Consider the cost of a home refinance before you replace your current mortgage with a new one. A refinance involves most of the same closing costs associated with financing a home purchase and usually totals several thousand dollars. You need a sufficient amount of equity in your home to refinance. Some advantages include a lower interest rate and monthly payment, or generally better repayment terms than your original mortgage agreement.
Average Closing Costs On the Rise
Each year, Bankrate conducts a survey of 10 lenders nationwide to determine average mortgage closing costs. In 2014, a $200,000 mortgage for a single-family home with a healthy loan-to-value of 80 percent and excellent borrower credit resulted in a national average of $2,539. The cost estimates in the survey were for loans in each state's largest city and didn't account for title and prepaid charges.
The website noted that 2014 loan costs were higher than the prior year, likely due to stricter mortgage regulations and oversight requirements imposed on lenders in 2013. Borrowers ultimately bear the lender's higher cost of doing business.
Lender Fees A Major Refinance Expense
Lenders fees make up a large portion of refinance closing costs. Lenders charge points, with one point equal to one percent of the new loan amount. Points cover lenders fees such as buying an interest rate that's lower than market rates, and also may cover a mortgage broker or bank origination fee for processing and funding a refinance loan. You usually must pay an appraisal fee and some lenders may charge to take your application and run your credit.
Third-Party Fees Add to Refinance Costs
A refinance requires the services of a title insurance company to provide coverage for the new lender. It also usually requires a settlement agent in the form of an escrow company or attorney. They ensure that the fees and payments are allocated correctly at closing, or settlement. Miscellaneous fees include notary and recording fees paid to third parties. You also may have to prepay certain costs, such as mortgage interest for the month, insurance premiums and upcoming property taxes.
If your refinance loan amount exceeds 80 percent of your home's value, the new lender may require an escrow impound account for collecting and remitting taxes and insurance. You deposit several months of taxes and insurance to establish an impound account, further increasing your closing costs.
Reducing the Burden of Closing Costs
You don't have to pay refinance closing costs out of pocket. Most borrowers add closing costs to the new loan balance, essentially financing the fees. You need sufficient equity to pay off your old home loan and cover closing fees. If you can't or don't want to increase your loan balance by adding the fees, you may opt for a higher interest rate. Your lender credits you a certain amount of points, which you can use to pay your closing costs upfront, in exchange for the higher rate. This option is often referred to a zero- or no-closing-cost refinance.