Average Cost of a Mortgage Refinance: Closing Costs and Interest Charges

The average closing cost for refinancing a mortgage in America is $4,345. These costs may vary depending on the lender and location of the mortgaged property. Additionally, the amount you borrow will impact the cost of the refinance. Refinances advertised with "no closing costs" or "no fees" often fold those charges into the interest rate, amount borrowed, or monthly payments of the new mortgage.

Average Cost of a Mortgage Refinance

To help illustrate the underlying costs associated with a refinance, we’ve itemized the most common fees below. We’ve also described a few of the costs specific to refinancing in more detail. See our article on closing costs:

The closing costs for a mortgage refinance are similar to the closing costs for a new mortgage. Estimated refinance costs exclude property taxes, mortgage insurance and homeowner’s insurance, which are typically required before purchasing a new home but may not be relevant when refinancing a property you already own.

Local Recording Fee: Local statutes require updated deeds to reflect the status of a new mortgage. This fee will vary according to the township in which your property is located.

Reconveyance Fee: The lender of the original mortgage may charge a reconveyance fee to release their interest from the property.

The following fees may be mandatory under certain circumstances but do not apply in all scenarios.

Homeowner's Insurance: You should be able to avoid paying additional costs for this if you are able to submit proof of adequate coverage on your home.

Points: These include loan-discount points and lender credit points. These reduce either the overall or upfront costs of the borrower.

Flood Certification: This is required for properties that fall within designated flood-zones, mandated by the National Flood Insurance Program. Properties that fall outside flood-zones are excluded from this charge.

Yield-Spread Premium: This applies to borrowers conducting their search through a mortgage broker, and acts as a commission for arranging the transaction.

Average Cost of Amortization

For our analysis, we evaluated the average cost of refinancing a $160,000, fixed-rate 30-year mortgage, originated in 2011 at 4.45%, at a rate of 4% today. We found that refinancing today reduces your monthly payments by $35 and results in $5,885 of savings over the life of the new loan. Assuming average closing costs of $4,345, it would take a little over ten years to recoup those fees.

While it may make sense to refinance today at 4%, this may not be the case as the years go on. Also, if you were to sell your home at an intermediary date after refinancing, the savings may be partially or entirely eliminated by transaction costs.

Closing costs are not the only cost incurred during a refinance. Depending on the purpose or timing of the refinance, interest expenses incurred during the amortization of the new loan can sometimes exceed the benefit of refinancing. These expenses should be regarded as additional charges and pose the greatest hidden cost for borrowers. When deciding whether to refinance, it’s helpful to weigh the reduction in monthly payments against the overall savings over the life of the loan.

Average Cost of Refinancing into an Adjustable Rate Mortgage (ARM)

We evaluated the average cost of refinancing a $160,000, 30-year fixed-rate mortgage, originated in 2011 at 4.45%, into a 5/1 ARM at a rate lock of 3.16%. After the five-year rate lock expires, the adjustable rate increases to the current one year Treasury Rate + a margin of 2.74% for a rate of 4.36%, which continues to increase annually by the cap rate of 2% until maxed out at the lifetime limit of 9.26% as our most aggressive assumption.

In this scenario, we found that the ~1.3% interest rate differential allows you to recoup your closing costs within four years of refinancing, making this a profitable decision in the short-run. Nonetheless, we found that the benefit from refinancing was quickly eliminated once the rate lock expired, and was actually $58,000 more expensive than the original loan if left outstanding until maturity. While this isn’t necessarily indicative of future market conditions, it illustrates the risks inherent in an adjustable rate structure. The potential costs or savings from an ARM structure rely on the movement of future interest rates, which are difficult to predict.

You may wish to refinance into an ARM if you intend to sell your home after the rate lock expires as the short-term savings from this structure are attractive, and can be amplified if rates stay low for an extended period. However, there are long-term risks to such a strategy that become magnified after the rate lock expires. It’s often difficult to forecast interest expenses when refinancing into an ARM because of the adjustable rate, which changes annually based on a margin to an index.

Average Cost of Refinancing from a 30-Year Mortgage into a 15-Year Mortgage

We evaluated the average cost of refinancing a $160,000, 30-year fixed-rate mortgage, originated in 2011 at 4.45%, into a 15-year fixed-rate mortgage at a rate of 3.26%. We found that refinancing today increases your monthly payments by $196 but reduces your overall interest expenses by over $47,000 over the life of the new mortgage, after factoring in transaction costs.

Our analysis shows that the benefit from refinancing into a shorter term is diminished from waiting. Assuming that 15-year rates stay constant, if you were to wait until 2021, then the savings from the refinance would be reduced from $47,400 to approximately $27,300. It’s important to weigh the savings from refinancing earlier against the potential savings from waiting for rates to decline.

You may choose to refinance from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage if you receive a permanent income bump and wish to achieve significant interest savings over the life of the loan. This is especially attractive in the early stages of a 30-year mortgage or if interest rates drop significantly. Refinancing into a shorter-term loan isn’t for everyone, but may prove lucrative for those who have the financial appetite for larger monthly payments.

In a normal rate environment, mortgages with shorter terms often offer lower rates than longer-term mortgages. The interest incurred on shorter terms is also lower. Therefore, the higher monthly payments of these structures can sometimes mean greater savings.

Average Cost of a Cash-Out Refinance

We evaluated the average cost of refinancing a $160,000, 30-year fixed rate mortgage, originated in 2011 at 4.45%, into a cash-out mortgage at a rate of 4.125%. We assumed that the amount borrowed for the cash-out mortgage is equivalent to the amount borrowed for the original mortgage. We found that by refinancing the remaining balance today of $142,500 and cashing out $17,500 for a combined $160,000 in new proceeds, we increase the overall interest expense for the new loan to $92,300 from $89,600, notwithstanding closing costs.

You may choose to undertake a cash-out refinance if you have large expenses that you want to fund; wish to make substantial improvements on your home; or to take advantage of current interest rates while freeing up equity. While cash-out refinances seem like an attractive hybrid solution, the "cash-out" portion of the loan will add to the interest costs of the new mortgage.

Although we found that closing costs for a cash-out refinance are similar to those for a standard refinance, interest rates for cash-out refinances are 0.12% - 0.25% higher on average, and may be even higher for lower credit scores.

A cash-out refinance is similar to a standard refinance to the extent the balance of the original mortgage is paid off. However, the new mortgage can be viewed as two portions:

Private mortgage insurance may be required if the amount borrowed exceeds 80% of the current market value of the home. This can cost between 0.05% - 1% of the loan amount per year, substantially increasing your long-term costs.

A cash-out refinance increases your monthly payments, which adds up in terms of interest and closing costs. By cashing out on existing equity, you increase the amount owed, monthly payments, and transaction costs, assuming no changes to the term of the mortgage.