Understanding Mortgage Refinance Closing Costs
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Ready to replace your existing mortgage with a better one? You’ll need to look beyond the potential of a lower interest rate and monthly payment. Make sure you pay attention to your estimated refinance closing costs.
What are mortgage refinance closing costs?
You already qualified for at least one mortgage when you originally bought your home, so you’re likely familiar with closing costs. These are the expenses you pay to borrow money for your home purchase or refinance. Mortgage refinance closing costs include many of the same fees you paid when you closed on your first mortgage.
There isn’t a standard method to calculate refi closing costs; the amount you’ll pay depends on your lender and location. One of the best ways to get an idea of how much you might pay is to use a reliable refinance calculator. You’ll get an idea of what a refinance can cost you, plus your break-even point — the amount of time it could take you to recoup those costs.
How much are refinance closing costs?
Mortgage refinance closing costs typically range from 2% to 6% of your loan amount, depending on your loan size. National average closing costs for a refinance are $5,749 including taxes and $3,339 without taxes, according to 2019 data from ClosingCorp, a real estate data and technology firm.
Several factors determine how much you can expect to pay in refinance closing costs. For example, property taxes will vary depending on where you live and influence your closing costs amount. Additionally, your credit score, home equity amount, loan term and mortgage type will also affect what you pay.
Here is a breakdown of the typical refinance closing costs you’ll likely pay:
Common mortgage refinance closing costs
|Refinance cost||How much?|
|Loan application fee||$75 to $500|
|Loan origination/underwriting fee||0% to 1.5% of loan amount|
|Home appraisal||$300 to $400|
|Credit report fee||$30 to $50|
|Title search/insurance fee||$400 to $900|
|Mortgage points||1% of loan amount per point|
|Settlement fee||$500 to $1,000|
- Loan application fee. Lenders may charge this fee to start the mortgage application process. The actual fee amount varies by lender, and some banks require you to pay it upfront. Some lenders will waive the fee once the loan process is complete. Most lenders, however, won’t refund the fee if they reject your application.
- Loan origination/underwriting fee. The loan origination process costs lenders money, so think of the fee as your way of telling the bank you intend to proceed with the process. Lenders charge this fee to originate the loan and assess your ability to repay it.
- Home appraisal. Many lenders order a home appraisal whether you’re purchasing a home or refinancing an existing mortgage. Banks can’t determine how much you can borrow until they know your home’s true market value. In some cases, however, you may not need an appraisal for your refinance.
- Credit report fee. It costs money to pull a copy of your credit report and scores, and lenders want to see it before they proceed with your application. Lenders pull several different versions of your credit report, so prices will vary. They often use FICO credit scores.
- Title search/insurance fee. All lenders require title insurance, which covers any ownership issues that might arise on your property’s title during your loan term. Because you’re refinancing your original loan, you’ve already bought a lender’s policy. Once you’ve refinanced your mortgage, the original lender’s policy is no longer valid and you must buy a new one. If you bought an owner’s policy, though, that remains in effect.
- Mortgage points. Also known as discount points, you pay mortgage points to your lender at closing for a reduced mortgage interest rate. Each point equals 1% of the loan amount and can lower your interest rate by as much as 0.25%. For example, if you buy one point on a $100,000 mortgage, it will cost you an additional $1,000 to get a lower interest rate. If you were originally quoted a 3.75% rate on that loan and bought a point to get your rate down to 3.50%, you could save more than $5,000 in interest over the life of a 30-year loan term.
- Settlement fee. You’ll need a professional to oversee the closing process and ensure all your paperwork is properly signed. This person may be a title agent or, if your state requires it, a real estate attorney, and they collect a fee for their closing services.
You may pay additional fees, depending on where you live and which lender you choose. Your lender might require you to pay additional property taxes if you no longer have an escrow account. You also might also encounter smaller fees that can really add up, such as courier, recording, rate lock or prepaid interest charges.
New Fannie Mae and Freddie Mac refinancing fee
Fannie Mae and Freddie Mac are imposing an “adverse market refinance fee” for conventional loan refinances that conform to their guidelines. The fee applies to rate-and-term and cash-out refinances that close on or after Dec. 1, 2020. It’s equal to 0.5% of the loan amount and may cost the average borrower about $1,400.
7 ways to reduce your refinance closing costs
Closing costs can determine whether it makes financial sense for you to replace your existing home loan with a new one. With so much money at stake, it helps to find ways to reduce your costs. Here are some tips to help you get started.
- Get your assets, credit and income in the best possible shape. Boost your savings to show your lender you’re able to withstand a rainy day. Aim for a 740 credit score or higher to get your best refinance rate, and keep your debt-to-income ratio below 43% to reduce your riskiness as a borrower.
- Shop around with multiple lenders. Before you decide to just refinance with your current lender, take a look at the competition and get two to three additional refinance quotes.
- Negotiate lender fees. Ask for certain fees to be reduced or waived, especially if you have a strong credit profile and substantial equity in your home.
- Review your loan estimate. Go over your loan estimate with a fine-tooth comb and ask for clarification about any costs you’re not clear on. You should also take advantage of comparison-shopping for the services you’re allowed to shop for, which can be found on Page 2 of the loan estimate.
- Try for an appraisal waiver. Ask your lender if you qualify for an appraisal waiver. If so, you can save a couple hundred dollars on your refi.
- Work with the same title insurance company. You can save money on the lender’s title insurance policy by asking for a reissue rate, a discounted policy amount you can get for working with the same title insurance company used for the original loan.
- Avoid paying mortgage points. There’s no need to pay thousands for mortgage points if you’re already satisfied with your refinance rate.
What about no-closing cost refinances?
You may be enticed by a lender or two offering you a new loan with no refinance closing costs. While a no-closing cost refinance can appear to save you a chunk of money on the front end, you actually pay for it over the life of your loan.
Mortgage lenders don’t just give money away; a no-closing cost refi simply means your lender will charge you a higher interest rate or add the closing costs to your new loan amount. If you’re refinancing to lower your monthly payments and reduce your interest expense, a no-closing cost loan might defeat the purpose.