If you’re shopping around for a refinance or even just considering refinancing your home or investment property you might be wondering how much the closing costs are going to run you. ORRR, if you’re already in the process of comparing lenders you might be wondering why the closing costs look like they change so much from lender to lender. In today’s video we’re going to go over what the typical closing costs on a refinance are, why they can be vastly different when you compare two different lenders and what you can do to get those closing costs down as low as possible.
Let’s talk about closing costs on a refinance. They are, or at least usually are, far far less than what closing costs run on a purchase transaction and with good reason. In a refinance there’s only one party. Escrow doesn’t need to coordinate with title the same way to make sure the money’s there and that title is clean. They still do that but it’s just much easier because generally speaking, if you’re refinancing you’ve lived there for a bit of time so there’s probably a good record of the title from your purchase.
Before we get into a dollar amount let’s quickly just go over what exactly is in your closing costs. If you are looking at loan estimates already you’re going to want to look at page 2 of your loan estimate….and if you are in the unfortunately position of getting one of those fake loan estimates that lenders sometimes call a loan estimate but isn’t ACTUALLY a loan estimate, then I would start looking for a new lender, but assuming you got a loan estimate that looks like this…then page 2 should detail all of your closing costs.
You’ll notice there are different sections labeled with letters from A all the way to J…and the page is also split up into two columns, one on the left and one on the right. The fees on your left hand side on a loan estimate are going to be considered “loan costs” – meaning those are fees that are specific to the loan while the fees on the right hand side of the page are considered your “other costs”…with one exception these are fees that you are going to be paying whether or not you get the loan so sometimes these can be a bit high and make your closing costs look higher than they actually are because the truth is you’re going to paying these fees whether you refinance or not.
What are typical closing costs?
There are really a few buckets for closing costs on a typical loan that fall into your “loan costs” which are on the left hand side of the second page on your loan estimate. There’s an underwriting fee which is usually somewhere around $1,000. Credit report fee which could range anywhere from $35 – $100 depending on if we’re pulling just a single person or a married couple or multiple co-borrowers and additional credit stuff
There are your title fees…and sometimes these can be broken down a little further into line items like tax certification, flood inspection, but really these are just title fees….these range from $300 to over $1,000 and usually are dependent on the loan amount.
There’s also your appraisal – which kind of jumps all over the map. About 40% of the refinances I do get an appraisal waiver, but for the other 60% we’re starting to see more desktop appraisals come through which can be just a few hundred dollars but if you’re in the situation where you need a full appraisal where someone comes out and inspects the property and takes photos that can be anywhere from $500 – $1,000 depending on how busy appraisers are.
Also, even though appraisals are considered part of your closing costs, that is a fee you’re going to have to pay up front so it’s not really a closing cost in my opinion as it’s paid well before closing or even before your loan is fully approved.
There’s going to be a notary fee which can be $125 to $250 depending on your area and how aggressive your title and escrow company is about beating up notaries on their pricing…
And finally there are escrow fees which are also called closing fees…which is currently floating somewhere around $500 on average.
The Right Hand Column
That’s everything that’s standard on the LEFT side of the page which are your loan costs…now there is one cost on the right hand side of the page that I always felt was something that was more appropriate for the left hand side which is the recording costs…after all, if you don’t get the loan there’s nothing to record so really this should be considered a “loan cost” in my opinion but on a refinance it’s usually somewhere around $150 – $200.
So if you include the recording fee which records your loan with the county to everything on the left side you’re going to get somewhere around $2,000 – $2,500 plus the appraisal if you are required to get one. When I think of closing costs on a normal loan anywhere from $250,000 to $600,000 or so I immediately know it’s going to be somewhere in the $3,000 ish range on the left hand side of the page for most borrowers…the right hand side of the page is a bit of a different story.
So on the right hand side of the page you have two sets of numbers that vary pretty greatly. The first is your prepaid interest. The way loans work is that your bill is going to be due on the first of the month…but, since most loans close mid month, on the third, fifteenth, twentieth, whatever, there’s this reconciliation that the accounting department has to do. They have to pay off your old lender to the day for when they’re paying off your old loan…and depending on when your loan closes, your new lender is going to need to charge you the balance of the days for that month in interest…so if you close on the 10th in a 30 day month you’ll have another 20 days of interest to pay for that loan.
