At first glance, refinancing your mortgage to take advantage of lower interest rates might seem like a no-brainer with little or no downside. It’s important, though, to consider closing costs, which can vary greatly depending on factors like your lender, where you live and your creditworthiness. In some cases, your total closing costs could outweigh the benefits of a new loan. Closing costs usually average between 2% and 5% of the purchase price of your home, which means that for a $300,000 home, the closing costs might range from $6,000 to $15,000. So whether you’re refinancing for a lower monthly payment or to pay off your loan earlier, closing costs can make the difference between a smart and a not-so-smart move.
Calculate your mortgage refinance costs
Lenders are required to provide a loan estimate that includes a detailed accounting of closing costs soon after you apply. You can check out a sample loan estimate from the Consumer Financial Protection Bureau. But before you take major steps toward a refinance, use a refinance calculator to get an idea of what your closing costs will be.
The calculator takes into account the current terms of your loan and compares that to the potential new terms of your mortgage, including how long the mortgage would last, the new interest rate and how long you plan on staying in your home. If you’re going from a 30-year fixed mortgage to a 15-year-fixed mortgage, for example, your monthly payments will almost certainly increase, but you will pay less interest over time.
Common closing cost fees
Closing costs is a blanket term that includes everything from what you pay a lawyer, to title insurance and lender’s fees. Remember that closing costs will vary depending on lender and region. Here’s a look at some of the common fees involved.
Origination fee: 0% to 1.5% of the loan amount
An origination fee is charged by the lender to cover the cost of evaluating your application and processing your loan. Some lenders will waive this fee at the end of the process. Don’t expect to get your money back if your application is rejected.
Underwriting fee: 1% of the loan
Sometimes the underwriting fee is combined with the origination fee. This is a fee the lender charges to have your ability to repay a mortgage assessed by a mortgage underwriter.
Appraisal fee: $300 to $500 for a single-family home; $600 or more for a multi-family home
Even though your home was appraised for your original mortgage, most lenders will require another appraisal to ascertain your home’s current market value.
Title insurance: Roughly $1,000 depending on location
Lenders require title insurance, which covers any issues that could arise during the length of your loan. Lender’s title insurance and owner’s title insurance protect each party in case claims are made after closing. Since you have an existing mortgage, you’ve already paid for a lender’s and owner’s policy, but after a refinance, the original lender’s policy is no longer valid and you must buy a new one.
Credit report fee: $30 to $100
Lenders will pull a copy of your credit report to check your credit score and history, and they will likely pass along the cost of the report to you.
Discount points: 1% of loan amount for every $100,000
Something of a misnomer, discount points actually involve paying more at closing to secure a lower interest rate. Buying two points on a $100,000 refinance, for example, will add $2,000 to closing costs. Generally speaking, this is only considered a wise move if you plan to own the home and keep the mortgage for 15 to 30 years.
Prepayment penalty: Usually one to six months of interest or a percentage of the remaining principal balance
Your original mortgage might have a prepayment penalty, a fee that a lender charges if you pay off the loan early. Find out if your current loan has this fee and how much it is.
Additionally, closing costs may include a variety of smaller fees like escrow fees and processing fees. Some lenders may also charge courier fees, administrative fees and lock-in fees. That’s why it’s important to get a loan estimate from your lender that spells out all your costs before you sign on the dotted line.
Ways to reduce refinance closing costs
With so much money on the line, it makes a lot of sense to try to reduce your closing costs as much as possible. Here are some tips to help you save.
Ask your lender to waive the appraisal
Both Fannie Mae and Freddie Mac have been approving no-appraisal mortgage refinances since 2017. Mostly these are for people who have a down payment of at least 20% and for homes where the companies already have an appraisal on record and have a lot of data on the local housing market. Waiving the appraisal can save you hundreds of dollars.
Ask your lender to lower or waive fees, especially ones like the origination fee or credit report fee, in exchange for your business.
Go for a reissue rate on lender’s title insurance
As mentioned above, you’ll be required to pay for lender’s title insurance as part of your refinance loan. But you don’t necessarily have to pay full price. If you buy a new lender’s policy from the company you used for the original loan, you can ask for the reissue rate — a discount that could save as much as 50%. Some restrictions apply, but be sure to ask your lender if you qualify.
Look for the best available deal
Like the song says, “You better shop around.” Get loan estimates from at least three lenders. The estimate should show all the fees you’ll have to pay, and it should allow you to compare costs.
Finally, keep in mind that you might be able to arrange for the lender to cover some or all of the closing costs by including them in the loan. You’ll probably have to pay a higher interest rate, which might run counter to your refinancing goal. It’s worth considering, though, especially if you’re short on upfront cash.
Be wary of “no closing cost” refinances
Who doesn’t like the sound of “no closing costs”? Just remember that most lenders are for-profit, so they’re not give away money for free.
Here they’re offering a way for you to avoid having to pay closing costs upfront, but only at the cost of increasing your interest rate — and possibly making you pay more in the long run. If you’re refinancing to lower your monthly payments or cut down on the amount of interest you’ll pay over the life of your loan, this probably doesn’t make sense.
The Federal Reserve raised interest rates four times in 2018, and has plans for at least two more raises in 2019. While those rates are not for consumer lending, many lenders raise their rates to match. With interest rates rising, it’s even more important to pay close attention to closing costs. Both will impact the overall cost of your refinance.
When you receive a loan estimate from a lender, don’t just give it a quick once-over. Go deep into the document until you understand your closing costs completely. And don’t feel you have to pay whatever the lender asks. Some costs aren’t negotiable but others are. It can be well worth your while to drive hard for a bargain.
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