The Hidden Costs of Refinancing

These are the fees and factors to consider when deciding whether to refinance your mortgage.

Refinancing a home sounds easy, right? Just fill out some paperwork and you’ll lower your interest rate by 1% or more.

Not so fast. There are some hidden costs associated with getting a new mortgage — any new mortgage — and if you’re unaware of these costs, you may your heart set on finding a vacation home for sale in Key West, FL and be surprised by the expense of your mortgage refinance.

Getting a loan at a significantly lower interest rate can justify these costs, but heed the following advice — and measure the true impact a mortgage refinance can have on your bank account — to help you decide whether refinancing your mortgage is worthwhile.

1. Mortgage application fee

This is the fee you pay to apply for a new mortgage. (When you refinance, you close out your current mortgage and open a new mortgage.) The application fee tends to hover around $250 to $500.

2. Appraisal report

Most lenders will require a house appraisal to determine whether it has enough value (and you have enough equity) to qualify for the new mortgage loan. This appraisal can cost anywhere from $300 to $600, and the outcome of the appraisal can determine whether it’s smart to refinance. If an appraisal finds that your home value dropped and the ratio of your loan-to-value is higher than your lender allows (typically 80%), you may have to put down cash to make up for it, or buy mortgage insurance.

3. Loan origination fee

The loan origination fee is typically about 1% of the total value of your loan. If you refinance a principal balance of $200,000, for example, your origination fee will be around $2,000. There is a little wiggle room to negotiate in your Good Faith Estimate, a form that gives you a reasonable estimate of the loan terms and the settlement charges.

4. Document preparation fee

Many lenders will charge you a document preparation fee that typically ranges from $200 to $500.

5. Flood certification

You may need to pay $50 to $150 for flood certification, which is mandatory in some areas.