The many consumers that shop in a physical store or online are faced with many decisions. Both places have their pros and cons about shopping, which can influence decision-making, depending on the location. Those who want to see the actual product in front of them, as well as leave with their purchase after payment, would prefer shopping at a physical location. However, customers who would like to get extra discounts, as well as other choices of products not available in a physical store, would rather shop online. Regardless of which location a consumer would go to, both choices leave a customer with the same question, “should I pay for an extended warranty?” This may not sound like a huge problem but whatever the answer is will determine what your closing purchase will be.
Hopefully, the light bulb above your head just went on to see how this example blends into the conversation for today. When a homeowner decides to go through with a refinance, the moment when the new mortgage has been granted does not end the process. Depending on the type of loan that was acquired, the matter of what the final costs of sealing the deal will have an impact of the final cost of the new mortgage. The good thing is that the borrower can have a say on how the closing costs will be handled; yet, a decision cannot be made without knowing what the consequences will may be.
What are Refinance Closing Costs?
When a homeowner first purchased their home, the new owner would be issued a loan agreement or mortgage that is an agreement between a lender and the mortgagee. Before this transaction can be completed, certain costs must be taken care of, and the schedule in which payments are to be paid must be agreed to. Fees include deed-recording fees, loan origination fees, taxes, discount points, surveys, appraisal fees, title search, title insurance and credit report charges. When acquiring a new mortgage, a borrower must contend with refinance closing costs that can be the same or different as when the original loan was issued.
When looking at closing costs, this can be separated into two categories: nonrecurring closing costs and prepaid costs. When looking at nonrecurring costs, these are one-time fees associated with obtaining a loan or buying a property. As for prepaid costs, these fees are paid in a repetitive manner such as with homeowners’ insurance and property taxes. The lender estimates these fees on what is known as a “good-faith estimate” and the lender is responsible to issue this to the applicant within three days of the new mortgage application. However, when going through a refinance, the applicant has options on how to handle closing costs depending on the situation of the mortgagee as well as what a lender is offering.
The Impact Refinancing Options Have With Closing Costs
When finalizing a refinance, any fees that the lender charges the borrower are referred to as the closing costs. This is common with most refinances; however, when these costs are actually paid off is another story. Depending on a borrower’s situation financially, some will decide to get closing costs paid off immediately and conclude the refinancing process. However, other homeowners may opt to pay closing costs at a later time, or may have no choice but to pay later due to a lack of finances. What usually happens in this situation is the closing fees are factored into the monthly payment schedule that the borrower and the lender agree upon. For example, a lender is offering a new mortgage of $300,000 to a homeowner. One option would be to pay closing costs at a later time, known as a no cost loan, and factor a monthly rate of 6.25% which would be $1,847 for your monthly payment. The other option offers a zero point loan with non-recurring closing fees of $2,800 at a rate at 6%, thus having a monthly payment of $1,799. The difference per month would be $49 and though this may not sound like too much to pay on the surface, the cost differential between the two would be $588 per year, $2,940 in five years and $5,880 in ten years. Safe to say, the longer it takes to pay off the new mortgage the more interest the borrower will have to lay out.
Of course, if you are lucky to refinance during a time where a lender may offer a new mortgage with no closing costs in order to remain competitive with other lenders, that is a possibility. For the so-called unlucky individuals, refinancing closing costs are a reality that must be dealt with. It is important to realize and understand there are types of new loans offered by lenders that deal with closing fees in a way that best fits your situation. Even though when searching for a new mortgage you should never rush into it. Keep in mind that when a lender offers a low rate or no closing fees that it is for a limited time; so, avoid procrastination. This ends today’s conversation, and I hope it was one that will lead you to a successful refinance.