Trading the mortgage you have for a new one can make sense to lock in a lower interest rate, shorten or lengthen a repayment term or switch from a variable to a fixed-rate loan.
But there’s more to refinancing than just finding a new mortgage with better terms. There are costs involved in refinancing, including the reappearance of some of the closing costs you paid when you bought your home in the first place.
Since refinancing a mortgage can cost between 2% and 6% of the loan amount, you’ll want to keep these expenses in mind before you move forward.
Mortgage refinancing requires its own set of closing costs that usually add up to 2% to 6% of the loan amount.
Jump to insightHomeowners can refinance to help lower their interest rate.
Jump to insightTo keep refinance costs at a minimum, compare rates across lenders and try to negotiate closing costs and miscellaneous fees.
Jump to insightWhat is mortgage refinancing?
Refinancing a mortgage involves paying off an existing home loan by taking out a new one. In some cases, consumers refinance in order to combine a primary mortgage with a second mortgage.
To refinance a home loan, you need to repeat many of the steps you took when applying for the original mortgage. This includes going through a credit check to ensure creditworthiness and mortgage affordability, and providing documentation like proof of identity and income.
You can refinance with the same company you borrowed from in the first place, but it’s also common to shop around for mortgage lenders with the best deal.
By the end of the mortgage refinancing process, you’ll see your old mortgage paid off and begin making payments on the new one instead.
Why refinance?
Most borrowers choose to refinance to save money. They may refinance to secure a lower interest rate, switch up their loan term or move from an adjustable rate to a fixed rate.
To get a lower interest rate
Interest rates can decrease due to economic conditions, and borrowers can take advantage of these reduced rates through refinancing. Or, if your credit has greatly improved since you first secured a mortgage, you could qualify for a lower interest rate when you refinance.
Small reductions in interest can result in big savings. For example, let’s say you locked in a rate of 6.15% on a 30-year, fixed-rate mortgage for $250,000. Your monthly payment is $1,523 (including principal and interest).
Then let's say interest rates were 5.15% when you reached 20% equity in your home and your principal balance is $200,000.
If you refinanced $200,000 at this rate and paid your closing costs separately in cash, your new payment will drop to about $1,290 on a new 30-year loan. That’s a savings of $233 a month.
To get a different loan term
You may want to refinance in order to get a longer or shorter loan term, depending on your financial goals. Many loan terms are either 15 or 30 years. You could choose to refinance to a 15-year mortgage if your income has increased and you want to pay off the loan faster. Also, 15-year rates are generally lower than 30-year rates, so you’ll save more in interest.
You may also consider refinancing to a 30-year mortgage if you want to reduce your monthly payment. This can free up cash in your budget to use elsewhere, like investing more in your retirement accounts, or you could pay off other debts, such as student loans or credit card balances.
To get a fixed rate
Refinancing can allow you to lock in a fixed rate if you currently have an adjustable-rate mortgage (ARM). ARMs have a set interest rate for a certain period of time, but after that, the interest rate could rise, which means a higher monthly payment.
For this reason, it can be more difficult to budget for a mortgage payment on an ARM. By locking in a fixed rate through refinancing, you can be sure your monthly payment won’t change over the life of the loan.
To access your equity
If you want to access funds from the equity in your home, consider a cash-out refinance. With this type of refinance, you borrow more than you owe on your existing mortgage and take the difference in cash. You can then use the money for any purpose, like renovating your home or paying off high-interest debt.
The costs of mortgage refinancing
According to several experts we spoke to, the costs involved in refinancing a mortgage typically cost around 2% to 6% of the loan amount. This means refinancing a mortgage amount of $200,000 could require you to pay fees that range from $4,000 all the way up to $12,000. According to Freddie Mac, average closing costs on a refinance work out to around $5,000.
The average closing costs on a mortgage refinance are $5,000.
Mortgage expert David A. Krebs of DAK Mortgage says major closing costs to be aware of include loan origination fees, appraisal fees, title search fees, insurance fees and credit report fees. These costs may also include mortgage points, which are “fees paid to the lender to lower the interest rate,” said Krebs.
- Loan origination fees: Krebs says these fees typically range from 0.5% to 1% of the loan amount.
- Appraisal fees: On average, appraisal fees can be around $300 to $500. For some borrowers, this may reach up to $1,000.
- Title search and insurance fees: The title search fee can range from $200 to $400, while title insurance could cost around 0.5% to 1% of the loan amount.
- Credit report fees: Credit report fees are usually around $30 to $50.
- Points: Points are fees paid to the lender to lower the interest rate. “Each point is equal to 1% of the loan amount,” explained Krebs.
Other fees that could show up in your mortgage refinance include government recording costs and various service fees that vary from loan to loan.
How to calculate your break-even point
Before refinancing a mortgage, it’s crucial to know your break-even point, which is the time it takes for your monthly savings to cover refinancing costs. Understanding this helps you decide whether refinancing makes financial sense, especially if you plan to move soon or take out a shorter-term loan.
Here’s how:
- Add up all closing costs associated with the refinance (appraisal, origination, title fees, etc.).
