Closing costs are key parts of refinancing a home. The closing costs generally include appraisal fees, credit fees, lender fees, discount points, taxes and insurance, and escrow and title fees. Understanding those costs and factoring them into your decision will enable you to know if refinancing will be truly profitable or advantageous to you. If you do not factor in all the possible costs before you make a decision to refinance, you may end up paying more for your home by refinancing, even if you may be getting a lower interest rate.
Refinancing your home is a decision based on multiple factors and for multiple reasons. You could choose this option to get a better interest rate, change your loan term or lower your monthly mortgage payments. Or you can take out a loan to pay off your existing mortgage and pocket the difference between the new loan and the balance owed to consolidate date, make home improvements or cover other expenses.
Either way, there are fees and costs associated with refinancing a mortgage.
Closing Costs and Other Costs Definitions
To help you understand all the various fees, we have provided simple definitions for each of them below:
- Application fee: You may be responsible for this fee even if your loan is denied. The average cost is $75-$300.
- Loan origination fee: Charged by the lender for your refinanced (new) loan. Usually, 0-1.5% of the loan amount.
- Appraisal fee: This fee is charged to determine the current value of your home. Depending on your area, you cannot get a loan for more than the appraised amount—usually $400-$700. You can generally keep a copy of the appraisal; just ask your lender.
- Inspection fee(s): Depending on your location, you may be required to have a termite inspection, mold inspection, structural integrity inspection, and so forth. These inspections will range anywhere from $200 to $500 each.
- Closing fees/attorney review: Depending on where you live, either an attorney or a title agency will be required to review all the documents and confirm they are legally prepared. Anticipate 500 to $1000.
- Prepayment penalty: Depending on the terms of your original mortgage, you may have a prepayment penalty due, which can be as much as six months’ worth of interest payments.
- Points: This is an optional fee paid to a lender in order to reduce the interest rate over the life of the loan.
- Credit reporting fees: Your credit profile and score play an important role in the interest rates and loan terms you’ll receive. Lenders will charge a fee to pull your credit report, typically between $25 and $50.
- Tax service fee: You’ll also pay a fee to a tax service provider who confirms that property taxes on the property have been paid. Expect to fork over between $50 and $100 for this service.
- Surveying fees: The lender may require a land survey to verify the property lines. It’s not required for all mortgage transactions, though, and the fee varies significantly.
- Title search and insurance fees: The lender needs a title to confirm legal ownership of the property. In many instances, a title insurer is also involved in providing title insurance. You’ll likely pay between $75 and $100 for the title search and a few hundred dollars for title insurance.
- Flood certification fees: Lenders also require a flood certification fee to determine if the property is in a flood zone. Most borrowers pay up to $50 for this assessment.
On average, closing costs total up to 3% to 6% of your outstanding principal. So, if you take out a $350,000 mortgage, expect to pay between $10,500 and $21,000. If you’re limited on funds, it’s worth exploring no closing cost refinances, which can save upfront fees, though they might involve higher interest rates over the life of your loan. More on this shortly.
Why Refinance in Spite of the Closing Costs?
Simply put, it can be a solid financial decision. In fact, if you have enough equity in your home, you can even use the equity to pay off all the closing costs. In addition, drops in interest rates can reduce your monthly payments substantially or reduce the amount you pay for your home over the course of the loan. You may want to move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. You may want to change the length of your loan, either decreasing the time to pay off or increasing the length to reduce the monthly debt. It’s essential to understand the equity you have in your home and find out if it can easily cover your closing cost when refinancing.
The Mortgage Refinance Closing Process
Here’s an overview of what to expect when you refinance your mortgage:
- Application and approval: The first step is submitting your mortgage refinancing application. The lender will review it along with your credit report and score, financials, property value and home equity to make a lending decision.
- Loan estimate: You should receive a loan estimate within three business days. This document outlines your loan terms, projected monthly mortgage payment and closing costs.
- Rate lock: Although it’s not mandatory, consider a rate lock to protect your interest rate against sudden hikes. Otherwise, you could incur steep borrowing costs when refinancing your home.
- Underwriting: Before the lender issues the final approval or “clear to close,” your file goes through underwriting. It involves the underwriter verifying your information to ensure you’re a good fit for financing.
