Refinance Mortgage Closing Costs

Learn about Lender Fees, Third Party Fees, Pre-Paids & Escrows, Government Taxes & Fees, and the Truth about No Closing Cost Home Loan Refinance Mortgages

In addition to mortgage rates, closing costs are a major area of focus for those looking to refinance. We'll take a look at the common refinance lender fees and mortgage closing costs you will encounter, and focus on the ones that will have the biggest dollar impact for your refinance. We'll also take a look at the "No Closing Costs" refinance options you may have seen advertised, so you can learn that there really is a cost, one that could be quite substantial.

There can be a major difference in total closing costs for the same refinance program (mortgage rate and terms) among refinance lenders. The Refinance Toolbox utilizes mortgage lenders with the most competitive refinance closing costs and mortgage rates in the industry, available to you, should you decide to get a Free Refinance Quote with us. In general, closing costs can be separated into 4 major categories. 1) Lender fees 2) Third Party fees 3) Pre-Paids & Escrow 4)Government taxes and fees. Now lets take a look at each of these categories of closing costs.

Mortgage Closing Costs: Typical
Refinance Lender Fees

Please keep in mind that the following is a list of common lender fees included in refinance closing costs so that you aware of the different charges you may be quoted on the Good Faith Estimate provided by the refinance lender. Some mortgage lenders may charge only a couple of the items listed below, where others might charge a great number of the refinance lender fees on the list toward closing costs. Again, there can be a vast difference in the lender fees charged among refinance lenders. You can simply add up the fees to compare between other lender's closing costs, now that you know what they are.

•  Application Fee

•  Funding Fee

•  Origination Fee

•  Processing Fee

•  Loan Set-up Fee

•  Administrative Fee

•  Transfer Fee

•  Wiring Fee

•  Flood Certification Fee

•  Tax Service Fee

•  Underwriting Fee

•  Discount Fee or (Discount Points)

Closing Costs: Application Fee- The application fee is charged by refinance lenders to cover administrative costs. This fee typically ranges from $500 to $750. Just so you know, not all mortgage lenders charge this fee and decide to pass along the savings to the consumer. "Junk Fee" is a common term used for the application fee applied to refinance closing costs.

Closing Costs: Origination Fee- This is the main fee that a refinance lender charges to make money on a loan. You will most likely see this fee on any good faith estimate received, and covers the lender's origination of the loan and applied to closing costs. The origination fee is stated in "percentage of the loan amount". For example, if you are refinancing $200,000 and the origination fee is 1%, the total origination fee would be $2000 for your loan. This is not a "junk fee", as the lender has operating costs and needs to make a profit to stay in business. Common and reasonable origination fees are between 1% and 2% of the loan amount depending on the size of the mortgage, but can go much higher, so be aware of this fee.

There may an instance where you receive a good faith estimate that shows no origination fee, or a very small percentage. Keep in mind that refinance lenders need to make money to stay in business, so take a closer look if the origination fee is lower that 1%. A low origination fee may be covered by a high application fee, processing fee, or combination of fees added to refinance closing costs.

Another reason for a low mortgage origination fee may be that the refinance lender is charging you a higher rate of interest than the par rate (lenders base rate) to make a profit through Yield Spread Premium (YSP). YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate. Comparing good faith estimates from competing refinance lenders at the same rate of interest is the best way to compare the true origination charged by the mortgage lender.

Closing Costs: Processing Fee- Mortgage lenders may charge a processing fee to cover the cost of the processor's duties in coordinating the loan to closing. This fee is normally ranges from $500 to $750. Again, not all refinance lenders charge this fee and pass along the savings to the consumer. "Junk Fee" is a common term used for the processing fee applied to refinance closing costs.

Closing Costs: Underwriting Fee- Refinance lenders charge an underwriting fee to cover the expense of underwriting a loan. In the case of a mortgage broker (loans filled through third party lenders), this is normally a charge-back to the broker and passed back to the consumer's closing costs at the refinance lenders normal charge. For a direct mortgage lender (underwrites the loan in-house), the cost of the underwriter is also passed back to the consumer. This is not a junk fee and quite normal in the mortgage industry. This fee should run in the several hundred dollar range.

Closing Costs: Discount Fee (Discount Points)- Discount points are fees paid to a mortgage lender at closing in order to lower your mortgage rate. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your mortgage rate by one-eighth to one one-quarter of your interest rate.

For example, on a 30 year fixed rate $100,000 loan, each point would cost $1,000. Assuming the interest rate on the mortgage is 5.5% and each point lowers the interest rate by 0.25%. Buying 2 points will cost $2,000 and will result in a mortgage rate of 5.0%.

To decide whether or not to buy discount points for your refinance, you can figure the breakeven point to determine if it is worth the expense. In the preceding example, with no points at 5.5%, the monthly principle and interest mortgage payment would be $567.79 per month. Buying 2 points would bring the principle and interest payment down to $536.82 per month at 5%. This results in a total monthly savings of $30.97 for a cost of $2,000. The breakeven point would be 64.57 for this example ($2,000 divided by $30.97).

So, if you planned on being in this mortgage for more than 65 months, the discount points may be a good buy. In fact, if the loan were kept for the entire 360 months, total savings would be $9149.20. (360 x $30.97 - $2,000 discount point closing costs).

Mortgage Closing Costs: Third Party Fees

Third Party fees are the portion of refinance closing costs incurred through the use of third parties utilized to perform tasks during the mortgage loan process, but are not paid to the refinance lender. The major refinance fees in this area are related to title company charges and the appraiser. Again, we will list the more common third party fees and focus on the ones with the biggest dollar impact for your refinance home loan.

