Before you can complete the home refinance process, you are going to be faced with closing costs. Closing costs are basically all of the fees necessary to get the refinance done. When they are all combined, you get a lump sum that you then pay to the lender, who disperses the funds to the various third parties that he used to get your refinance taken care of. They are separate from the down payment for a home or refinance, although both the down payment and the closing costs are required upon closing. So while they are necessary, the question remains, what are FHA refinance closing costs and why are they required?
FHA Refinance Closing Costs – a Combination of Fees
When a lender begins the approval process for a refinance he has to involve a number of people to help get all of the information necessary for the approval to happen. These include underwriters, title companies, lawyers, appraisers, surveyors and so on. All of these people need to be paid for what they do, and each of them are going to charge a certain price. Their fees are added into the closing costs.
In addition to these fees, there are other fees for services given by the lender and for payments that have to be made before certain paperwork is released. So you’ll have a credit report fee, a loan origination fee (the lenders fee for handling the paperwork from the loan),survey fees, title search fees, recording fees, escrow fees, and possibly prepayment penalties. Keep in mind that this list isn’t necessarily required by every lender. Some lenders will want your business bad enough to cover most of the closing costs on their end. Just make sure you know exactly what you’re dealing with.
When all of these expenses are combined you typically end up with closing costs that are in the thousands. Often times the FHA Refinance closing costs are anywhere between 2% up to 5% of the loan so keep that in mind when you decide to refinance. These are, of course, in addition to any down payment that may be required by your lender.
Taking Care of These Requirements
If a down payment is required on an FHA mortgage, the money can come from various sources, including being gifted by a family member or even a charity. For some, it’s worth it to pull the money from savings, because when you reduce your interest rate you can potentially save thousands of dollars. For others, planning ahead for the refinance makes it easier to handle the closing costs. If the money is already budgeted into the expenses for the refinance, it’s not a big deal to cover the cost. For others, a no cost loan becomes the best option. These loans typically have a slightly higher interest rate and in some cases, the mortgage amount is increased, but they can be a great way to avoid paying those fees up front. Be cautious when taking this step, because you could end up paying more over time. However, if you want to look into the no cost option, your loan officer will be able to help you determine whether this is available to you.
In many cases you can reduce the closing costs by negotiating with your lender. While this doesn’t reduce them entirely, it can make the impact a little easier to bear. Because you are an investment that the lender wants, they are often willing to negotiate away some of those expenses, or negotiate scenarios that work to your advantage financially. With you as a customer they make money every month on interest, so they want to keep you around. Don’t be afraid to negotiate with your lender, and don’t be afraid to get your loan officer to negotiate for you. With a good expert on your side you may be able to get those fees reduced.
Refinance closing costs are required because everybody needs and wants to be paid for the services they gave to get your refinance approved. In the end, one way or another, the closing costs will need to be paid. So make sure that the benefits of the refinance outweigh the cost of the refinance before you sign.