Refinance Closing Costs

This guide cover refinance closing costs on home loans. Refinancing is almost at a historical high. Mortgage rates has dropped from its all time high. More and more homeowners are refinancing their mortgages due to record lower mortgage rates. Last year in 2023, mortgage rates were at an all time high since the 2008 Great Recession. However, rates started dropping starting the beginning of 2022. The Feds have cut rates for the first time in 11 years before mortgage rates started going up to its all time high at 8%. The Federal Reserve Board cut rates twice in the past three mones and may continue to do so.

Mortgage Rates are still at high levels. Mortgage rates today is over 1.0% lower than it was one year ago. Some homeowners have refinanced multiple times in the past few years. However, there are refinance closing costs every time a borrower refinances. In this guide, we will cover and discuss mortgage refinance closing costs for homeowners.

What Does It Mean To Refinance

Refinancing is when a homeowner with a mortgage pays off the outstanding balance with a new mortgage due to one reason and/or another. Refinancing is paying off the existing mortgage with a new mortgage. The homeowner is responsible for the new principal and interest with the new mortgage. Closing costs on refinance mortgage loans depends on many factors. It will cost borrowers money every time they refinance their home loans.

We will cover the various reasons why homeowners refinance and the net tangible benefits. The majority of homeowners refinance to save long-term interest costs and to lower their monthly payments. By refinancing a high-mortgage rate loan to a lower rate mortgage, it can save tens of thousands of dollars in interest expense.

No Refinance Closing Costs Mortgage

Is there such a thing as a no-cost refinance mortgage? The blunt answer is no. There is nothing for free in the mortgage world. Many lenders advertise no-cost refinance mortgages. What this means is the borrower does not have to pay any upfront mortgage to refinance closing costs. Borrowers can pay discount points and upfront closing costs and get lower rates on refinance transactions.

Reasons Why Homeowners Refinance

There are many reasons why homeowners refinance. The most common reason to refinance is to save money by paying off the existing high-interest rate mortgage with a new lower-rate loan when rates are low. Other reasons are when you need to take out a co-borrower. Non-occupant co-borrowers can be taken off the existing loan by paying it off with a new loan via refinancing. Cases, when joint borrowers go through a divorce, is another common reason why homeowners refinance

Many homeowners with FHA loans refinance FHA to Conventional mortgages to eliminate the FHA MIP. Homeowners with non-QM loans or other mortgages with high rates often refinance to conventional loans when they meet Conforming loan guidelines. Homeowners with equity in their homes can refinance and get a cash-out refinance mortgage.

Pre-Payment Penalty on Existing Mortgages

Pre-payment penalties used to be very common prior to the 2008 Housing Collapse. However, it is illegal to have pre-payment penalties on owner-occupant mortgages. It is legal to have pre-payment penalties on investment property loans

Most investment real estate loans have pre-payment penalties the first three years. Common penalties is borrowers will get charged 3% the first year they pay off their investment home loans. 2% if they pay it off in the second year. 1% if they pay off the loan in the third year. After the fourth year, the pre-payment penalties are usually waived.

Typical Mortgage Refinance Closing Costs

Every lender has a different mortgage refinance closing costs. The following are typical refinance mortgage closing costs:

• Application and/or origination fees
• Credit report fee
• Discount points
• Pre-paid which are escrows held by the lender of homeowners insurance and property taxes
• Appraisal fee
• One year homeowners insurance
• Inspection fees
• Processing fee
• Underwriting fee
• Title charges
• Recording fees
• Transfer stamps
• Inspection fees
• Other third-party fees and/or costs

Closing costs vary from city to city, county to county, and state to state. Closing costs are more expensive in some areas than others. Lenders can exempt certain costs and can eat it for rate shoppers. Refinance closing costs can either be paid upfront and/or through a lender credit. To get a lender credit, the mortgage rates will be higher.

Frequently Asked Questions on Refinance Closing Costs

Fueled with knowledge about refinance closing costs, let’s proceed with the questions, shall we?

Common Questions on Refinance Closing Costs

What are refinancing closing costs? In the refinancing deal, the owners have to bear the mountain of paperwork, as these costs include title insurance, appraisal fees, and lender fees, among many others. Refinance closing costs can add up from 2%-10% on the mortgage amount.  For example, if you were to refinance a house worth $200,000, you would need to pay between $4,000 and $10,000 as refinance closing costs.

Which Fees Do I Need to Pay to Refinance Closing Costs?

Now let’s explore which costs are included:

• The loan origination fee is paid to a lender for their services, including processing a loan.
• Second, the appraisal fee is crucial as it is the fee for hiring a professional to evaluate the property’s market worth.
• Furthermore, the owner can get a title insurance policy that protects them in case there are disputes in property ownership.
• Additionally, the fees that allow for credit reporting are also applicable.

Finally, once the loan application has been submitted, the fee to check it is applicable, known as the underwriting fee. Remember, the local authorities charge a fee for recording the new mortgage, known as the recording fee.

In What Ways Can I Cut My Closing Costs?

Yes, closing costs can be minimal if you:

• Compare Fees: Check with several lenders for better rates and fees.
• Cut Fees: Some fees are negotiable, so you can contact your lender and tell them to give you good rates.

Restructure the Loan with No Closing Fees

Some lenders offer this option, paying the closing fee but charging higher interest rates.

Are closing costs added to the loan amount?

Some lenders allow you to add your closing costs to the new mortgage. When this is allowed, the closing payment is added to the new loan, resulting in a higher loan amount and monthly rates.

• Am I required to pay closing costs at the start?

No, you are not required to pay closing costs at the start. Depending on your lender and the terms associated with your refinance, you may have opportunities to roll the payment into the loan, negotiate with the lender to pay, or pay at the closing meeting.

• Is tax charged on closing costs?
• Tax is not charged after additional costs associated with the refinancing are incurred.
• However, it may be tax deductible if paid to reduce an interest rate within a year.
• I always recommend consulting a tax professional for individual advice.

What Will Happen if I Change My Mind About the Refinance?

Suppose you wish to refrain from pursuing the refinance and have already spent some money on some of the costs borne by the loan applicant. In that case, some costs, like the appraisal fee, will not be refunded to you. Care to examine any such fees at the outset so they do not become a burden later on.

How Will Refinancing Be Beneficial For Closing Costs?

There is a need to assess if savings from a lower interest rate justify the closing costs when the appraisal of the costs and benefits from such an exercise is done. A rough rule of thumb is that if you expect to recover those costs through lower monthly payments in two or three years, then it may make sense.

What Questions Shall I Pose to My Lender About the Costs Incurred at the Appointment Verification?

When talking with your lender regarding closing costs, you can ask:

What Fees Are Included in The Normal Closing Costs?

• Should I pay certain fees, and are there alternatives that allow me to avoid fees?
• Can closing costs be incorporated into the new loan amount?
• How long would I receive GFE or a Loan Estimate?

Understanding the refinance of mortgage closing costs is critical. This is especially true when comparing the overall benefit of refinancing your mortgage. You can make better decisions about your refinancing alternatives by knowing which fees will most likely be billed against you and the proliferation of measures to manage those expenses. Talk to a mortgage expert for specific and relevant advice to your situation.

This guide on refinance closing costs was updated on November 27th, 2024.