refinancing can save you money if done properly, but it can also go against your financial best interest.
Some folks choose to refinance their mortgage as a way of financing other life expenses. Although this can be a huge advantage, it can also be a huge disadvantage if you truly can’t afford those other life expenses. Just because the equity is in your home doesn’t mean you need to cash it in!
If your existing interest rate on your mortgage is less than the refinanced interest rate, it may not be in your best interest to refinance your loan. Interest is a meaningful expense, and spread out over the loans term, an increase of just $50 - $100 a month can be a significant expense.
Last but not least, if you’re refinancing your loan to save money each month, consider how long you plan on staying in your home for. If your current mortgage is $2000/month, and your new mortgage under a new interest rate is $1850 a month, you may be excited thinking you can save $150 a month. However, you must keep in mind the fees associated with refinancing. If you paid $5,000 in refinancing fees, it would take you just about three years to recoup that money ($5,000 / $150 = 33.33 months). Not to mention that $5,000 could have earned interest over the years, so there is also a lost opportunity expense worth considering.
This page last updated: March 21, 2022