If you’re trying to refinance your mortgage you should know what the costs are really are going to be and how they play into the mathematical equation of the total picture. Here’s what you need to know when it comes to refinancing your house and paying fees…
When you refinance your house your closing costs will dramatically lower than when you purchase a house. Purchasing a house for the first time and subsequently taking title to the property always costs more. Moreover, the most expensive closing cost you will incur as a borrower is title insurance. You will pay two forms of title insurance when you purchase a house for the first time including an owner’s policy and a lender’s policy. Refinancing only requires a lender’s policy. Title insurance insures that the property you’re buying is free from any clouds on title e.g. other liens, other party interests.
How closing costs factor into a refinance
There are two types of closing costs reoccurring closing costs and nonrecurring closing costs. Reoccurring closing costs include interest, taxes and insurance you incur as a homeowner regardless of whether you refinance or not. If you choose to have an impound account on your mortgage, the lender will have to collect for future months of taxes and insurance to establish a new escrow account. When you elect for this option, it may appear your closing costs are more than what they are.
This brings us to the next point which is non-reoccurring closing costs which are the junk fees that you typically pay when you refinance as well. This includes any lender fees, title fees, escrow fees, notary fees. These are the one-time fees that you pay when you encumber your property. These are the real closing costs and these are the closing costs that you should be paying the most attention to. If your loan size is $400,000 it’s realistic to think that closing costs assuming you chose a no points loan be can anywhere from 1 to 1.25% of your loan amount. For example, for a loan amount of $300k it is realistic that your closing cost would be $3000 including the cost of the appraisal assuming no points.
Closing costs can be rolled into your loan, paid for in the form of cash due at closing or can be built in the form of an interest-rate which will generate a lender credit to cover the closing costs. A good general rule of thumb when deciding to refinance your mortgage- expect closing costs to be somewhere between $2800-$3300 for loan sizes between $220k-600k. Lastly, to justify your home investment. Take the monthly savings divide by the amount of the closing costs to determine your recapture point.
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