•  Title Insurance

•  Recording Fee

•  Closing Fee

•  24 Month Chain of Title

•  Appraisal

•  Courier Fee

•  Credit Report

•  Tax Certificate

Closing Costs: Title Insurance- Title insurance is protection against loss arising from problems connected to the title to your property. Mortgage lenders will always require title insurance and fees will vary depending upon the size of the loan, the property location (title insurance rates vary from state to state and market to market), and the title company used by the lender. The cost of title insurance can vary widely, but is generally around .5% of the loan amount. It is important to note that many mortgage brokers have an interest in, or own the very same title companies utilized for the loans they originate. They must disclose this relationship, usually including the disclosure with the RESPA documents that you receive to satisfy compliance requirements.

Closing Costs: Closing Fee - This fee is paid to the title company or attorney for conducting the closing. The closing fee is usually between $150 and $400.

Closing Costs: Appraisal- The appraisal is required to determine the fair market value of the home. A home appraisal is generally required by a refinance lender before loan approval to ensure that the mortgage loan amount is not more than the value of the home and property. Therefore, an appraiser is needed to make this determination. Home appraiser fees are usually between $300 and $500.

Mortgage Closing Costs:
Pre-Paids and Escrow

Closing Costs: Pre-Paid Interest- This is interest you pay at closing in order to get the interest paid up to the first of the month. It varies depending on your mortgage rate and the day of your home loan closing. For example, if your loan closing is on the tenth day of the month, you will pay 20 days worth of interest on your loan to cover the period before your first payment is due on the first of the next month.

Closing Costs: Upfront Mortgage Insurance- This pre-paid item only pertains to FHA home loans and is paid upfront (usually added to the loan amount) in the amount of 1.5% of the total loan amount.

Closing Costs: Property Tax and Homeowners Insurance Escrow Deposit- Mortgage lenders may require you to make monthly payments equal to one twelfth of your yearly total taxes and insurance into an escrow or impound account for the payment of your taxes and insurance when your loan amount is more than 80% of the appraised value of your home. The lender will use this money to pay your taxes and insurance when the bills are due and will more than likely require an initial deposit to ensure adequate funds. You may be required to pay an extra two months' worth of payments at closing to make sure the lender will have enough money to pay the bills in the event the taxes and insurance are higher in the following year.

We will use a simple property tax deposit example to illustrate how escrow deposits are calculated. Assume $1200 per year property taxes are due and were paid on January 1st and your new refinance is set to close on March 15th with your new payments beginning on April 1st . By the time the taxes are due the following January 1st , you will have made 10 monthly escrow payments of $100 totaling $1000. Since you would be $200 short your initial deposit would be $400 to account for the 2 months shortfall and the extra 2 months' worth of reserves.

It is important to note that the escrow deposit is borrower's money and that borrower will get the remaining balance of the escrow deposit back when the mortgage is paid, plus interest.

Mortgage Closing Costs:
Government Taxes and Fees

Many states and local governments will charge taxes when you refinance your home. Taxes and other state and local government fees will vary widely.

These closing costs will depend solely on your location and are not controlled by your refinance lender.

Closing Costs: Recording Fees- Recording fees vary widely depending on municipality. This is a fee charged by the local recording office for the recording of certain legal documents in the public land records such as your deed or mortgage.

The Truth About "No Closing Costs" Refinance Home Loans

Most looking to refinance have undoubtedly viewed the "No Closing Costs" and "No Points" refinance mortgage programs advertised on TV and the internet. The truth of the matter is that these hyped refinance programs do have a cost, a cost that can add up to multiple thousands of dollars over the term of the mortgage. More accurately, these refinance loans should be termed as "lender paid closing costs". Does that mean that the good-natured mortgage lender is paying your closing costs for you? Not exactly.

Remember the old saying that "if it sounds too good to be true, then it probably is". The truth is that the borrower is paying the closing costs by paying a higher rate of interest as compared to the rate of interest they would be eligible for when paying the closing costs directly.

For instance, suppose you are taking a 30 year fixed rate refinance for $300,000 (with closing costs rolled in) and the normal closing costs for this loan is $5000. Based on your qualifying income, credit, and equity, you qualify for a market or "par" rate of 6% interest. This would result in a monthly principle and interest payment of $1,798.65. With a "no closing costs" option, this same loan now has an interest rate of 6.625% and a loan amount of $295,000. The resulting principle and interest for this loan is $1,888.92. The no closing costs loan actually will cost you $90.27 more per month. If you stay in the loan for less than 55 months, then this is actually a good deal for you ($5000 closing costs divided by $90.27 additional payment per month). On the other hand, if you stay in the mortgage for the entire 30-year term, you will be paying an additional $32,497.20 in mortgage interest. So much for No Closing Costs!

You can see by the preceding example that there are situations when a no closing costs refinance loan makes sense, but other instances where it can cost the borrower tens of thousands of dollars. In our opinion, those who advertise "No Closing Costs" refinance loans steer toward deception to prey on those not educated in mortgage finance and those who do not ask questions. A borrower's best option is to work with an upfront mortgage lender, one that will review all your options so that you can make an informed decision for your new refinance mortgage.

Want the Lowest Rate and Fee
Refinance Mortgage?

The Refinance Toolbox works with Upfront Refinance Mortgage Lenders that give fair and accurate closing costs quotes. We also utilize lenders with the most competitive closing costs and mortgage rates in the industry, which are available to you, should you decide to get a Free Mortgage Rates Quote with us.

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