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Refinance Closing Costs: How Much Is Too Much?

The best things in life may be free, but a mortgage refinance isn’t one of them. Just like your initial home loan, there are closing costs associated with a refinance — and they’re not cheap. The full cost of refinancing a home depends on a number of factors, including the borrower's qualifications, the type of loan, and the state in which the loan originates.

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What Makes Up Closing Costs

Closing costs cover a variety of fees associated with the refinancing process. Here are some of the costs you are likely to incur.

Mortgage Application Fee
Mortgage lenders charge this fee to cover the cost of reviewing your loan request, checking your credit, and an assortment of other tasks. Mortgage application fees vary, but can go as high as $500.

Origination Fees
The origination (or loan processing) fee is a percentage of the overall loan amount often referred to as a ‘point.’ If your new mortgage loan was for $250,000, and the lender charged a one-point origination fee, that fee would equal one percent of the loan amount — which in this case would be $2,500.

Title Search and Insurance
Before extending a home mortgage refinance, a lender will review public records to confirm that you own the property. This fee usually averages between $400 and $700.

Appraisal Fee
To ensure a house is worth the amount paid for it, lenders will send out an appraiser to examine the property. Home appraisal fees range from $150 to $500.

Legal Fees
Mortgage lenders often have attorneys review refinance documents during the closing process. This fee varies, and while it usually ranges from $100 to $300, it can go higher.

While this list of home refinance costs isn’t all-inclusive, it does consider most of the common costs associated with a home mortgage refinance. Before you apply for a refinance, be sure to get all of the costs in advance. This will not only help you avoid sticker shock, but will also allow you to save accordingly.

How to Get the Lowest Cost Possible

There are no discounts or coupons in the world of refinancing, but there are some practical ways to make sure you’re getting the best rates available.

Raise Your Credit Score
Most lenders require a minimum credit score of 500 to 620 — but unless your score is 740 or above, you'll pay a higher mortgage rate for conventional loans. If you want the best rate, take a few years to build your credit and get that score up to at least 740.

Lower Your Debt
Even if you have a high credit score, you may end up with high interest rates — or no loan at all — if your debt-to-income ratio is too high. In order to qualify for a loan, your debt-to-income ratio cannot be higher than 43%. If you can get it to 36% or lower, your golden.To reduce your debt-to-income ratio and improve your chances of qualifying for a low mortgage rate, pay bills on time and pay down your credit card balance.

Shop Around
Start online with a refinance calculator to estimate your monthly payments at various loan terms. Use this information to determine the loan term that’s best for you. Once you've decided on your loan term, you can start researching which loans are available from credit unions, regional/community banks, national banks, and direct lenders, as well as what special programs they offer.

Lenders don't have to provide an estimate before you apply for a loan — but you want to find the ones who are at least willing to provide ballpark figures for closing costs. Get at least three estimates from local lenders before making your choice.

But Really, How Much is Too Much?

When it comes down to it, closing costs vary too much to give a hardline answer. Fees can fluctuate with the market, vary from state to state, and even lender to lender. According to the Federal Reserve, closing costs are roughly three percent of the home's price. However, in high-tax areas of the country, closing costs can go as high as six percent.

The best thing to do is stay informed. Know the average closing costs in your state, get estimates from multiple lenders, and question all the fees you see in the paperwork. Don’t be afraid to ask a question — the difference could be hundreds of dollars.

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