- Closing disclosure: Once you have the green light to close, the next step is to schedule the actual closing. Three business days prior to this date, you’ll get a closing disclosure. Compare it against the initial loan estimate you received.
- Closing day: The final step is to review the new mortgage documents and sign on the dotted lines. Be sure to bring a valid form of identification to the closing and remit the funds needed to seal the deal (if applicable). For the latter, the title company handling the closing typically provides instructions on how to send funds a few days prior to closing.
Is There a Way to Avoid Closing Costs When Refinancing?
You may be able to steer clear of closing costs during a mortgage refinance using these strategies:
- Opt for a no-closing cost refinance: The closing costs are added to your loan balance, which slightly increases your monthly payments and the total amount repaid over the life of the loan. Or you can accept a higher interest rate in exchange for the lender covering the closing fees.
- Inquire about lender credits: Some lenders may offer a credit to cover your closing costs in return for a higher interest rate. Keep in mind that this translates to higher monthly repayments and more interest paid over time.
- Negotiate with the lender: The lender may be willing to reduce or cut some of the fees. This is especially true if you have a solid payment history or a sizable amount of equity in your home.
How to Lower Refinance Closing Costs
There are also a few key ways to lower mortgage refinance closing costs.
Improve Your Credit Score
A higher credit score often means better loan terms, including lower interest rates. Before refinancing, check your credit report for errors, file disputes if needed and focus on reducing balances on revolving debt (i.e., credit cards, lines of credit) to improve your score.
Negotiate with Your Lenders
Don’t accept initial closing cost quotes, as you have the power to negotiate with lenders to reduce or waive certain fees. Obtain multiple quotes and use competitive offers to leverage negotiations. Doing so could potentially save you thousands in closing costs.
Roll Closing Costs into Your Loan
If out-of-pocket expenses are a concern, consider rolling a portion of your closing costs into the loan balance. This means you’ll pay less upfront in exchange for a higher loan.
Opt for a ‘No-Closing Cost’ Loan
As previously mentioned, some lenders offer ‘no-closing cost’ refinances, which means you won’t have to pay upfront fees. However, this usually involves agreeing to a higher interest rate, which means the lender is recouping the costs over the life of the loan. Always calculate whether this trade-off makes sense for your financial situation.
Common Mistakes to Avoid With Closing Costs
When refinancing your mortgage, it’s essential to be aware of common pitfalls related to closing costs.
Not Shopping Around
Don’t settle for the first refinance offer you receive. Shopping around with three or more lenders can help you find a new loan with lower refinance closing costs.
Overlooking Negotiable Fees
You can save money by negotiating negotiable fees that are part of the closing cost of a refinance. Don’t ignore the opportunity to discuss these with your lender. (Note: Some fees, including appraisal costs, flood certification fees and property taxes, are non-negotiable. Consult with the lender to learn more).
Neglecting to Compare Good Faith Estimates (GFEs)
You should compare the Good Faith Estimates (GFEs) provided by lenders you’re considering. GFEs outline the costs you can expect for your loan, including any Private Mortgage Insurance (PMI) you might have to pay.
Conclusion: Navigating Refinance Closing Costs
To wrap up, closing costs are crucial parts of refinancing, but they shouldn’t discourage you from refinancing because refinancing may still be right for you even after factoring in the closing costs. If there is enough equity at the time of refinancing, the equity can even cover the closing costs, and you can use the rest of the equity for other things, like paying off debt or investing.
Frequently Asked Questions (FAQs)
Closing costs on a refinance can be high due to various fees, such as loan origination, appraisal, title search and insurance, as well as any prepayment penalties or application fees. Local regulations and taxes can also contribute to steeper closing costs.
It depends on your financial situation. Rolling your closing costs into your refinance can decrease upfront expenses but may result in higher interest rates, which could increase your borrowing costs over the loan term.
Yes, you can negotiate some closing costs on a refinance, such as lender fees, application fees, and sometimes third-party charges, by shopping around and asking lenders to match or beat competitor’s fees or by requesting lender credit. However, not all fees are negotiable, like fixed third-party fees or governmental charges.
You can include your refinance closing costs in your loan amount, which is commonly known as a no-cost refinance. Be mindful that doing so can result in a higher loan balance and potentially a higher interest rate, which could cost more over the long term.
