Refinance closing costs and pre-paids

I wanted to do a video to try and explain refinance closing costs. And how you can structure your new loan amount to include the closing costs or not.

Hard costs – refinance closing costs

So when you look at a loan estimate, also called a good faith estimate, you’ll see there are hard costs that are needed to put the new loan into effect. Application fees to the lender, appraisal fees, title fees, title insurance, and then depending on your jurisdiction, the state and county for transfer taxes.

Prepaids and escrows – refinance closing costs

And then you get into prepaids and escrows. Which are not necessarily closing costs, although they are monies that you see at closing. But they’re not hard costs that are paid to affect the new loan. These are monies that you would pay anyway. You pay per diem interest anyway on your current loan. You pay taxes and insurance on your current loan. So when you look at the total breakdown, you see that all of the costs together. They list as total closing costs, which is semantically not totally correct, because they’re not all closing costs to affect the new loan. But you’ll see $8,515 at settlement. Which is partly closing costs to the lender and the appraiser and the title company. And then there are escrows to establish the new escrow account for property taxes and homeowner’s insurance.

Per diem interest – refinance closing costs

And then there’s a little bit of per diem interest, which will fluctuate depending on what time of the month that we go to settlement.

How should you structure your new loan amount?

These three things together total that $8,515. So what most people would do is they would finance the closing costs, the actual lender, title appraiser cost, the hard costs, into their new loan amount. So if you owe $500,000, for example, maybe you would take out a new loan for $504,000 or $503,600. And then you would pay cash for the escrows and the interest. Maybe you would show up at the settlement table with $4,900 to cover these two things. Knowing that you’re going to get a refund back from your existing lender for the existing escrow account. Which should be very similar in dollar amount to what the new lender is going to take here.

You have an escrow refund coming from the old lender who is getting paid off

So if you go to settlement and you’ve got to write a check for $4,800, you may be getting a refund of $3,000 from the current lender. Now, that refund check may take three or four weeks, FYI. And you’re also not going to make a payment on the 1st of the month after settlement. If you settle, let’s say, March 16th. You’re not going to make an April 1st mortgage payment. You wouldn’t make a new payment until May 1st. So you skip that April 1st payment because you’ve effectively paid it at the settlement table. There’s that prepaid interest. By paying some per diem interest, and that skipped mortgage payment, and then the refund from the lender getting paid off. This will offset the amount of cash you bring to the settlement table. And then you’ve financed in the hard costs or the closing costs into the new loan.

You can finance all costs, escrows and interest

Now, depending on the appraisal and some other variables, you could potentially finance in every penny of this. Most people don’t, because it really doesn’t make sense to pay interest on a 30-year loan on a partial property tax bill or two weeks of per diem interest. That really doesn’t make fiscal sense. So most people would finance the hard costs or the closing costs, pay cash for the escrows and interest, and that’s the way they would structure their new loan amount. Some people might want to pay cash for all of it. And if you owe $500,000, rather than inflating your loan amount to $503,000 or $504,000; they may just keep the loan amount at $500,000 and pay all of this at settlement.

You have options

The bottom line is you have options on how to construct your new loan amount. We should talk about this at loan application, and again, when the appraisal comes in. Because the appraisal amount and the loan-to-value are also going to have some input into how we are able to construct the new loan amount. But hopefully, this gives you some good input on how the loan amount is constructed, what the costs are. And the fact that the closing costs on this particular loan are not $8,515. It’s more like half of it, almost $4,000 is closing costs. Half of it, a little over $4,000 is escrows and interest. So we’ll talk soon. And feel free to ask questions on how to construct your refinance loan amount. Thanks for watching.

Contact me to discuss refinancing, mortgage rates, or other mortgage questions. Click here to schedule a call or you can email me directly.