Nobody likes spending more money than they absolutely have to, especially on credit repayments like car financing or a home loan. That’s why a lot of folks will consider refinancing their mortgage to try and get a better, lower interest rate than they had on their original mortgage.
Any savings on a home can be worthwhile; even if it frees up only a couple of hundred extra dollars a month, that can make a significant difference to your budget. That said, refinancing comes with its own associated expenses, like closing costs. So what is included in closing costs when refinancing? Here are the typical closing costs for a buyer so you can better understanding of any expenses entailed with refinancing.
There’s no such thing as a no closing cost refinance
Before we get into detail about refinancing and the associated costs, let’s dispel one myth – there is no such thing as a zero closing cost mortgage. This article from Forbes explains more about what is called a zero out-of-pocket cost mortgage, which entails including all the closing and other associated costs and adding them to the total mortgage. This means that instead of paying those fees out of your own funds at closing, they are incorporated into your loan amount instead. Often lender’s credits are offered to offset these costs, so be sure to factor them in. You can discuss with your mortgage banker if this is a good option for you.
The downside is that this can mean slightly higher monthly repayments since building in these costs increases the loan amount, but to many borrowers this is a worthwhile trade off to reduce their out-of-pocket funds required at the time of closing.
Expenses associated with refinancing
When you refinance your mortgage, there are several costs that you can expect to pay. While the actual amounts may vary, you might see some or all appear on your loan application. These can include:
1 – Credit report fee
Whenever you apply for financing of any kind, the lender will review your credit report to determine your current credit score and use that to help calculate a new mortgage rate.
2 – Title report and insurance
Lenders review a title report on your property to verify legal ownership of the home and look for any potential deficiencies of title that would affect the loan. As the borrower, you have your choice of escrow companies.
3 – Appraisal fees
Now the lender is satisfied you are the homeowner and are in good credit standing, it’s time to appraise your home and determine the current market value. The reason for the appraisal is to make sure that the value of the loan is covered by the value of the property and buildings. This is important to ensure that the loan to value ratio is within guidelines for the particular loan product you’re seeking.
4 – Inspection fee
This one doesn’t always apply, but the lender may require the home to be inspected for various things, including structural integrity, water damage, electrical compliance and so on.
5 – Insurance fees
Depending on your area, there will be various insurance requirements, which can include fire, flood and other hazard insurance. This is a third-party cost that will be negotiated between you and your insurance company. Depending on the day your loan closes, there might be prepaid insurance costs to bring the payment schedule on track for the following month.
6 – Escrow fees
Escrow is an additional amount of money you pay up-front to cover property taxes, which are a legal requirement. Yes, you can opt to pay your property taxes separately in many instances, but escrow makes sure you pay just one fee every month and don’t have to concern yourself with the extra admin. Again, escrow fees are handled by a third party, and can often be bundled in with your title and insurance fees.
Want to Refinance? Here’s what you can do to start the process:
Mortgage refinance can bring substantial financial benefits to a homeowner and to make it simple, you need to equip yourself with the tools that can make the process fast, easy and pain-free as possible. Listed below are the steps that can guide you on mortgage refinance.
Step 1: Prepare
The first step to mortgage refinance is to check your credit report and score. You have to eliminate any wrong entries that may have been reported on your credit report. In case of erroneous input, you can consider disputing the report before you plan to apply for a mortgage refinance. A minimum of 60 days should be allotted before the planned application.
To help you further, provided below is a list of documents that you also need to present to your loan consultant:
- Most recent pay stub
- W2s and personal tax returns for the past two years
- Statement of Accounts for the past two months (bank, investment or retirement)
- Recent homeowners insurance declaration
- Latest mortgage statement
Step 2: Choose the right refinance loan
Finding the best refinance loan option can be as simple as understanding your goals. To make the right choice, here are the things that you need to assess.
- Your ultimate goal for a mortgage refinance
- The length of time you own the property
- The length of time you intend to own the property
- Familiarity with available loan products
- Your tolerance for payment adjustments with your new loan
Step 3: Complete the loan application
There are a few things that you need to consider when signing the application and one is to ensure accuracy of all the information. Remember that even mistakes that you are innocent of can be viewed as suspicious by the loan reviewer. After the review has been accomplished, you then have to order your appraisal as this will provide a documentation of your property’s value.
Once the loan application and appraisal is completed, the document will be forwarded to an underwriter. This is when the documents will be assessed to determine your capacity to pay for the loan. During this stage, you must be ready to provide additional documents as needed.
Step 4: Review loan approval and conditions
Once the underwriter has approved your loan application, you will be issued an approval letter and conditions. This will contain the terms of the loan that you qualified for, while the conditions provides a list of the remaining items that you need to provide. Once these are received, make sure that you will carefully read through you approval letter and conditions.
Step 5: Lock Your Refinance Mortgage Rate
Rate lock keeps you protected from rising mortgage rates for a specific period of time, usually 7 to 60 days. Basically, you can expect that the longer the lock period is, the higher the cost at close. During this period, you must be able to carefully assess the length of time required for you to put together the remaining conditions, while taking into consideration the time needed for the lender to reassess and prepare your documents. .
Step 6 – Order documents
Upon acceptance of your conditions and once your rate is locked, you can already order loan documents. You can request your loan officer to furnish a preliminary closing statement for you to review important details and avoid unexpected surprises. Don’t hesitate to call the attention of your loan agent if you have any question.
Before refinancing your home, it pays to weigh up what the reduction in your monthly repayments will be versus the closing costs, whether you pay those upfront or have them rolled into the total mortgage amount. For more information on refinancing your home loan, contact a mortgage banker at Carlyle Financial today.