How Much Does It Cost to Refinance Your Mortgage?

A mortgage refinance could help you save money in the long run and allow you to accomplish other financial goals. But before moving forward, it's important to budget for the upfront costs. Closing costs generally range from 2% to 5% of the total principal amount, while a study found that in 2023, homeowners paid $4,243 on average (excluding taxes), according to the National Association of REALTORS®. Here's a breakdown of refinancing costs so you can have a better idea of what to expect.

What is a mortgage refinance and how does it work?

A mortgage refinance involves taking out a new home loan, ideally with better terms, and using the money to pay off your current mortgage. Then you pay down the new loan over time. 

Homeowners often do this to secure a lower interest rate, adjust the loan term, or borrow a lump sum of money through a cash-out refinance. 

"It’s an opportunity to reset your financial terms and potentially save money over the life of the loan," says Dana Hendrix, the senior vice president of finance at DSLD Mortgage.

What are the typical costs to refinance a mortgage?

The closing costs you pay on a refinance are similar to the ones you paid on your initial mortgage. Some of these costs are influenced by your lender and the laws in your city or state. Here's a breakdown of what you may need to pay at closing:

What factors influence the cost of refinancing?

After applying for the refinance, your mortgage lender will give you a loan estimate that includes a list of closing costs, your interest rate and monthly payment, and other details about the loan. Some of the factors that influence your total cost of borrowing include:

• Loan size: Generally, a larger loan balance carries a larger monthly mortgage payment and higher closing costs. 
• Location: Where you live can have a big impact on your closing costs when you refinance. Property taxes, appraisal costs, and other closing expenses are all priced differently across the U.S.
• Discount points: You can choose to pay the lender a fee in exchange for a lower interest rate. The cost of each point amounts to 1% of the mortgage loan balance.
• Type of refinance: Generally, cash-out refinances come with higher interest rates compared to rate-and-term refinances because they carry more risk for the lender. You might also incur private mortgage insurance if your home equity decreases.
• Fees: Closing costs may include an application fee, appraisal fee, and title fee. Some lenders may waive or lower these fees, but they’ll also vary with every transaction and in each region.

Can I avoid closing costs when refinancing?

Yes, it's possible to avoid closing costs when refinancing. This is usually done through a "no-closing-cost" refinance, where the lender pays the closing costs on your behalf.

But "check the terms closely," says Nicole Rueth, a branch manager and senior vice president at Movement Mortgage. "Some lenders are eating the costs, but others are passing it along in higher interest rates, meaning it will cost you more in the long run." 

In another scenario, lenders may charge you for some of these fees, even when they call it a no-closing-cost refinance. For instance, you might pay third-party fees like the appraisal or title search costs. To avoid surprises at closing, "compare the offer with other lenders," Rueth says. "This helps ensure you’re truly getting the best deal."

What is the break-even point for a refinance?

The break-even point is when you recoup all of your refinance costs through your monthly savings. You start saving money beyond this point.

To calculate the break-even point, add up your total refinance costs and divide the sum by the amount you save each month. For instance, if you paid $5,000 to refinance and your new monthly payment is $200 lower than your original payment, then it will take 25 months to break even. Here's how you'd do the math:

$5,000 / $200 = 25

When is refinancing worth the cost?

Some experts say refinancing is worth the cost when you can lower your interest rate, but that rule might not work for everyone. According to data from the Federal Housing Finance Agency, about 15.8% of outstanding mortgages have an interest rate that is 6% or higher; in contrast, Freddie Mac reported the average interest rate for a 30-year fixed-rate mortgage was just under 7%. Instead, think about what you'd like to achieve by taking out a new home loan. 

"Refinancing is worth the cost when it helps you meet your financial goals," Hendrix says. "If you can lower your interest rate, reduce your monthly payment, or pay off your loan sooner, refinancing can be a smart move."

You may be eligible for lower interest rates if your financial situation has improved since you took out the initial loan, such as from an increase in your credit score or income. Or, if you initially financed your home purchase with an FHA loan, you could refinance into a conventional mortgage and avoid paying mortgage insurance premiums or other required costs.