Homeowners
What is the Cost to Refinance a Mortgage and the Break-Even Point?
June 17, 2021
With rates so low, you may have wondered what the cost to refinance your mortgage is. The answer is that every refinance is unique, depending on your credit score, your income level, and whether you have a low loan-to-value ratio. It comes down to what you qualify for and what loan options your lender has available.
So back to our question? What will refinancing cost you? That depends on your specific situation. Let's take a look at the type of fees you may incur during your refinance which can help you figure out if refinancing is right for you.
How Much Does It Cost to Refinance?
Remember what you did to get your first mortgage? Well, a refinance is similar; much of the process is the same, as well as the types of costs except inspections. Refinancing costs vary by state and of course by the lender, but they typically range from about 0% to 6% of the mortgage amount. In some cases, the lender may charge no fees and in others, there may be fees associated with the loan. In some instances, one may even choose to pay points to buy down the rate. Keep in mind, that some of these fees may be able to be negotiated with your lender.
Typical Refinance Costs |
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Loan Origination Fee |
This is the fee charged by the lender to evaluate and prepare the loan including underwriting and loan processing |
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Loan Discount Points |
A point is equal to 1% of the loan amount. You may be able to pay point(s) to reduce the interest rate of the loan |
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Appraisal Fee |
This will cover the appraisal of your home and is required by the lender to determine the value of the home |
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Inspection Fee |
A home inspection is not required everywhere, but many lenders do require them to secure the structural condition of the property. Some states require specific inspections |
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Homeowner's Insurance |
Most lenders require that a homeowner's insurance policy be in place at the time of closing. Most homeowners already have a policy, so when refinancing, the lender will only need proof of the policy |
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Title Search and Title Insurance |
A title search is done to ensure you are the rightful owner of the property to refinance. Title insurance protects you and the lender's investment in your mortgage making sure you have a clean title |
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Survey Fee |
Some lenders may require a survey fee to verify the official boundaries of the property, and improvements on the land, and to ensure that your lot has not been infringed upon by other structures |
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Prepayment Penalty |
This only applies when your current mortgage has a prepayment penalty and you pay off your existing loan too early |
What is the Break-Even Point of Your Mortgage?
A common goal of refinancing is to save money by lowering your rate and payment. You start to incur real savings from your refinance at the break-even point. Simply put, this is when your savings equal your costs (i.e., points, fees, insurance, etc.). To calculate this, first add up your total loan costs. Then figure out your monthly savings for your new refinance by subtracting this payment from your current monthly payment. Next, divide your total costs by one month's savings. This will provide you with the number of months to recoup your costs or your break-even point.
Time is essential to this calculation. For instance, how long do you plan on staying in your home? If you plan on moving before you recover your costs, then you will have to decide if a refinance makes sense for you. Or you may want to consider negotiating with your lender about refinancing options to lower your upfront costs to shorten the break-even period.
Is it worth refinancing for .5 percent?
For years, refinancing was considered to be worthwhile if you got a rate that was 1 to 2 points lower than your current rate. However, because of today's historically low rates, a half-point drop makes up a larger percentage of your existing rate, thus making it potentially worth your time. (Again, depending on if you plan to stay in your current house for the long term a refinance gives you a better interest rate and/or repayment term.)
Ready to Refinance?
Rates continue to be low. Want to see if you could benefit from a mortgage refinance? Check out our easy-to-use mortgage refinance calculator to give yourself a better idea of how refinancing could save you money over time. And if you're considering other options, a cash-out refinance also has its advantages. Ask a New American Loan Officer today about either of these options. They'll be glad to help!
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