Refinancing? Protect Yourself from Surprises at Closing

If you plan to refinance your mortgage, it's important to understand the expenses involved. Otherwise, you may get to the closing table and have a rude awakening. Thanks to lots of relatively small costs that add up quickly, paying for a refinance can get surprisingly expensive.

Most homeowners decide to refinance in order to save money. Perhaps they want to capture accumulated equity by starting over with a new mortgage, or maybe they're hoping to avoid higher monthly payments by refinancing from a costly adjustable-rate loan into a more manageable fixed rate one. Whatever the motivation or particular reason for refinancing, the bottom line is usually overall savings.

Avoid refinancing shock

Sometimes, a borrower will get to the closing table and be shocked to learn how much it costs to refinance. While some costs are high-like paying points to get a better rate-others can be relatively insignificant. Couriers may charge $15 per trip to deliver documents, a termite inspector might charge $50, or the bank may tack on an extra $20 to check your credit history. Although rather small, these fees can accumulate quicker than ants at a picnic. When you see them all tallied up at closing-and let's not forget that the person who does the calculation also charges a fee for doing the math-it can be a startling amount of money. It might even make you have second thoughts about your original motivation for refinancing, as these miscellaneous closing costs can incrementally erode your precious margin of savings, and be frustrating to boot.

To avoid this kind of "sticker shock" at the closing table, pay special attention to any charges your lender levies. You can reasonably anticipate paying up to 5 percent of the value of the refinance, and you should factor that amount into any calculations you make as you decide whether or not a refinance is a good financial decision. If you want to borrow $300,000, for example, your closing costs might average in the range of $15,000.

Protecting yourself

Begin by asking for a detailed and itemized estimate of all potential fees, even before you sign off on the loan. The list will include two basic types of expenses:

• Origination fees that are paid to the lender or mortgage broker for processing your loan and the related documents, and for actually providing the funds. If you pay points for a cheaper rate, they'll appear in this set of fees.
• The other costs are for services provided by third parties, such as surveyors, appraisers, credit reporting agencies, and attorneys.

After you apply for your loan, the lender is required by law to provide you with a good faith written estimate of closing costs within three business days. Review this document with your lender to make sure that you understand everything on the list.

Even before you apply for a refinance, remember that lenders have some latitude regarding how much they charge for origination fees. Shop around, because they may be willing to negotiate in order to win your business.