Can You Refinance a Mortgage for Free?

Refinancing a mortgage involves getting a new home loan. You'll use the money from your new lender to pay off your existing mortgage loan provider. The purpose of doing this is usually to get a better rate and terms from the new lender. For example, you might decide to refinance if you can reduce the interest rate you're paying or if you want to convert an adjustable rate mortgage (ARM) into a fixed rate mortgage.

The big question, though, is whether there is a cost to refinancing or whether you can do it for free. Here's what you need to know to answer that question and make an informed choice about whether to refinance.

There are always closing expenses when you refinance a mortgage

The first thing that you need to know is that there are upfront expenses that are associated with a mortgage refinance. Mortgage closing costs for a refinance loan include:

• Loan application fees
• Loan origination fees
• Credit checks
• Appraisal costs for a professional appraiser to determine the value of the home
• A survey required for your lender to ensure there are no boundary disputes or encroachments
• Title insurance to protect against competing ownership claims
• Flood certification

These costs typically add up to around 2% to 6% of the loan amount.

You'll either pay these expenses upfront or over time in one of two ways

Often, paying closing costs for a refinance loan out of your checking account can get really expensive. In fact, having to pay these costs could make it difficult to afford to refinance. That's why a lot of lenders offer so-called "no-closing-cost" refinance loans.

Here's the problem, though: All those costs mentioned above -- they don't just disappear. You still have to pay them somehow. And usually, this happens in one of two ways:

• Your lender raises your interest rate a little bit
• Your lender adds the amount of the closing costs onto the refinance loan. So if you were borrowing $200,000 to repay your mortgage and owed $6,000 in closing costs, your lender would give you a $206,000 loan.

While this makes it seem cheaper upfront, or even free, to refinance, it's really not. It can cost you more in the end.

Say, for example, you financed $6,000 over 30 years at 7.00% (which is effectively what you're doing if your lender takes $6,000 onto your 30-year refinance loan that you get at a 7% mortgage rate.) Over time, that $6,000 would end up costing you $14,370.53, including $8,370.53 in total interest costs. The extra borrowing could also add $39.92 to your monthly loan payments. That means not only was your refinance loan not "free," but the closing costs of the loan would end up being almost $15,000!

Now, to be clear, there's nothing wrong with refinancing. If you can lower your mortgage rate by a good amount (around 1.00% or more) and you plan to keep your house for a while, you can end up paying less in total over time. But you should be aware that refinancing isn't free and it's often better to try to pay closing costs upfront if at all possible to maximize the savings your refinance can provide you.