Public figures put a refinance at roughly two to five percent of the loan amount, about $7,000 to $17,500 on a $350,000 loan, though part of what appears on the closing statement is prepaid money that comes back rather than a cost at all.
A refinance is a new loan, so it is charged like one: the same origination, title, escrow and recording lines as a purchase, minus everything that belonged to the sale. The confusing part is that the largest single number on the statement is often the new escrow account, which is not a cost. Separating the fees from the prepaids is most of the work in answering this.
What is actually a fee
These are the lines that leave and do not come back. The first is negotiable and varies most between lenders; the rest are third-party charges that sit within a fairly narrow band.
- Origination, underwriting or processing: the lender's own charge, commonly a few hundred to about one percent of the loan.
- Appraisal: a few hundred dollars where one is required, and nothing where a waiver is issued or a streamline removes it.
- Title: the lender wants a new policy on the new loan. Refinances usually qualify for a reissue or refinance rate rather than the full one, so ask which rate is being quoted.
- Escrow or settlement fee: the company handling the signing and the payoff.
- Recording: the county fee for the new deed of trust, and later the reconveyance of the old one.
- Credit report, flood certification, and the wire or courier lines, which are small and real.
The prepaids are not a cost
Two large numbers usually sit under the fees. Prepaid interest covers the days between funding and the end of that month, which is interest you would have paid on the old loan anyway. The new escrow account is funded with several months of property tax and insurance, and it can easily run into thousands of dollars.
That escrow deposit is not a charge. The old servicer refunds the balance of the old escrow account after payoff, normally within about 20 business days under Regulation X, so the money is moved rather than spent. It matters because it is the line that makes a refinance look far more expensive than it is, and because the refund arrives weeks after the money went out, which is a cash flow problem rather than a cost.
In Nevada there is one line a purchase has that a refinance does not. Real property transfer tax under NRS chapter 375 is charged on a conveyance of the property by deed. A refinance records a new deed of trust and no deed, so no transfer tax is due.
A no-closing-cost refinance is a rate or a bigger loan
There are only two places for the costs to go. In the first version, the lender pays them with a lender credit and prices it into a higher rate. On a $350,000 loan at 6.5 percent the payment is about $2,212; at 6.875 percent it is about $2,299. That is $87 a month, or about $5,200 over five years and about $31,300 over the full thirty, in exchange for a credit of a few thousand at closing.
In the second version the costs are added to the balance. Rolling $9,000 into the same loan raises the payment by about $57 a month and adds roughly $11,500 in interest over thirty years on top of repaying the $9,000. Neither version is free, and both can still be the cheaper answer for someone who does not expect to hold the loan long. The comparison that shows it is the APR next to the note rate.
The break-even, which is the only number that settles it
Divide the fees by the monthly saving. Going from 7.5 percent to 6.5 percent on $350,000 takes the payment from about $2,447 to about $2,212, a saving of $235 a month. At $7,000 of costs the break-even is about 30 months; at $12,000 it is about 51 months.
Then set that against how long the loan is likely to be held, which is the part only the owner knows. A break-even of four years means one thing to somebody staying twenty and another to somebody who expects to move in three. The arithmetic does not decide; it tells you what you are deciding.
Questions people ask
Do home equity loans have closing costs?
A home equity loan or line usually costs far less to open than a refinance, and some lenders charge nothing up front, recovering it through an early closure fee if the line is closed within two or three years. It is a second lien, so the first mortgage and its rate are left alone.
Can you roll closing costs into a refinance?
Yes, up to the loan-to-value limit for the program, which is what makes it possible to refinance with no money at the table. The costs are then financed for the life of the loan, so a few thousand dollars accrues interest for thirty years.
What is the biggest cost of refinancing?
In dollars on the statement it is usually the new escrow deposit, which is refunded from the old account and is not a cost. Among the real fees it is normally the lender charge and the title policy, and over the life of the loan it is the interest added by restarting the amortization schedule.