What Is Included in Refinance Closing Costs?
When you refinance a mortgage, your lender must provide a Loan Estimate within three business days of your application. This document itemizes your potential costs, which are finalized in the Closing Disclosure you receive before signing. These fees fall into three main categories:
- Lender Fees: Charges for the services required to create and process your new loan.
- Third-Party Fees: Costs paid to external companies for services like the appraisal and title search.
- Prepaid Items: Upfront payments for expenses like property taxes and homeowners insurance, which are often held in an escrow account.
Here is a breakdown of common fees you can expect to see:
| Cost Type | Description |
|---|---|
| Application Fee | A fee from the lender to cover the initial cost of processing your loan application. |
| Loan Origination Fee | Typically 0.5% to 1% of the loan amount, this fee covers underwriting and funding the loan. |
| Appraisal Fee | Pays for a professional appraiser to determine your home’s current market value, ensuring it secures the loan. |
| Credit Report Fee | Covers the cost of pulling your credit reports to evaluate your financial history. |
| Title Search & Insurance | A title company searches public records for claims against the property. Title insurance protects the lender from future ownership disputes. |
| Attorney Fees | Some states require an attorney to oversee the closing process. This fee covers their legal services. |
| Recording Fees | Paid to your local government to officially record the new mortgage in public records. |
| Prepaid Interest | Covers the interest that accrues on your new loan from the closing date to the end of the month. |
Source: Consumer Financial Protection Bureau
How Are Refinance Closing Costs Paid?
As the borrower, you are responsible for paying closing costs. You generally have three options for handling them:
- Pay at Closing: You can pay the fees upfront with a cashier’s check or wire transfer at the closing appointment. This is the most straightforward option and avoids increasing your loan balance.
- Roll Into the Loan: Many homeowners choose to add the closing costs to their new loan principal. This eliminates the need for out-of-pocket cash but increases your total loan amount and the interest paid over time.
- Accept Lender Credits: A lender may offer to cover some or all of your closing costs by giving you a “lender credit.” In exchange, you will accept a higher interest rate. This reduces your upfront expense but results in a higher monthly payment.
Strategies to Lower Your Refinance Closing Costs
While some fees are non-negotiable, you can take steps to minimize your overall costs:
- Compare Multiple Lenders: Obtain Loan Estimates from at least three different lenders or mortgage brokers. Pay close attention to lender-specific fees like origination and application fees, as these can vary significantly.
- Negotiate Fees: Ask your chosen lender if they can reduce or waive any of their proprietary fees. While third-party costs are typically fixed, the lender has control over its own charges.
- Schedule Your Closing Strategically: Closing at the end of the month minimizes the amount of prepaid interest you’ll owe, as there are fewer days between your closing date and the first of the next month.
- Understand “No-Closing-Cost” Refinances: Be cautious with these offers. The costs are not truly gone; they are usually absorbed into a higher interest rate or rolled into the principal. Calculate your break-even point to see if this trade-off makes sense for you.
Are Refinance Closing Costs Tax Deductible?
According to the IRS, most refinance closing costs are not immediately tax-deductible. Unlike the costs associated with an original home purchase, these fees are considered costs of servicing a loan rather than acquiring a property.
However, you may be able to deduct certain costs over the life of the loan. For example, any mortgage points paid to lower your interest rate can often be deducted proportionally each year. As the rules can be complex, it is best to consult IRS Publication 936 and speak with a qualified tax advisor about your specific situation.
For more information on what you can deduct, see our guide on the Mortgage Interest Deduction.
