Shock Protection: Be Prepared for Refinance Settlement Costs

When Oprah Winfrey gave everyone in her studio audience a free car, TV Guide named it one of the greatest moments in television history. But once the recipients got over their amazement, they were in for a different kind of sticker shock – each winner was required to pay up to $7,000 in taxes for the grand prize. While it was a great deal for the 276 winners, it still came with a hefty price tag.
   
Now that mortgage rates have dropped to mouth-watering lows, people are taking advantage of the opportunity by refinancing their mortgages. While you may be getting a great deal on an interest rate, you’ll be paying a steep price for the privilege. Learn about the real costs of refinancing in order to avoid a disappointing surprise at the closing.

Fees the bank controls

The bank is in the business of mortgage refinancing to make money, and they’ll do it any way they can. You may be charged a fee for application ($365) and loan origination ($2,734 for 5 percent down, $2,537 with a 10 percent down payment). You may also be charged fees for credit reports, underwriting, and processing,

There are additional costs that are worthwhile, but may cause you to dig into your pockets.  Points -- a one-time fee that you negotiate with your lender to reduce the interest rate – are generally 1 percent of the loan amount, and can make a difference in what you shell out of your pocket each month.

Always ask your lender for a breakdown of these costs. Because most of these services are done in-house, the lender isn’t out-of-pocket, and may agree to reduce them. It never hurts to ask.

Fees the bank doesn’t control

There are certain checks on your property that the bank may require before they’ll close your loan. The median costs below are courtesy of the Federal Reserve Board:

Appraisal Fee                                               $292
Home Inspections                                        $300 to $500
(May include termite inspection,
structural analysis, water and/or
septic tests)
Mortgage broker fees                                   variable
Title Insurance                                              $175 to $900 per $100,000 loan, depending on your state

Paying Uncle Sam

The taxman always seems to want a little piece of you. It’s no different in a mortgage refinance. At closing, you’ll be required to pay various taxes, including transfer and recording fees. You’ll also need to cough up some funds for prepaid interest, to cover the period from when you close until your mortgage payments begin.

You can minimize closing cost shock by understanding what you’ll be paying before you fill out your mortgage refinance application. The good news is that you may not feel a direct hit, because you can roll these costs into the loan, so you won’t be out of pocket. Once you have the closing costs handled, you can maximize the advantages of a mortgage refinance, and count the dollars you’ll be saving by reducing your interest rate while kicking back and enjoying a rerun of Oprah!