Mortgage Refinance Closing CostsCASAPLORERTrusted and Transparent
Mortgage refinancing is the process of replacing your current mortgage with a new mortgage with different terms and conditions. Closing costs are the fees paid for various expenses to lenders and third-parties to finalize your mortgage or refinance. Refinance costs can vary significantly as it is various expenses that differ based on location and service rather than a single lump-sum payment.
These are your total closing costs which is an addition of your fixed and variable costs. This is 3.59% of your loan value which is $320,000.
These are the services where the cost does not change, which means you can not opt in or out of them.
These are services you can shop for (Negotiable), which means you can opt in or out of them
Total Closing Costs
This cost is given by the addition of your down payment and your closing cost:
How much are closing costs on a refinance?
Refinance closing costs are on average between 3% - 5% of the loan amount. For example, if you are refinancing your mortgage for $300,000, closing costs can range from $6,000 to $15,000.
Refinance closing costs consists of several expenses from the lender fees to third-party fees. Some of the expenses are fixed such that similar fees are paid by everyone, and some of the fees are variable, such that you can negotiate a lower amount or find another service provider.
Here is a typical list of mortgage refinancing closing costs:
|Refinance Fees||Fee Amount||Fixed or Variable|
|Loan Origination Fee||1% of Loan Amount||Variable|
|Home Inspection||$350 - $600||Variable|
|Title Insurance||0.5% - 1% of Loan Amount||Variable|
|Insurance||0.4% - 2.25% of Loan Amount||Variable|
|Settlement Fees||$400 - $1000||Variable|
|Discount Points||1% of Loan Amount||Variable|
- Loan Origination Fee – This is the largest expense as it involves the process of the lender going through all your financials, documentation, and processing the application. It will cost about 1% of the outstanding balance or loan amount and can be negotiated.
- Appraisal - An appraisal will be required to determine the value of the home. The appraisal fee is fixed and costs $350.
- Home Inspection – Safety standards and quality are determined in the home inspection. The fee can be negotiated and can range from $350 - $600.
- Title Insurance – This fee is paid to protect the lender if the ownership of the home is disputed. Title insurance can range from 0.5% - 0.1% of the loan amount.
- Insurance – If the outstanding balance is greater than 80% of the home value, private mortgage insurance (PMI) will be required. PMI can range from 0.4% - 2.25% of the loan amount.
- Settlement Fee – A lawyer will need to be hired to finalize all the paperwork at closing. Fees can vary and usually range from $400 - $1,000.
- Discount Points – If you choose to purchase discount points it will increase your closing costs. Discount points help reduce the mortgage rate that you will receive.
Apart from the traditional fees stated above, as a result of the Coronavirus pandemic, both Fannie Mae and Freddie Mac have added another fee known as the ‘Adverse Market Refinance Fee’ for conventional loan refinances. This fee helps support their rising costs from the pandemic. The fee costs 0.5% of the loan amount and will cost the average borrower around $1,500 for a $300K mortgage. The Adverse Market Refinance Fee only applies to refinance or cash-out refinance that closed after December 1st, 2020.
How do I reduce my mortgage refinance closing costs?
Closing costs are a significant cost in the process of refinancing so it is important to know how you can reduce your costs.
- Explore several lenders – It is essential to shop around for different lenders. Each lender can offer a different rate and service and it is essential you get a lender that best satisfies your needs. A lender who can offer you a better refinance rate can save you a lot of money in interest and closing costs.
- Negotiate fees – the largest closing cost fee is the loan origination fee; this fee is negotiable and can be reduced. If you have reached out to several lenders you can use that to bargain a better deal with the lender you choose. If you have a high credit score and low debt-to-income (DTI) ratio you can get some of the fees waived.
- Appraisal waiver – You can reach out to your lender for an appraisal waiver which can save some money.
- Variable fees – Several of the closing costs are variable and can be negotiated. It is essential that you search for several service providers who can provide a low-cost deal.
- Title Insurance – If you work with the same company that provided the title insurance for the original mortgage, they might be able to offer you a discount.
- Avoid discount points - Discount points can increase your closing costs and might not be worth it only for a minor decrease in the mortgage rate. If the refinance rates are already low in the market, buying discount points will be an avoidable cost.
No Closing Cost Refinance
A no closing cost refinance involves no upfront payment of closing costs. However, this does not mean closing costs are not paid by you, instead, the lender can either take the closing costs and add them to your existing outstanding balance or increase the interest rate charged.
Method 1. Move Your Closing Costs to Your Mortgage
The lender will add your total closing costs to your outstanding balance thereby increasing your monthly mortgage payment. It is important to know that you will be paying interest on the closing costs if they are added to the loan amount.
For example, on a $300,000 refinance, if your closing costs are 4%, the total would be $12,000 ($300,000 * 4%). If you paid the closing costs upfront your monthly mortgage payment with a 30-year 3% mortgage rate would be $1,600, whereas if the closing costs are added to the loan amount, your new monthly mortgage payment would be $1,700 or $100 more.
Method 2. Pay a Higher Mortgage Rate
Lenders can cover the closing costs for you by increasing your mortgage rate, which in turn will increase your monthly mortgage payment. The outstanding balance or loan amount remains the same.
For example, on a $300,000 loan, the closing costs will be around $12,000. If the mortgage rate is 3% and the term is 15 years, the monthly mortgage payment will be $2,400 and the total interest paid would be $73,000. Iif the lender waives the closing costs and increases the mortgage rate to 4%, the monthly payment will increase to $2,550 and the total interest paid will be $100,000. Therefore, your monthly payment would be $150 higher and the total interest paid over the life of the loan would be $27,000 more!
Advantage of using a no closing cost refinance
A no closing cost refinance allows you to have minimum closing costs upfront and helps spread it across the term of the loan in the form of increased monthly payments. It can be extremely useful if you want to benefit from mortgage refinancing but do not have cash saved up for closing costs. If the refinance allows you to reduce your mortgage rate significantly then a minor increase in monthly payments as a result of closing costs will still be better for your total savings.
When should I not use a no closing cost refinance?
The amount of time you stay in the home plays a huge role in your overall savings. If you plan on staying in the home for a short period of time (less than 5 years) then a no closing cost refinance with the higher interest option makes sense as you will be paying the higher rate for only a short time. However, if you plan on staying in the home for longer, the higher monthly mortgage payments can result in a much higher total interest payment.
Should I use a no closing cost refinance?
There are three major questions you need to ask yourself before you make this decision:
If you have enough funds saved for closing costs and plan to stay in the home for a long period, you should pay the closing costs upfront and save thousands in interest.
However, if you do not have the money saved up or do not plan to stay in the home for long, you can choose a no-cost refinance as it will help you get a refinance and the total interest paid will not be too large in a short period of time.