Refinancing your mortgage can reduce your interest rate and monthly payment. And while it can be a smart move to refinance, be aware that there are costs involved. The good news? Many lenders allow borrowers to roll closing costs into their home loan. But what closing costs are associated with refinancing, and how much does it cost to refinance? Here’s a quick breakdown of what you might have to pay, and the cost to refinance your mortgage — but remember, every borrower and financial situation is different.
Escrow & Title Fees
Escrow fees are paid to an escrow company that overlooks your transaction as a neutral third party. An escrow company would make sure that all parties are paid appropriately.
A title fee is paid to a title company that researches property deeds and makes sure no one else has a claim to the property you are refinancing. This is also known as a title search.
Your new loan might require an escrow deposit — or a portion of your homeowner’s insurance premium plus property taxes — taken by your lender and held in escrow until you begin making mortgage payments. An escrow deposit may be required if your loan-to-value ratio (the amount you owe on your loan divided by the estimated value of your property) is more than 80%.
Some (but not all) states require that borrowers pay an attorney to complete the closing transaction on your house. Check with your mortgage lender to find out whether you live in a state where an attorney’s presence is required.
Since most loans come from a private bank or a mortgage company, there are overhead fees that cover work that is done on your loan. Lending fees are essentially the costs associated with all of the behind-the-scenes, administrative actions — application fees, underwriting fees, origination fees, etc.
Credit fees include the costs of a tri-merge credit report that a lender will pull when borrowers apply for a home loan. Credit reporting companies charge for hard pulls, and you might have to cover the costs.
Mortgage lenders require homeowners to buy homeowner’s insurance. Lenders typically want to make sure that your home is covered in the event of a natural disaster. Depending on where you live, you might be required to purchase additional hazard insurance, like flood insurance. There are also some optional insurances you may choose to buy, like title insurance, which protects homeowners if someone tries to challenge their ownership of a property.
Private Mortgage Insurance (PMI)
Even if you didn’t have private mortgage insurance (PMI) on your original mortgage, it might be a part of the cost to refinance. Your lender might require you to pay for PMI, which protects the lender in case a borrower defaults on a loan. Lenders typically require PMI when a buyer pays less than 20% down on a home loan.
Mortgage points or discount points allow you to pay some of the interest on your loan upfront in exchange for a lower interest rate over the life of your loan. One discount point costs one percent of your mortgage amount. (For example, if you have a $100,000 loan, one point would equal $1,000.)
Lenders might require an appraisal to determine the value of your home, and you might be required to pay an appraisal fee.
You might have to pay to have the property surveyed to verify property lines.
Lenders generally do not require borrowers to get a home inspection in order to obtain a mortgage, but appraisers might highlight some major problems — even though their job isn’t home inspection. Lenders might require a termite report, and they might not approve your home loan until certain inspection requirements are met.