Don’t think that because you’re refinancing your property that you get any free days from your new bank – banks don’t work like that. They are going to want to collect the interest for every single day so if you close later in the month you’ll have a much smaller amount of prepaid interest to pay vs if you close early in the month where you might have nearly an entire month of prepaid interest to pay…the reason this shouldn’t matter to you though is that whatever you’re not paying in the closing costs, your old lender is going to collect from you.
When you pay off your old loan we order what’s called a payoff statement from your bank, and they break down how much is owed to pay off the existing loan and it’s broken down to the day…so don’t think that if you move your closing date towards the end of the month you’re really saving any money, cause you’re not – you’re just paying your old lender instead of your new one – so I look at prepaid interest as a wash, it basically comes out neutral…the same thing can be said of the other fees that might be on the second column and that’s for prepaids and escrow.
If you pay your insurance and property taxes together with your mortgage payment that’s called having an impound or escrow account on your mortgage. But in order to have that, the bank needs to collect a few months extra for padding in case you’re late or skip a payment or if your property tax or insurance fees go up…so they’re going to collect a few months more than they actually need here…but so did your old lender.
If you look at your current mortgage statement you should see a line item somewhere on there that says “escrow balance” – that escrow balance is how much they have in your escrow account that they have been collecting every month including the initial extra padding they probably charged you to start the escrow account when you bought your property…but the bank doesn’t keep this excess…when you refinance with your new lender whatever is left in the escrow account gets returned to you. Usually in 2-3 weeks you’ll get a check in the mail for this so again, your property taxes and insurance are generally pretty neutral.
So while you may have additional thousands of dollars on that right hand column if your loan is larger that can make your closing costs look quite high but really those are fees you are going to be paying whether you get the loan or not, or funds that will be refunded to you from your existing bank when you close on your new loan so they’re not really true costs and you shouldn’t pay as much attention to them…which is why in my mind I always think of closing costs on a normal loan as somewhere around $3,000 or so…cause the rest aren’t really true closing costs but just money moving from one lender to another.
Now I’ve said “normal” loan a few times so let me go over the few places where this can change.
The first is quite simply that your lender is using an expensive title and escrow company. Not all title and escrow companies are equal and some can get quite pricey and you may end up paying an additional $1,000 in closing fees if someone is using a not so aggressive title and escrow company. So watch out for that as that’s a hard cost you don’t want to pay if you can avoid. These fees are going to be in section B and C of the second page of your loan estimate so keep an eye out for those…
The second way this can be different is if you are being charged an origination fee or broker fee ORRR if you’re paying what are called discount points.
Discount points are where you actually pay to buy the rate down. So if you’re at 3.5% and you really want to bring your monthly payment down you can opt to pay a couple thousand and usually get that rate down to 3.25% to get your payment down. Obviously if you’re paying several thousand dollars to buy a rate down then your closing costs are going to get high pretty quickly. Discount points are going to show up in section A of the second page of your loan estimate by the way…
Let’s talk now about broker fees or origination fees. A broker can charge you a fee to do the loan. They can charge you a flat few thousand dollars or they can charge you as much as 2 or 2.5% of your loan amount as an origination fee. That’s how lenders and loan brokers like me make a living – however just know that if you don’t see an origination fee that just means that the bank is paying the broker directly and the way they do that is by charging you a higher interest rate….so you can either pay an origination or broker fee or get a higher interest rate that’s typically the trade off.
One way that my company often tries to get my clients the best rate is to charge a brokerage fee (which gets you a lower interest rate on the loan) but then try to negotiate with several different lenders to see if we can get you a lender credit. A lender credit is a rebate that the lender offers to help offset your closing costs. Often times we’ll get a lender credit that is the same as the brokerage fee so we’re able to get you a lower loan amount while also getting our fee essentially taken care of by a lender credit.
If you are getting a lender credit it will show up on the bottom right hand column of page 2 on the loan estimate in section J.
Now the last thing to keep in mind and this is super important to understand is that you don’t have to pay these fees in cash. You might have a few thousand in closing costs or even more if you’re buying down the rate but the most common way to refinance is to fold those closing costs into the new loan, so if you only needed $300,000 to pay off your old loan, we would make the new loan for $304,000 or so to cover all of your closing costs so that you don’t have to come out of pocket with any cash for anything other than the appraisal if that’s necessary.
If you have questions about anything I always invite you to leave a comment below so I can get back to you.