What Are Closing Costs When Refinansiering?

A few years ago, you took out a mortgage and made a dream of owning a house come true. You’re just one of the many homeowners who got roofs over their heads with this long-term loan. And that’s fine since a mortgage allows you to make this big purchase, even when you don’t have enough cash.

The terms on which you borrowed the money may have seemed good at the time. Maybe you were earning less, your credit score was low, and your overall financial situation wasn’t great. Still, you managed to get a loan by accepting certain lending terms.

Fast forward, the situation in the global market has changed. Now you might have a chance to refinance your mortgage with a lower interest rate. Moreover, your finances have got better, so you can get a very good deal from the lender. But although that sounds ideal, you shouldn’t rush into this decision until you have considered all its aspects.

Refinancing makes sense when you can yield real benefits. For example, if you have more money, you can refinance to pay off your mortgage or build equity sooner. Or you can decide on a new loan to relieve the budget, or you need extra cash. In any case, you must calculate the profitability of refinansiering and, as part of that, pay special attention to closing costs.

What Are Closing Costs?

Refinancing means switching one loan for another that is more favorable for some reason – a lower interest rate and monthly installments, a shorter repayment period, etc. In any case, you should close the initial mortgage after getting a refi loan. That procedure entails certain expenses, known as closing or refinancing costs.

There is no universal formula to compute the exact amount of refi costs. What is known is that some fees are flat, while others depend on the mortgage amount. Also, many other things need to be factored into this calculation, such as where you live, the moment you decided to refinance, your financial and life goals, and your creditworthiness. The latter can greatly affect the profitability of refinancing.

In general, refinancing costs are from 2 to 6 percent of the new loan amount, which is about several thousand dollars. There are always deviations, but knowing these expenses even approximately is important for calculating the break-even point.

What’s Break-Even Point and Why It Matters

If you refinance your mortgage to achieve savings, you’ll tend to find a favorable refi loan. Compared to the initial installments, new ones can be lowered by several tens or hundreds of dollars, leaving you some money in your pocket.

But don’t forget the closing costs that you’ve paid either in advance or rolled into the new loan. So you won’t actually start saving money until you recoup these through the savings achieved with the new loan. The break-even point is the moment when that happens, and since then, you actually start saving money.

Most homeowners reach the break-even point in four to five years, but that’s not a golden rule. It depends on the closing costs and the difference between the rent and the new installment. The calculation is quite simple because you just need to divide the closing costs with the savings you make every month, and you get the number of months until you break even.

If you plan to live in the house even after the break-even, then refinancing really pays off. If not, there’s a big chance that you will spend more money than you saved. So if you want to sell the house before the break-even moment, then extra mortgage payments are a better solution than refinancing.

Closing Fees You Should Know

The structure of closing costs depends a lot on your location and the lender, but also your creditworthiness. Some expenses are negotiable if lenders find you reliable enough to afford the refi loan and make timely payments. They can waive some fees, thus making refinancing much more affordable.

Application Fee

This is the cost you pay for making the application, and it’s just about several tens or hundreds of dollars, depending on where you apply. It’s a fee for processing your data, checking credit abilities, and determining whether you’re a reliable borrower. It usually includes a credit report fee, too.

If you apply at traditional lenders, you will generally pay this cost in advance. After processing the application, most lenders will refund you this money if the loan is approved. However, you won’t get that money back if your application is denied.

Origination Fees

After receiving your application, lenders must work on it. You sent the necessary documents with the application, and the lender’s agents must process and verify them. They’ll charge for all that work through the origination fee, which is generally the most significant item of closing costs.

You can pay this fee, as well as others included in the closing costs, in advance. However, in agreement with the lender, it can be rolled into your loan, which is handy if you don’t have enough cash.

This expense depends on the mortgage amount and is usually in the range of 0.5% to 1% of it. That makes it negotiable, as the lender determines this percentage. And whether this fee is on the higher or lower end of the range makes a world of difference. So if possible, try to lower this cost and thus save up money.

Appraisal and Survey Fees

Appraisal refers to the assessment of the value of your real estate by an expert who considers the location, age, look, current prices, etc. You pay for their services before applying for a loan, and this cost has nothing to do with your lender since you hire an appraiser independently.

In any case, the appraisal can make or break your decision on refinancing. If the appraiser estimates the value of your property too low, the chance for a favorable refinancing is low. And the cost you paid for this service is non-refundable because you are paying it to a third party.

Lenders may ask you to perform a property survey. That’s mostly necessary when it comes to larger properties to record their boundaries. You also hire a third party for this service, meaning the lender has nothing to do with it so you can negotiate it.

Other Fees You Should Know

Other fees that make closing costs can be the cost of an attorney, recording fee, and title insurance. The costs of legal representation are not always necessary, but they are highly desirable. Refi can be complicated, especially the paperwork, and you’ll be glad to leave it to an expert.

Recording costs aren’t mandatory either, as they usually depend on your local or state authorities. You pay for the transaction to be registered in public records, which might be handy for future sales. In fact, you pay for this information to be easily accessible.

When you took out a mortgage, you already paid for title insurance. However, this cost awaits you when refinancing, as lenders usually require it. This policy protects both you and them from some problems that may have happened in the past with your property (for example, lien claims).

Another insurance-related cost you might pay is private mortgage insurance. You have to pay it when you don’t have enough equity to refinance. Otherwise, you can’t qualify for a loan. You must distinguish that from the MIP (mortgage insurance premiums) you pay upfront if you refinance an FHA mortgage. Favorable refinancing is possible if you find a refi deal with a low-interest rate and closing costs that won’t require you to visit the bank. In general, this cost is negotiable, provided you have a good credit score and credit history with no records of loan defaults or bankruptcy.