How much will closing costs be?
Closing costs can vary wildly from a few hundred dollars to several thousand. Keep in mind that even a “no closing cost” loan may require considerable out-of-pocket expenses on your part. If you review your original HUD- 1 statement from when you bought the house (the HUD-1 details each and every penny of the mortgage transaction) you will see that there are “closing costs” and there are “pre-paid” items which together make up the total “settlement charges.” While there are programs that offer no closing costs there are none that offer “no settlement charges” Pre-paid items include things such as pre-paid interest (for the period of time between the closing date and the end of that calendar month), pre-paid real estate taxes and insurance (up to 6 months worth in some cases) and PMI. Even if you are rolling all these expenses into the loan amount, the settlement charges can come as a shock at the closing table especially in some states such as New York which have very high school/property taxes as well as a refinance tax. The other main components of your closing costs are origination points (discussed above), and title insurance both of which are based on the loan amount.
At least with origination points you can be comfortable that you are getting something for your money (a lower interest rate). Title insurance offers no benefits to you but can be extremely expensive depending on the size of the loan. Title insurance protects the lender from losses due to a defective title but it is the borrower that has to pay for this insurance policy. Even though title has been checked and re-checked and even though you paid for title insurance when you first took out a mortgage, you have to pay for it again when you refinance, indeed every time you refinance! Note that title insurance does not protect the home-owner/borrower. It is possible to buy owner’s coverage as well (at a discounted price) but most borrowers do not choose to do so. The rest of the closing costs are relatively small by themselves although they can add up to a significant amount: processing and underwriting fees may be around $500, attorney fees another $500 or so and then there are all the little bits and pieces; recording fees, courier fees, flood certificates, title search etc. etc. Keep in mind that the attorney fees mentioned here that will be paid for at closing are for the bank attorney even though you are paying the fee.
You are of course welcome to have your own attorney at the closing although there will of course be another fee that you will have to pay to your own attorney. The good news is that in most cases when refinancing, the closing costs and pre-paid items can be rolled into the loan amount so that you don’t have to come up with any cash at closing. Adding a few thousand dollars to your mortgage balance may increase your payment $10, $20 or $30 per month but if the lower interest rate is saving you $200 per month, then the closing costs have to be looked at in perspective.
What factors determine the interest rate for a specific borrower? Fixed or adjustable rate mortgage?