If you’ve been doing some research on mortgage refinancing you’ve undoubtedly been forewarned about the dangers of the “hidden fees”.
And for good reason. No matter your circumstances or which lender you choose there are going to be some costs associated with your refinance. Now the extent to which these costs are “hidden” will vary from lender to lender. And yes, the more unscrupulous your lender is, the more likely you will be socked by pesky fees you didn’t see coming.
But the best way to ensure that you aren’t surprised by fees -- hidden or otherwise -- is to do your homework, read the fine print and ask a lot of questions.
To get you started off on the right foot in that process, here’s a rundown of the most common fees in the mortgage refinancing process:
Mortgage application fee
This is the fee you pay to apply for a new mortgage. (When you refinance, you close out your current mortgage and open a new mortgage.) The application fee tends to hover around $250 to $500.
Most lenders will require a house appraisal to determine whether it has enough value (and you have enough equity) to qualify for the new mortgage loan. This appraisal can cost anywhere from $300 to $600, and the outcome of the appraisal can determine whether it’s smart to refinance. If an appraisal finds that your home value dropped and the ratio of your loan-to-value is higher than your lender allows (typically 80%), you may have to put down cash to make up for it, or buy mortgage insurance.
Loan origination fee
The loan origination fee is typically about 1% of the total value of your loan. If you refinance a principal balance of $200,000, for example, your origination fee will be around $2,000. There is a little wiggle room to negotiate in your Good Faith Estimate, a form that gives you a reasonable estimate of the loan terms and the settlement charges.
Document preparation fee
Many lenders will charge you a document preparation fee that typically ranges from $200 to $500.
You may need to pay $50 to $150 for flood certification, which is mandatory in some areas.
Before your lender approves the refinance, they may require a title search, which can cost $200 to $400.
The lender and the homeowner will probably be expected to purchase title insurance to guard against any problems or errors with the title transfer. This may amount to $400 to $800, though rates vary.
The county or city you live in may charge a recording fee for handling the paperwork, which may add another $25 to $250 to your total bill. On the whole, expect to pay (as a very rough ballpark) about 1.5% of your principal loan amount in closing costs when you refinance. The bulk of this, about 1%, will be in the form of the loan origination fee, while all the ancillary charges (document prep fee, appraisal, etc.) may add another 0.5% or more to your bill.
But there’s more
Of course, those are the surface costs — the literal fees and expenses that get added to your mortgage bill. Possibly the biggest hidden cost of a mortgage refinance is that your amortization starts from square one.
“Amortization” refers to the way in which your payments get applied toward principal reduction, as opposed to interest payments. It’s tempting to believe that if you have a 5% interest rate, and you make a $105 payment, $100 will go toward your principal reduction and $5 will go toward interest. But that’s not how mortgages work.
Instead, your payments are applied primarily toward interest at the beginning of your mortgage and predominantly toward principal as you reach the end of your payments. In the first year of a 30-year mortgage, your regular payments will barely make a dent in your principal balance; the bulk of your payments will be applied toward your interest. In the 29th year, those trends will be reversed.