How Much Does it Cost to Refinance a Mortgage Loan?

Today I’m going to discuss the question “How much does it cost to refinance a mortgage loan? “ If you’re considering today’s best refinance rates to lower your monthly payment it’s important to consider loan origination fees and closing costs when deciding If mortgage refinancing makes sense. Here are several tips before you refi to help you avoid paying unnecessary markup and junk fees when refinancing your home loan.

How Much Does It Cost to Refinance a Mortgage Loan?

The fees you pay when mortgage refinancing actually determines how good of a deal you’re getting when taking out a new home loan. The reason mortgage refinance fees are so important is that you’ll need to break even recouping your out-of-pocket expenses before benefiting from today’s best mortgage refinance rates. You can lower your payments by refinancing; however, the fees you pay can quickly turn that shiny new mortgage refinance rate into a sour deal.

Mortgage Loan Origination Fees

One of the most common mortgage mistakes is overpaying your broker’s loan origination fee. This is the fee you’re paying at closing for the broker’s (your loan originator) work arranging your mortgage refinance loan. How much should you pay for mortgage loan origination when refinancing? One percent of your home loan is a reasonable amount to pay the mortgage broker. On a $250,000 mortgage refinance loan one percent is $2,5000, representing a large chunk of your closing costs. Keep in mind that loan origination fees are negotiable and shopping around could get you a better deal. When you’re shopping for mortgage brokers it’s not uncommon to find origination fees as high as three percent; don’t fall for a broker’s sales pitch and agree to pay more than one percent.

Beware Mortgage Junk Fees

How much does it cost to refinance a mortgage loan when you factor in junk fees? More than you’ll ever want to pay. Unfortunately these unnecessary fees are common from both the broker and the lender as they’re trying to boost profits at your expense. Common junk fees include rate lock fees, processing fees, application fees, and broker courier fees. Remember you’ll need to recoup your closing costs before benefiting from your mortgage refinance rate. You can quickly calculate how long it will take you to break even by adding up all of your closing costs including the loan origination fee and dividing by the amount you’re saving each month.

Here’s an example to illustrate how to do this. Suppose you’re refinancing your home for $275,000 with a lower refinance rate of 4.5 percent. Your old mortgage payment at 6.0% was $1,650 per month. Your new payment at 4.5 percent is only $1,390 which is a savings of $260 per month. The mortgage origination fee in this case is $2,750 (assuming you’re paying one percent) plus lender closing costs of $3,500. In this example your mortgage refinance will cost you $6,250 to close, saving you $260 per month. Divide your total closing costs of $6,250 by your savings of $260 and you’ll find it’s going to take you 24 months (two years) to break even on your mortgage refi.

The Hidden Cost of Mortgage Refinancing

There are a couple of refinancing gotchas you need to know about when answering how much does it cost to refinance a mortgage loan for yourself. One applies to FHA mortgage loans. If you’re refinancing with a government FHA home loan you have to consider the cost of mortgage insurance. All FHA loans require mortgage insurance which protects the lender from certain losses if you default. Rising mortgage insurance premiums are quickly negating the benefit of low refinance rates by driving up your monthly payment. Second, you want to consider what mortgage refinancing does to your home loan’s amortization.

Mortgage loan amortization describes the process of paying down your home loan. Mortgage loans are front loaded with interest so in the early years you’ll find the majority of your payments going to interest and less to pay down the principle balance. Over time this gradually reverses and you start building equity in your home at a faster rate. The bad news is that your mortgage refinance resets the clock on your home’s amortization schedule and you’re back to stuffing money in your lender’s pockets without building much equity in your home. One way around this refinancing trap is to keep paying the same amount from before you refinanced. The difference between your old and new payment amount is to your principle balance and you’ll build equity at a faster rate.

How much does it cost to refinance a mortgage loan? The answer is different for every homeowner depending on several factors including your credit score, loan-to-value ratio and fees. I could give you a blanket amount of $4000-$6000 like many financial advisors; however, pulling numbers out of thin air isn’t very helpful at the end of the day. The short answer to the question how much does it cost to refinance a mortgage loan is it depends; however, I can show you how to pay less.