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.
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.