Deciding when to refinance your mortgage means considering your personal situation, the prevailing interest rate environment — and something that really hits close to home: fees.
You may pay as much as 2%-5% of your outstanding principal in mortgage refinance fees, known as closing costs, though the total can vary by state and lender. It’s not a massive single charge, but a pile of small costs that quickly add up. If you decide to lock in a new, lower mortgage rate, switch loan products or tap equity by refinancing, here are the hidden fees to watch out for.
» MORE: How to refinance your mortgage
Early repayment fees
If refinancing will result in an early repayment fee from your mortgage lender, you may want to reconsider. A prepayment penalty can be as much as six months of interest payments. FHA and VA loans and other mortgages insured or guaranteed by a federal agency generally cannot include a prepayment penalty. And in some states, they are illegal. But it’s one thing you want to be aware of before beginning the application process.
Discount point fees
Points are interest payments in 1% increments based on the total amount of your mortgage. You can prepay points in order to lower your mortgage loan’s long-term interest rate — these are called discount points. In other words, you pay now instead of later. If you plan on staying in a home for a long time, loan-discount points to lower your mortgage rate may work to your advantage. Remember, when you buy points, it alters the break-even period, so be sure to do the math.
Lenders can also charge points on a mortgage refinance simply to make more profit — without reducing the mortgage’s interest rate (calculate whether you should buy points and when you’ll break even here).
The mounds of paperwork you’ll face when closing on your mortgage refinance come at a price. Lenders often charge application fees to cover the cost of processing your loan and obtaining a credit report. A loan origination fee, sometimes referred to as an administration fee, underwriting fee or document preparation fee, can increase your closing costs even further.
Appraisal and inspection fees
There is due diligence performed by the lender to ensure that your home is properly valued. You guessed it — you’ll pay for that, too.
You may see an appraisal fee, often between $300 and $500. If you bought your home recently and already have an appraisal on file, sometimes this service can be waived. However, if you suspect your home has gained value along with the recovering real estate market, you may want to have your home reappraised.
The mortgage lender may also require a termite and pest inspection, as well as a general review of the home’s condition by a property inspector or engineer. The charges for these services can be several hundred dollars as well.
Mortgage and title insurance fees
While you will already have homeowner’s insurance due to your existing mortgage, the lender will likely confirm the coverage, protecting itself in the event the house is damaged or destroyed.
Mortgage loans backed by government agencies, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), require the payment of mortgage insurance — once again for the benefit of the lender.
If you have a conventional mortgage but put less than 20% down, you will be required to pay for private mortgage insurance (PMI) to protect the lender in the event of a default. The fees for lender’s insurance varies by the entity involved and ranges from 0.55% to 2.25%.
And there is yet one more protection policy involved when refinancing a mortgage: title insurance. Courthouse records are searched to determine if you have valid ownership of the house and land and to ascertain if there are any liens against the property. Title insurance covers the cost of any errors made in such investigations. Again, you will pay — around $1,000 on average — to protect the mortgage lender in the event such an omission arises.
You may also be required to pay for a survey of the property and improvements, unless one has been recently completed. Cost: somewhere under $500.
High-cost mortgage refinances are regulated
Homeowners who refinance their mortgage or apply for a home equity loan are protected from high fees and outrageous interest rates by the Home Ownership and Equity Protection Act (HOEPA). If you believe you are being unfairly charged, review this booklet issued by the Consumer Financial Protection Bureau. HOEPA regulations do not apply to mortgages issued to build a new home, reverse mortgages or USDA loans.
A final tip on refinance fees: From each lender you apply to, you will receive a Loan Estimate so that you can easily do a side-by-side comparison of mortgage costs. Once you choose a lender, you’ll also receive a Closing Disclosure three days before finalizing your loan, detailing all of the charges that will be assessed at signing. That way there can be no surprises at the closing table.