For many homeowners, refinancing may seem like a ready solution to many financial woes. Paying off high-interest debt or reducing monthly payments through a reduction in interest or a change in the mortgage term can have a major impact on your monthly budget. However, potential borrowers need to remember that most refinancing mortgages involve significant settlement fees. In fact, mortgage experts estimate closing costs to total from 4 percent to 6 percent of the total mortgage value. Fees vary widely by location and some can be negotiated, so be sure to ask your lender.
Points
Points are charged by lenders to reduce the overall interest rate of the mortgage, and can often be negotiated. Each point is 1 percent of the loan value. During a refinance, you may be able to roll the cost of points into the mortgage, increasing the face value of the mortgage as well as the amount you'll need to pay each month. Points paid at closing are usually tax-deductible. While not all mortgages include points, others may have one, two or three points.
Origination Fee
Also referred to as a processing or loan administration fee, this cost covers administrative and legal fees associated with evaluating and preparing your mortgage. These fees are generally about $3,000, and can vary based on the amount of your down payment.
Appraisal Fee
To ensure the amount you're borrowing doesn't exceed the value of your home, your lender will likely order an appraisal. If you have recently obtained a mortgage, some lenders may waive an additional appraisal. If an appraisal is required, be sure to get a copy for your own records. Most appraisals vary from $300 to $500, and vary based on location.
Title Search and Insurance
A title search is used to make sure there are no other liens or claims to ownership on the property you're refinancing. If you're refinancing a first mortgage, your lender will want to ensure that their lien is in first position. Title insurance guarantees the results of the title search and in the case of a refinance, protects the lender in case of error. Thanks to computers, title searches can be performed more quickly and, in some cases, more affordably. Title costs vary widely by state and county, usually falling somewhere between $400 and $900.
Private mortgage insurance (PMI)
During a refinance, PMI is usually charged when more than 80 percent of the home's value is being refinanced. Under federal law, once your equity reaches 22 percent of your home's value, as long as your payments are up-to-date, the PMI will be canceled. Most PMI ranges from $50 to $100 per month.
Inspection Fees
These may include termite inspections, inspections of the structure of your home, or inspections of the septic system or well, if present. Most inspections range from $300 to $500 each.
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