I got an email today from a woman who has been reading recent columns about refinancing a mortgage.

She read that I paid very little to refinance and another woman paid $2,100 to refinance.

“How can this be when I paid $10,000 to refinance two years ago?” she asked.

It’s a good question because it gets to the heart of why no one seems to have the same refinance experience. There are several different choices you make that will directly affect how much you pay to refinance (or, let’s face it, finance) your mortgage. There are also several factors over which you have no (or almost no) control that will play directly into the refinancing cost.

Here are some of the factors that could affect how much you pay to refinance (or finance) your mortgage:

  • Lowering the interest rate. Dick Lepre, a mortgage broker with RPM Mortgage in San Francisco says the lower your interest rate, the more you’ll pay in closing costs. “Mortgages are a ‘you pay me now or you pay me later’ proposition,” Lepre says. What he means is if you choose to have a lower interest rate, you can pay “points” (a point is one percent of the loan amount), to buy down the interest rate. Points count as part of your closing costs, and while deductible, you have to amortize the cost over the life of the loan when you refinance. If you’re buying a home, you can deduct points in the year of purchase.
  • “No Cost” refinance. A no cost refinance means you pay very little, but instead receive a slightly higher interest rate than what is otherwise being offered to the best customers. “It is difficult for me to do a “no cost” loan if the loan amount is less than $250,000. This is because the costs get too large compared to the loan amount and the rate required to do “no cost” gets too large,” Lepre explains.
  • Not the greatest credit history or score. Today, the best interest rate and lowest closing costs are being offered to those with the highest credit scores (and best credit histories). Lenders will pull credit histories and scores from each of the three credit reporting bureaus, Experian, Equifax, and TransUnion. The middle score is the one that’s used to qualify you and if that middle score isn’t above 760 (780 in some cases), you might have higher closing costs.
  • Title insurance. Title insurance can be the single most expensive line item on the HUD-1 (the government mandated closing statement form used on most all residential loan closings), and the cost varies from state to state and even from county to county within some states. Some states have very good title insurance lobbyists and the costs are higher than in others.
  • Lender costs. Lepre says that of his refinance fees, the biggest closing costs are processing and underwriting fees and those fees charged by the escrow company (title insurance and escrow). “In our business model the processing fee covers what happens in our branch and the underwriting fee is to compensate for the overhead of running the mortgage bank,” he adds.
  • Prepaid costs. Depending on the day you close, you’ll have to prepay the interest you owe from that day (and including that day) through the end of the month. This gets tacked on to your closing costs. So, if you close on the first of the month, you’ll have 30 days of prepaid interest. If you are getting a $420,000 loan, that could be a tidy sum of money. You may also have to prefund your tax and insurance escrow (you’ll eventually get a check from your old mortgage company with whatever is left in that escrow account) and that can add to the total closing costs as well.

So how much should you pay to refinance? As little as possible.

Lepre’s “rule of thumb” is that you should refinance if you can lower your interest rate at no cost to you, even if it is just a half a percentage point.

“This may not make sense in the case of someone who is 5 years into a 15-year mortgage but it makes sense for most folks who are less than 2 years into a 30-year mortgage,” he explains.

“Once you decide to refinance, the decision about how much closing costs and points to pay is made by estimating how long you will have this loan. If rates are likely to fall again, it makes no sense to pay points. If you plan on moving in less than 5 years it makes no sense to pay points,” he adds.