A key factor for deciding to refinance a home is whether the new interest rate will lower the mortgage value a sufficient amount to recover the refinance closing costs. The loan closing costs consist of an assortment of fees and other expenses borrowers must pay to obtain a new mortgage. These charges typically range from 2 to 3% of the loan amount. Closing cost can be grouped into four categories: lender fees, third-party fees, pre-paid and escrow, and government fees and taxes.
The most common charges lenders will assess on borrowers are the application fee, loan origination fee, and discount points. To cover their administrative costs, most lenders charge borrowers an application fee. The loan origination fee is usually one of the largest refinance closing costs. It is calculated as a percentage of the loan amount, and is typically around 1 to 2%, or more. If the loan origination fee is less than 1%, the lender will usually make up for the lower amount by charging the borrower higher fees in other areas, or even a higher interest rate.
Many borrowers choose to lower the interest on their loan by paying the mortgage lender what are called discounts points, or discount fees. Lenders will generally charge 1% of the loan amount to reduce the overall interest rate from 1/8 to 1/4%. Most lenders will also require borrowers to pay other upfront costs for refinancing their home, including processing and underwriting fees.
Third party fees are the refinance closing costs borrowers must pay to vendors who complete specific tasks or services that are necessary to close the loan. Appraisals must be performed to determine the fair market value of the property and to make certain that the loan amount does not exceed the valuation. Title insurance is required to insure lenders against loss resulting from problems with a home’s title. The cost of the policy is based on the amount of the loan and the property’s location. A closing fee is paid to the lawyer or closing firm responsible for performing the closing.
Another group of refinance closing costs that borrowers typically pay is pre-payments and escrow expenses. Pre-paid interest is the money borrowers pay on the interest that is due up to the first day of the month. The amount of this expense is determined by the loan’s interest rate and the closing date. In the US, borrowers who obtain Federal Housing Administration (FHA) loans must pay private mortgage insurance. They are not required to pay out-of-pocket for this expense because the cost, typically 1 1/2% of the loan amount, is included in the loan.
In cases where the loan amount is more than 80% of the appraised value of the property, lenders may require borrowers to make monthly deposits into a property tax and homeowners insurance escrow account. The payments are pro-rated, usually about 1/12 of the estimated annual taxes and insurance. Most lenders required borrowers to pay several months of the escrow payment in advance to ensure that there are adequate funds to pay the taxes and insurance in case of higher than anticipated costs.
The last major category of loan closing costs is levied by regional and local governments. Many municipalities charge recording fees for entering deeds and mortgages into the public records. In some counties and states in the US, transfer taxes are charged for refinancing a home. These costs will differ according to location and are not determined by the mortgage lender.
To ensure that consumers are aware of the costs involved with obtaining a refinance loan, mortgage lenders in the US are required by law to give clients a document called a Good Faith Estimate of Closing Costs. It must be given to customers within three business days after the lender receives their loan application. The Good Faith Estimate of Closing Costs itemizes the mortgage rate, terms, and settlement costs associated with the loan.
Costs and fees may vary depending on the lender and the location. Some lenders may charge additional fees. Before submitting a full application for a loan, borrowers should compare the refinance closing costs of various lending institutions before choosing a mortgage lender.