Mortgage refinance closing costs usually add up to thousands of dollars. So how much might you pay, and for what? And can you reduce your costs – or even dodge them altogether? Read on to find out.
"No Closing Cost Refinance"
Although it's not possible to claim nobody has ever completely avoided these costs, it's rumored that the last person to do so traveled to their closing in a golden coach pulled by four matched unicorns. No matter what ads and salespeople tell you, you can be virtually certain you're going to pay in the end.
Companies promising you won't pay closing costs actually mean you won't pay them upfront. But you're almost bound to be charged a higher refinance rate than the one you could have gotten if you'd settled those costs on closing. So you're going to pay in the end.
There's nothing wrong with that if you're low on cash and would otherwise struggle to go ahead with your refinance. But be aware you'll be paying for the privilege for years – maybe three decades – to come.
Use the LendingTree refinance calculator to see how much extra your higher rate means you'll be paying each month, and multiply that amount by the number of months you think your new mortgage might last before you move or refinance again. If you won't be staying in your home more than a few years, the "no cost" option might actually save you money, but beyond that it's likely to be more expensive. Learn more at No Closing Cost Refinance.
What Do Mortgage Refinance Closing Costs Cover?
These costs fall into four broad categories:
- Origination fees – What your lender charges for the processing of your loan application. This can include your broker's compensation.
- Settlement services – These are fees paid out to third parties for services such as the title search and insurance, appraisal, credit checks and legal filings. You may also be liable for taxes on your purchase.
- Interest prepayment – Suppose, for example, you close on the third day of the month, and there are 27 or 28 days to go before the end of the month. You lender might want interest to cover those days.
- Escrow payments for future property taxes and insurance premiums – Not everyone has to pay these, but your lender can insist you do.
In addition, you may, if you wish, purchase "discount points," which involves making an upfront payment on closing to purchase a slightly lower refinance rate.
How Much Are We Talking About?
If you haven't gone with a "no-cost" option, the costs you're likely to face will largely depend on the size of your loan. Estimates vary, but one commonly quoted figure is 3 percent of the amount you're borrowing. However, one survey conducted in mid-2016 found the nationwide average then was $2,128 on a $200,000 mortgage, which is barely more than 1 percent. But that excluded many variable costs, including title search and insurance, taxes and government fees, escrow payments and discount points, so you're going to pay considerable more.
That survey revealed considerable differences in closing costs between states, which might arise at least in part from different regulatory requirements. For example, the average (excluding those variable costs) in Pennsylvania was $1,837, while in New York it was $2,560.
In reality, you probably won't know how much you're going to pay in closing costs until you receive your loan estimate (an upgraded version of what used to be called a good faith estimate), which is a three-page document that should be issued within three working days of your lender receiving your application. The numbers in that are not set in stone, but the lender must let you know if the estimate changes, and should be able to justify why those changes occurred.
How You May Be Able to Reduce Your Costs
Time was when you could negotiate your origination fee with your lender, but that was outlawed in 2010. Nevertheless, you may still find ways in which you can shave something off your closing costs.
For example, you may be able to choose your closing agent, which might be called a settlement agent or escrow agent where you live, and may, depending on your state's laws, have to be an attorney. Your lender will usually provide a list of agents it's happy to work with, and you can shop around between them. And, if you find another off the list you prefer, you can always ask whether it will be all right to go with that one. Although your objective is to pay low fees, you should take care to use a good agent, because the potential hassle that a bad one might bring can far outweigh financial savings. Ask your real estate agent, family and friends for recommendations.
You can often make savings with your title search and insurance. Your lender may suggest an insurer, but you're free to shop around. Just be sure to compare bottom-line totals, and not itemized charges on a list. The same applies to you continuing homeowners insurance: Providing you have appropriate coverage, you can choose your own, and don't have to go with your lender's recommendation.
Your Closing Costs and Your Refinance
You should definitely take closing costs into consideration when deciding whether your refinance is financially viable. And with refinance rates rising recently, the consequently higher monthly payments can be off-putting when you add in those costs.
So if your goal is to access some of the equity in your home, you might want to explore home equity loans and home equity lines of credit as an alternative to getting a whole new mortgage.