Refinancing to take advantage of low interest rates? Refinancing can be a smart way to reduce debt, but it is important to keep an eagle eye on closing costs during the process. Closing costs can average between 2 to 6 percent of the cost of the property, a hefty burden to bear when your overall goal is to get out of debt. By comparing fees thoroughly, you can see how your loan options stack up.
5 fees to watch when refinancing
You are likely to encounter these fees as you refinance. But be aware that some are not refundable if for some reason you do not complete the loan process.
- Application charge: The fee to process your loan request generally includes checking your credit. According to the Federal Reserve, this expense can range from $75 to $300 -- and if you're denied refinancing, you may still have to pay the fee.
- Appraisal fee: The fee to appraise your home so that the lender knows it is at least worth the cost of the loan is generally your responsibility. Appraisals usually range from $300 to $700, depending on the size of your home.
- Inspection fee: Some lenders require an inspection of your home, which can include checking for termites and a structural analysis. This test can cost anywhere from $175 to $400, according to the extent of the inspection and size of your home.
- Loan origination fee: The loan origination fee includes all of the costs of evaluating and processing your loan. According to the Federal Reserve, this fee, which may be negotiable, can be as much as 1.5% of the loan principal.
- Points: A point equals 1 percent of the amount of your mortgage loan. Points, known as loan-discount points, are a one-time fee that allows for a reduction in the interest rate on your loan. You can negotiate the number of points you pay with the lender.
Use the Good Faith Estimate to compare loan offers
After you submit your mortgage application, you should receive a Good Faith Estimate (GFE) which details the basic information about the loan you need to compare offers. Knowing how much the loan will cost can help you make an informed decision, but ask the lender if you have any questions.
If refinancing to lower debt is the right decision for you, keeping costs contained by shopping for services and negotiating for lower fees is one way to help support your overall goal to reduce debt.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.