- Calculate your expected monthly savings from a lower interest rate or shorter loan term.
- Divide total closing costs by monthly savings to find the break-even point in months.
Suppose your refinance costs $5,000, and the lower interest rate saves you $200 per month. Your break-even point would be $5,000 divided by $200, equalling 25 months. If you plan to stay in the home longer than 25 months, refinancing could save you money. If not, the upfront costs may outweigh the benefits.
Knowing this calculation ensures you make a data-driven decision rather than relying on assumptions about potential savings.
Other costs to consider
Other costs with a mortgage refinance may be less obvious. For example, itt’s possible to get a lower payment on a mortgage but still pay more interest over the life of the loan.
As an example, imagine you have a 15-year, fixed-rate mortgage for $300,000 at 6.6%. Your monthly payment (including principal and interest) totals $2,629.84. If you refinance to lower your monthly payment and go with a 30-year, fixed-rate loan at 7.74%, your new monthly mortgage payment will drop to $2,147.16. That's a difference of $482 per month.
That said, total interest charges on the 15-year loan work out to $173,371.64, whereas refinancing to a longer 30-year mortgage with a higher interest rate leads to total interest charges of $472,979.04. Not only are you paying off a mortgage for twice as long after the refinance, but yout’re paying almost $300,000 more in interest charges.
Krebs mentions some other expenses that can catch consumers by surprise are potential prepayment penalties on the original home loan.
“Some loans have a clause that requires the borrower to pay a penalty if the mortgage is paid off before a certain date,” he said.
» MORE: Should you refinance your mortgage to pay off student loans?
Example of refinancing costs
Let’s say you have a $200,000 refinance with an average of 3% in closing costs.
“You'd be looking at approximately $6,000 in fees,” said Krebs. “This would include various costs such as the application fee, appraisal fee, title search and insurance and more.”
For this example refinance, your closing costs could look like this:
- Loan origination fee: $2,000
- Appraisal fee: $500
- Title search fee: $400
- Title insurance: $1,000
- Credit report fee: $50
- Points: $2,000
Total: $5,950
How to save on refinancing costs
There are several ways to pay less when you refinance your mortgage, and they all require some work and research upfront. Consider the following tips if you want the most affordable mortgage refinance you can get.
- Compare lenders and offers. Some lenders may offer a better deal than others. “To save on refinancing expenses, it’s a good idea to shop around and compare rates and fees from different lenders,” said Krebs.
- Negotiate with lenders. Krebs says negotiating with mortgage refinance companies to waive or reduce some fees can sometimes be successful. You can ask, and the worst they can say is no.
- Consider a “no-closing-cost refinance.” A no-closing-cost refinance typically rolls your closing costs into your new loan amount in exchange for a higher interest rate. This means you can save on out-of-pocket expenses upfront, but your total interest costs will be higher.
- Decide if you want to pay points. Paying points on your mortgage to get a lower interest rate will actually make refinancing your mortgage cost more upfront, but you’ll save money on interest over the length of your loan with the lower rate.
FAQ
How much equity do I need for a refinance?
According to TransUnion, you typically need at least 20% equity in a home to refinance. However, homeowners with a good credit score are often approved for refinancing with less home equity than that amount.
Do I lose equity with a mortgage refinance?
If you pay your mortgage closing costs separately and don't get any cash out when you refinance, you won't lose any equity in the process.
What credit score do I need for a refinance?
Most homeowners need a credit score of 620 or higher to refinance, although some government home loans that allow refinancing have lower minimum credit score requirements.
Can I refinance my mortgage with a different lender?
You can refinance your mortgage with any lender that approves you for a new loan.
Bottom line
Refinancing your mortgage can make financial sense, but you’ll want to factor in the costs of refinancing before you move forward. You may find the interest savings you get with a refinance makes paying closing costs worth the trouble, or that refinancing to a lower monthly payment is worth a longer-term investment.
Then again, refinancing costs can also eat away at your potential “gains” until there is almost nothing left. Speaking with a mortgage broker to find out potential costs for refinancing and running all the numbers is the only way to know for sure.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Britannica Money, “Mortgage refinancing: lower payments, shorter terms, or “cash-out” refi?” Accessed Nov. 13, 2025.
- Calculator.net, “Amortization Calculator.” Accessed Nov. 13, 2025.
- National Association of Realtors, “Instant Reaction: Mortgage Rates, January 26, 2023.” Accessed Nov. 13, 2025.
- Consumer Financial Protection Bureau, “What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?” Accessed Nov. 13, 2025.
- Freddie Mac, “Understanding the costs of refinancing.” Accessed Nov. 13, 2025.
- U.S. Department of Housing and Urban Development, “Streamline Your FHA Mortgage.” Accessed Nov. 13, 2025.
- Consumer Financial Protection Bureau, “What are (discount) points and lender credits and how do they work?” Accessed Nov. 13, 2025.
- Consumer Financial Protection Bureau, “What is a prepayment penalty?” Accessed Nov. 13, 2025.
- TransUnion, “How Much Equity Do I Need to Refinance?” Accessed Nov. 13, 2025.
