Refinance Closing Costs: What to Expect

Refinancing your mortgage can be a smart way to lower your interest rate, shorten your loan term, or tap into your home’s equity. However, like your initial mortgage, refinancing comes with closing costs. Understanding these expenses is crucial to determining if refinancing is truly beneficial.

What Are Closing Costs?

Closing costs are fees and expenses associated with finalizing your new refinance loan. They cover the various services required to process and approve your application. Typically, closing costs range from 2% to 5% of the loan amount. For example, on a $200,000 refinance, you could expect closing costs between $4,000 and $10,000.

Common Refinance Closing Costs:

• Appraisal Fee: A professional appraiser assesses your home’s current market value. This ensures the lender isn’t lending more than the property is worth.
• Credit Report Fee: The lender pulls your credit report to evaluate your creditworthiness.
• Origination Fee: This fee covers the lender’s administrative costs for processing your loan. It can be a flat fee or a percentage of the loan amount.
• Title Insurance: Protects both you and the lender against potential title defects or disputes. There’s often a lender’s title insurance and an owner’s title insurance policy.
• Title Search Fee: An examination of public records to verify the property’s ownership history and ensure there are no outstanding liens or encumbrances.
• Recording Fees: These fees are charged by local governments to record the new mortgage in public records.
• Attorney Fees: Some states require or recommend you hire an attorney to represent you during the closing process.
• Escrow Account Setup: If you have an escrow account for property taxes and homeowners insurance, there might be initial setup costs or an adjustment to the account balance.
• Prepaid Interest: Interest that accrues from the closing date until the first mortgage payment date.

Negotiating and Reducing Closing Costs:

While some closing costs are unavoidable, you can take steps to potentially reduce them:

• Shop Around: Compare offers from multiple lenders to find the best rates and fees. Don’t be afraid to negotiate.
• No-Cost Refinance: Some lenders offer “no-closing-cost” refinances. However, this usually means the closing costs are rolled into the loan amount, resulting in a higher interest rate or loan balance. Be sure to calculate the long-term cost.
• Waive or Reduce Fees: Ask if any fees can be waived or reduced. Lenders might be willing to negotiate, especially if you’re a strong borrower.
• Re-use Existing Title Insurance: If you refinanced recently, you might be able to re-use your existing title insurance policy.
• Time Your Refinance: Closing towards the end of the month might reduce the amount of prepaid interest you owe.

Is Refinancing Worth It?

To determine if refinancing is a good financial decision, calculate the “break-even point.” This is the amount of time it will take for the savings from your lower monthly payment to offset the closing costs. Divide the total closing costs by the monthly savings. If you plan to stay in your home longer than the break-even point, refinancing is likely a worthwhile investment. If you plan to move soon, the upfront costs may not be worth the long-term benefits.