Updated: Apr 4, 2021
Closing costs are the fees associated with refinancing a loan, outside of the actual loan. On average, closing costs equal about 2%-5% of your chosen loan amount. So the cost of refinancing a $100,000 mortgage loan, for example, would be about $2,000 to $5,000.
Lenders are required to outline your closing costs within the initial offer, and again just before finalizing the loan purchase.
Closing costs may include:
Application fees — These are the processing and administrative expenses. Because application procedures differ between lenders, the exact amount you will need to cover depends largely on which lender you choose.
Loan Origination fees — AKA Underwriting Fee. This covers the expense of document preparation, notary fees, lender attorney fees, and your overall mortgage loan evaluation. This is likely the biggest expense and is typically equal to 0.5% of the loan amount.
Prepaid interest — This is if the lender asks you to cover the mortgage interest amount that accrues between the date of settlement and first monthly payment due. Keep in mind that most lenders prefer for you to pay this amount at closing instead of letting it roll over into your first monthly payment. The exact number you will need to pay depends on your loan size and interest rate.
The easiest, most cost effective way of paying closing costs is as a one-time out-of-pocket expense. If the lender is ok with it, you might be able to include the closing costs within the loan, but you will still have to pay them eventually. And since you would need to pay interest, postponing payment only increases the total cost.
Some counties and states offer special programs and grants to help first-time home buyers with closing costs. Our advice is to compare lenders, see what’s available, do the math, and make sure you’re prepared to pay the closing costs before refinancing.