Understanding Mortgage Refinance Closing Costs

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Whether you want to take cash out for one of life’s big expenses or you simply want to lower your monthly payment, there are many benefits to refinancing your mortgage. However, those benefits don’t come free. In particular, there are closing costs to consider, much like when you took out your mortgage your first time around.

“It’s not uncommon for these costs to run you 2% to 3% of your total loan value,” said Ralph DiBugnara, president of Home Qualified and vice president at Residential Home Funding Financial in New York City.

With amounts like those, it’s important to know what you’re getting into before you sign on the dotted line. To that end, we’ve created a guide on mortgage refinance closing costs. Keep reading to ensure you know what to expect.

Calculate your mortgage refinance costs

Your first step, if you’re still considering whether refinancing is the right move for you, should be to turn to a refinance calculator. This will give you a better idea of how much you could save by refinancing and where your break-even point could be.

However, a refinance calculator won’t pinpoint what your costs could be. For that, you have to talk to different lenders. When you do so, Todd Huettner, president of Huettner Capital in Denver, recommends making sure to look at the big picture, rather than just your bottom line.

“Look at the APR [annual percentage rate], but be careful. The APR assumes that you keep the loan for its entire term and it’s variable,” he warned. “It should be one tool in your toolbox rather than your entire focus.”

“Instead,” he said, “ask what the lender fees will be at a specific rate. This helps makes sure you’re comparing apples to apples.”

Once you select a lender, the final step is to receive an official estimate of your closing costs. Luckily, you should get one fairly soon after you hand in your application.

“The beauty of the way that regulations work now is that within 72 hours of receiving your application, the lender has to send out a disclosure packet, which has an estimate of all your closing costs,” explained DiBugnara.

Common closing cost fees

While every lender’s exact fee structure may be different, there are some similarities in terms of what charges you’ll see. Below is a list of common closing fees, to give you an idea of what to expect:

  • Application fee: ($75-$300) Not all lenders charge an application fee for refinancing, but for those that do, it covers the initial costs associated with processing and approving your loan request. This can include or be separate from a credit check fee.
  • Underwriting fee: ($700-$1,500) This is a flat fee that comes to the lender to cover the administrative costs associated with the loan. It can be in addition to or in place of the origination fee.
  • Origination fee: (0%-1.5% of the loan’s principal value) This fee is charged by the lender to cover the cost of evaluating different loan programs and preparing your loan.
  • Discount points: (Each point is equal to 1% of the loan’s principal value) Points are optional fees that you can pay to the lender in order to bring down your interest rate. Occasionally, lenders will also charge points in order to earn more money on the loan.
  • Appraisal fee: ($300-$700) Sometimes lenders will require an appraisal to verify that the home is worth at least as much as the loan amount. This is especially common for cash-out refinancings, where the amount of money you can borrow is directly tied to the amount of equity you have in the home.
  • Inspection fees: ($175-$350) In addition the appraisal, the lender may require other inspections such as an inspection for structural damage or wood-destroying insects, but, according to Huettner, these instances are rare.
  • Survey fee: ($150-$400) Some lenders require surveys to confirm the location of any buildings or improvements to the property. It’s done to ensure that the house and any other structures are located in the same spot where they’re legally supposed to be.
  • Homeowner’s insurance: ($300-$1,000) Lenders require homeowners to have homeowner’s insurance in place at the time of closing on the loan. The purpose of the policy is to protect the lender’s investment against physical damage such as fire, wind or vandalism. Usually homeowners already have a policy in place, so they just have to show that they have one, rather than buy another.
  • Mortgage insurance: (0.5%-2% of the loan’s principal value, depending on loan program) Depending on which loan program you use, you may be required to carry mortgage insurance, which protects the lender in case you end up defaulting on the loan.
  • Title search and insurance: ($700-$900) Lenders insist on a title search to make sure that you are the rightful owner of the property and that there are no liens or judgments against it. Title insurance, on the other hand, is there to protect against mistakes on the part of the title company.
  • Attorney review fees: ($500-$1,000) In some states, an attorney is required to preside over the closing.
  • Prepayment penalties: (One to six months’ worth of interest payments on the loan) Prepayment penalties are exactly what the name suggests. They’re fees incurred on your old mortgage because you’re paying off the loan early. Fortunately, according to Huettner, they aren’t too much of a concern anymore.

“Prepayment penalties are pretty rare these days,” he said. “Especially on a residential loan. You see them more often with investment and commercial properties.”

Ways to reduce refinance closing costs

Luckily, if you don’t have a lot of cash on hand, there are a few things that you can do to try to reduce — or restructure — closing costs so that they aren’t so big a burden. Read on below for a few ideas to help you get started.

Shop around

The best thing that you can do to save money on a refinance is to shop around.

“Every lender has different rates and a different fee structure,” explained Huettner. “You’re well within your rights to shop around and make some comparisons.”

However, as mentioned earlier, make sure you’re comparing similar products, meaning interest rates and fees, rather than just one or the other. Huettner also advises being wary of anything that looks too good to be true.

“Be careful with super-low rates,” he warned. “Most of the time, the numbers they’re showing you don’t give the full picture, and you can end up with an end product that looks a lot different.”

Stay with the same lender, who may reduce or waive fees

“Lenders can’t waive third-party fees like title insurance or the appraisal fee, but they can waive bank fees,” said DiBugnara.

If you already have an existing relationship with your lender, you may feel comfortable enough to ask them to waive some fees. However, if you do so, just be careful that the lender is not simply rolling its costs into another area of the transaction.

Waive appraisal

Though appraisals used to be a common requirement for refinances, Fannie Mae, one of the government-sponsored enterprises (GSEs) that buys loans from lenders, started offering appraisal waivers just last year.

However, in order to get one you have to meet some requirements. You must

  • Be refinancing a one-unit property
  • For limited cash-out refinances: Have up to a 90% loan-to-value (LTV) ratio on primary residences and second homes, or a 75% LTV on investment properties
  • For cash-out refinances: Have a 70% LTV for primary residences and a 60% LTV for second homes and investment properties

Ask for discount on title insurance

“Whether or not there’s flexibility will depend on the state,” said Huettner. “In some states, title companies are allowed to set their own rates and in others, there isn’t much flexibility at all.”

However, one thing you can do to save money is ask about a “reissue rate.” This discount is applicable when you take out a new lender’s policy with the same title company that you used for the original loan and it can save you as much as 50%.

Be wary of “no-closing-cost” refinances

In this case, the label “no-closing-cost” is unfortunately (and probably intentionally) misleading. Though you don’t have to bring any money to the table to cover your closing costs, that doesn’t mean that these refinances are completely without fees. The fees are just structured differently.

In this scenario, one of two things can happen. Either the money for the closing costs will be given to you in the form of a lender credit in exchange for a higher interest rate, or your closing costs will be added on to your principal loan value.

Either way, you may end up paying more over the life of the loan than you would have in the first place. With that in mind, make sure you do your homework before you agree to a no-closing-cost refinance and know exactly how much you’ll be paying long term.

The bottom line

Refinancing your mortgage can be a smart financial move, but that doesn’t mean it comes without a cost. Before you agree to any new loan, it’s crucial to do your due diligence. Shop around, ask questions of different lenders and most importantly, make absolutely sure you understand every fee that you’re being charged before you sign on the dotted line. If you do all that, you should end up with a new loan that will suit your needs for the foreseeable future.

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