Refinancing a mortgage loan isn't free: It could cost you thousands of dollars in closing costs. Refinance costs vary by state, but you can follow some guidelines to determine if your lender's closing costs are reasonable -- or a rip-off.
Average Closing Costs
The Federal Reserve Board says that the cost to refinance a mortgage loan should range from 3 percent to 6 percent of your loan's outstanding balance. If you're refinancing a mortgage loan on which you owe $200,000, then, your refinance should cost from $6,000 to $12,000.
Your lender will charge several fees to close your refinance. These could include an application fee, a fee for appraising your home, a charge for running your credit score and a loan origination fee. You'll also have to pay for a title search and title insurance.
Is it Worth it?
Determine if a refinance is worth the costs. If you're refinancing a 30-year fixed-rate loan of $200,000 from an interest rate of 7 percent to one of 4 percent, your estimated monthly mortgage payment would fall from $1,330 to $954. That's a savings of $376 a month or $4,512 a year. If your refinance cost $6,000, you'd be able to pay back the refinancing fees in less than two years. But if you refinance that same loan from an interest rate of 7 percent to one of 6 percent, your monthly payment will fall by only $131. That's a yearly savings of $1,572. At this level of savings, it would take you slightly less than four years to pay back your refinancing costs.
Because you're under no obligation to work with your current lender, it makes sense to shop around. You can refinance with any lender licensed to do business in your state. Ask lenders what estimated fees and rates they'd offer you. Be prepared, though, to let these lenders check your credit score. You'll also have to provide them with estimates of your gross monthly income and monthly debts if you want to receive accurate quotes on their fees and interest rates.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.