Just like when you first bought your home, there are various lendercosts to refinance a mortgageyou'll have to pay. In most cases, these fees can end up being 2% – 6% of your loan amount. Some of the closing costs you may see when you refinance include:
Loan Origination Fee
You'll pay an origination fee to your lender to prepare your loan. The averageorigination feeis 0.5% – 1% of the loan amount and covers the application fee, underwriting and other administrative costs. This is listed in the same origination charges section of your loan estimate as discount points.
Appraisal Fee
During anappraisal, a professional comes to your property to assess its value. When you refinance, you'll need to get an appraisal or other form of home valuation to ensure your property value hasn't drastically changed since you bought the home. Lenders will use the appraisal to calculate yourloan-to-value (LTV) ratioto help them determine the financial risk of your refinance.
Most appraisers charge $300 – $500 for their services. The cost can be higher depending on square footage, the number of units and the distance the appraiser has to travel, among other factors.
Title Fees
You receive a document called a deed, among otherclosing documents, when you buy a piece of real estate. A deed shows that the seller transferred legal ownership, or the title, of the home to you.Title insuranceprotects you from errors in the ownership records of your home or property. You'll need to pay for the title search and buy a new lender's title insurance policy when you refinance your mortgage loan because the refinance is a new loan. Mosttitle insurance companiesoffer significant discounts for returning customers who already got a policy when they first bought the home.
VA Funding Fee
If you’re refinancing aVA loan, you'll need to pay a percentage of your new loan back to the Department of Veterans Affairs (VA). The amount you pay for theVA funding feedepends on the type of refinance being done as well as the amount of equity you’ll have after the refinance and whether it's your first time using a VA loan.
If this is your first time using a VA loan and you're refinancing from a differenttype of loan, the funding fee is up to 2.15%. If you're coming from a different type of mortgage, but you've used a VA loan in the past, the funding fee is up to 3.3% of the loan amount.
If you're doing a refinance where you're going from one VA loan to another – a VA Interest Rate Reduction Refinance Loan (IRRRL), also known as aVA Streamline refinance– the funding fee is just 0.5% of the loan amount.
Some borrowers are exempt from paying the VA funding fee, including those receiving VA disability. Additionally, surviving spouses receiving Dependency Indemnity Compensation (DIC) are exempt. Finally, the exemption applies to Purple Heart recipients who are on active duty.
Mortgage Insurance
Federal Housing Administration (FHA) loans have an upfrontmortgage insurance premium (MIP)of 1.75% of the loan amount if you're refinancing from another type of loan to an FHA loan or if you're doing an FHA Streamline (from one FHA loan to another). In either case, these can be built into the loan balance.
Conventional loans have the option of what's called single-pay mortgage insurance. Rather than pay forprivate mortgage insurance (PMI)every month until you get to have at least 20% equity or opt for the higher rate associated with lender-paid mortgage insurance (LPMI), you can choose to pay off some or all of the mortgage insurance policy at closing in order to get a lower rate for the life of the loan.
Credit Report Fee
Lenders need to ensure that yourcredit scorehasn't gone down since you initially bought your home. They'll also check for financial issues like unpaid student loans or credit card debts. Some lenders pass the fee of checking your credit score back onto you during closing. Credit report fees typically range from $25 – $50 depending on the lender and your state of residence.
Discount Points
Discount points are optional – they're the fee you pay your lender in exchange for a lower interest rate. Each point costs 1% of your total loan amount, and you can buy multiple points. For example, one point on a $100,000 refinance would cost $1,000. You may also see these referred to as prepaid interest ormortgage points.
Whether it makes sense to purchase discount points depends on the amount you save on yourmonthly mortgage paymentby buying them and how long you plan to stay in the house.
Let's say you're considering whether to purchase 2 points on a $300,000 loan to save $75 per month. The points would cost you $6,000, and the key is to calculate the breakeven point. In this case, that's 80 months ($6,000/$75 equals 80).
If you plan to stay in the home for at least 6 years and 8 months, then purchasing the points to lower your refinance rate makes sense. If you don't plan to stay that long, either don't buy the points or buy a smaller number of them.
