Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Paying Closing Costs For Refinancing a Mortgage
Due to low-interest rates on mortgages many people are looking to refinance, however, most of them get discouraged because they think that they have to write a check at closing to pay all the closing costs out of their pocket.
In this post, we will learn different ways you can use to pay the closing costs when refinancing your mortgage.
There are a lot of misconceptions out there so it is important to know what the real deal is.
What are the types of Closing Costs For refinancing a Mortgage?
First, let us understand what types of closing costs you are going to pay when you are refinancing your home mortgage. There are three basic types.
1) Origination cost: These are the costs to underwrite the mortgage, process the mortgage, and if you choose to pay the points to buy down your interest rate.
These fees could be anywhere between 0.5% to 1% of the loan amount which covers origination and administrative services such as underwriting and funding the loan. You will be paying this towards the closing of your loan.
2)Title settlement and Recording charges: These are the charges that are going to go to the attorney or the title company for them to do their title search, title insurance, and recording charges that would be to the town or the city to record the new mortgage.
3) Escrow Deposits: These are the deposits that will go into your escrow account on the new mortgage to pay for your property taxes, your homeowner’s insurance, and if applicable to your property, the flood insurance.
These are the types of costs that you are going to incur as your closing costs for refinancing your home mortgage. Let us now take a look at the options that you have to pay for them.
1) Pay Out Of Pocket
The first option that you have is to pay out of your pocket and write a check, however, most people do not prefer paying for the closing costs for refinancing their mortgage in this way.
Most of the people who are refinancing for the first time, still think that they have to pay for the closing cost from their pockets.
The thing is the closing costs for refinancing could easily be around a couple of thousand dollars sometimes even tens of thousands of dollars.
Paying them from your pocket could be like digging a deeper hole in it. That is why most people opt for other paying options.
2) Roll The Costs Into Your New Mortgage
The second option to pay for your closing cost for refinancing your mortgage is to roll these costs into your new mortgage. By doing so you are eventually increasing your principal balance.
For example, if you had a mortgage balance of $100,000 and there is a closing cost of $3,000 then it would increase your principal balance to $103,000.
This mode of paying your closing costs could make sense because then you don’t have to pay anything out of your pocket.
It just increases and goes into your monthly payment and is amortized over the term of the loan (30,20, 15 years).
Since the borrower does not have to pay out of pocket this is one of the most common options used to pay for the closing costs for refinancing the mortgage.
3) Lender Paid Closing Costs
This is an option where you can take a higher interest rate and in exchange for taking a little bit of higher interest rates the lender will chip in to pay your closing cost.
This may be something where it may pay a portion of your closing costs. It is not normal that the lender paid closing cost will take all of your closing costs, however, it could take care of half or even three-quarters of these costs.
For example, if you qualify for a 3.5% interest rate on a $100,000 loan but you get a 3.75% by taking that quarter percent higher the lender can do a rebate back to you let’s say one percent of your loan amount which would be $1,000.
The lender will give you a credit of $1,000 at the closing which would reduce the closing cost by $1,000. And remaining closing costs could be paid at the closing either by writing a check or rolling it to your loan balance.
Conclusion
When you are refinancing your mortgage you need to look at the ratio of cost versus the benefit.
The time you are planning to stay in the house may determine if it is worth refinancing your mortgage for the amount of closing cost you are willing to pay.
Speak to one of our preferred lenders who can do a cost vs benefit analysis and figure out how much your closing costs would be vs how much you are going to save and what the break-even point be.
