Understanding Closing Costs
Typically, there are expenses associated with refinancing. They're called closing costs, and they can be broken into four main groups.
Lender Fees:
This is what the lender charges you to originate a loan. It covers the overhead associated with processing your loan.
Third Party Fees:
This includes other service provider costs, like appraisal, credit reports, and flood zone determination. These are sometimes called “pass-through costs” because lenders select the providers and then pass the costs directly to the borrower. Lenders are not permitted to mark up these costs in any way.
Title & Settlement Fees:
This includes settlement charges like title exam, title insurance, and other settlement fees. As the borrower, you’re allowed to select your own title company, so you do have some influence in determining these costs. And similar to third party charges, lenders are not permitted to mark up these costs in any way.
Taxes and Other Government Fees:
Some states charge taxes on mortgage transactions. These are sometimes called transfer taxes, documentation stamps, or intangible taxes. This category also includes county recording fees.
To determine if it makes sense to refinance, homeowners often consider the number of months it takes to break even on closing costs. In other words, how long will it take until the monthly savings that result from refinancing equals the closing costs paid? If the time period is reasonable, it may make sense to refinance.
Fast Fact:
When total closing costs are only $295 (like at Third Federal), your months to breakeven are really short. Calculate your breakeven here.