The Cost of Refinancing a Mortgage
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The cost to refinance a current mortgage can vary according to the interest rate, credit score, lender and loan amount. Homeowners who can make lenders compete for their business are more likely to obtain a better mortgage refinance deal.
The closing costs of a home refinance generally include credit fees, appraisal fees, points (which is an optional expense), insurance and taxes, escrow and title fees, and lender fees. If there is enough equity in the property at the time of refinancing, the owner may choose to finance their closing costs and fees by adding them to their current mortgage balance. Cash may also be used to cover these expenses at closing.
Homeowners with a no-cost mortgage can avoid additional fees to their current mortgage balance, or having to pay closing costs in cash, by simply taking a higher interest rate. All one-time closing costs on a mortgage (excluding insurance, interest, and taxes) can be covered by the mortgage originator, which utilizes their rebate from the lending institution who funds the mortgage.
Escrow and Title Fees
The escrow and title fees will include both the lender and the owner policy of title insurance, as well as the escrow fee itself. The title insurance will protect not only the owner, but also the lender by insuring a clear title, and also that the people with a legal right to convey title to the property are the people who will actually do so. In some cases, the policy also protects against an occurrence of forgery or fraud.
Most homeowners who refinance have already paid for a policy of title insurance during the initial property purchase, and do not want to pay for it a second time. Also keep in mind that lenders as well as owners are insured. The new mortgage created during the refinancing process brings about the need for a new policy. Many title companies can offer a substantial reduction in both the escrow fees and title policies to borrowers needing to refinance.
Escrow fees are service fees that are charged by the title company for assuming the role of an independent third party, insuring that those involved in the transaction perform as agreed, as well as facilitating the transaction itself.
Other title costs include the miscellaneous drawing, express mail, and courier fees, as well as the recording fee, the county recorder office's fee to record the deed of trust, mortgage document notarization fees, and the notary's fee.
Flat fees charged by the lender to fund and process a mortgage are known by a variety of names, and in general, can be categorized all together and commonly referred to as "garbage fees.” These fees include processing, underwriting, document preparation, as well as administrative and funding fees. Tax service fees, wire, and flood certifications are all additional lending fees. Nearly all lenders charge these fees, and homeowners can expect to pay between $650-$850 to cover them all.
In general, points fall into two categories: discount fees, and origination fees. Discount fees are actually prepaid interest that a homeowner elects to pay up front, and is used to buy down the mortgage interest rate. Origination fees are also used to buy the rate down, but are mainly used to compensate a mortgage originator during the transaction, and avoid them having to accept a higher interest rate where the lending institution funding the mortgage compensates the mortgage originator. One point is the equivalent of 1% of the entire mortgage amount.
Fees that the appraiser charges to inspect a property will depend on whether the property will be an investment property, what type of property it is, and if it will be owner-occupied (meaning the homeowner plans to live there). Typically, the fee for a standard, owner occupied single family condominium, townhouse, or tract home, is between $300-$400. Investment properties normally require a completed operating income statement and a rental survey to be completed along with the appraisal, and may add an additional $200-$300 to the appraisal fees.
The fees to review a homeowner's credit report obtained from any of the three credit bureaus can range from $25 to $65 per married couple or per person. If any of the reports are inaccurate, costs to correct such errors could generate higher fees from the credit bureaus, but having an accurate credit report will help homeowners get a better interest rate.
A homeowner's insurance policy should be current at the close of the new mortgage. The standard coverage required by the lender is simply replacement cost coverage. Many lenders require a homeowner's policy to be effective for a period no less than four months after the new mortgage's first payment date. Owner's may also want to check with their insurance carriers, to insure that an incremental vs. annual payment, will be acceptable. Otherwise, they may have to pay up front for another 12 months.
For properties located in geological hazard zones, the lender will ask that homeowners have policies to cover such hazards, along with flood insurance. FEMA establishes each geological hazard zone, therefore, appraisers can easily determine whether the property is located in one of these zones by simply referring to FEMA's most current geological hazard map.
Most counties request the payment of property taxes on an annual or semiannual basis, and the lender will require that all outstanding or delinquent property taxes be paid at the mortgage closing. Borrowers who are refinancing during the time the property taxes are due but not yet delinquent may be required, prior to closing, to pay the installment in escrow. During this time frame, the property taxes are considered a valid lien on the mortgage property.
For homeowners, it is important to remember that if they fall within the aforementioned time frame, they should not attempt to pay their property taxes outside of escrow. Doing so can delay the county in listing the property tax payment as received. The homeowner is then left to pay their taxes twice in escrow, because their title company was unable to verify the first payment was received and recorded by the county. The extra payment would be refunded to the homeowner, but such a hassle is easily avoidable.