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Finance Home Mortgage Refinance

Mortgage Refinance Guide Step 8: How Closing Costs Finance a Home Mortgage Refinance

    When people look for home mortgage refinance loans, the last thing that is on their mind is how they are going to finance it. After all, the purpose of refinancing your home mortgage is to save money -- not to spend it. But just like everything else you buy, home mortgage refinance loans will cost you money. Although unlike bread or butter, home mortgage refinance loans don't come with a price tag. Instead, you have to pay closing costs.

How to Finance a Home Mortgage Refinance Loan

    If you are thinking about getting a home mortgage refinance loan, you probably have already figured out how to budget for your monthly payments. After all, you have been making your monthly payments for a while and if you refinance right, your monthly payments will decrease leaving you with some extra cash. While you have the monthly payments under control, your closing costs may be a shock. 
    Unfortunately, you will be expected to pay closing costs just as you did when you got your first mortgage. Some of the closing costs you will probably need to pay are loan origination fees, credit report charges, appraisal charges, inspection fees, points, mortgage recording taxes, title insurance, and legal fees (Goodman 404). You may find that your lender will charge fees other than the ones listed above.
    Your closing costs will probably be around four percent of your total loan amount (Sutton 33). Therefore, if your home mortgage refinance loan is for $200,000, you closing costs will be somewhere around $8,000. There is no guarantee that the closing costs will be four percent of the total loan amount. Some lenders will charge higher closing costs and other will charge lower.

How to Finance Home Mortgage Refinance Loan Closing Costs

    If you remember back to when you got your original mortgage, you will recall that you or the person who sold you the home had to pay the closing costs upfront (Milligan 215).  Luckily, when you finance a home mortgage refinance loan, the closing costs don't work that way.  You will have a choice to either pay your closing costs up front or have them finance in the mortgage (Milligan 215).
    If you choose to have your closing costs financed with the mortgage, then you will get a no-cost loan. When you get a no-cost loan, your lender agrees to pay for your closing costs (Garton-Good 75). While that may seem like a great deal, beware. Nothing is ever for free, not even home mortgage refinance loans. The way your lender will make the money to cover your closing costs is either to charge you a higher interest rate, add the amount for the closing costs to your loan balance or both (Milligan 215).
    If your closing costs are added to your loan balance, the total amount of money you must repay will increase.  So if you needed a home mortgage refinance loan for $200,000 and your closing costs were $8,000, then your new loan balance would be $208,000.  Keep in mind that you will have to pay interest on the extra $8,000 added onto your loan balance. Therefore, if your lender adds the full amount of the closing costs to your loan balance, you will end up paying a larger fee than you would have had you paid the closing costs upfront.
    If you choose a no-cost loan where the interest rate increase to cover the closing costs, you will have to pay additional interest.  To see if the no-cost loan will cost you more money than paying the closing costs upfront, subtract the amount of total interest you will have if you pay your closing costs upfront from the amount of interest you would have to pay on the no-cost loan. If the difference between the two is greater than the closing costs you are being charged, then you know that the no-cost loan is more expensive.

Choosing Which Way to Finance a Home Mortgage Refinance Loan

    It may seem that choosing a no-cost loan doesn't make much sense because you will probably end up paying more for it. However, there are some circumstances in which getting a no-cost loan is smart. Let's say you plan on moving in 4 years and the interest rate offered on a no-cost loan is lower than the interest rate you are currently paying. If the extra interest you must pay on the no-cost loan does not equal the amount of the closing costs, then you would save money choosing to finance a home mortgage refinance loan with a no-cost loan. However, be warned that if you decide not to move, you may be stuck paying more money than you had anticipated.

Mortgage Refinance Guide Sections:


Fisher, Sarah Young, and Shelly, Susan. Complete Idiot's Guide to Personal Finance in Your 40s and 50s. Indianapolis; Alpha Books, 2002.

Garton-Good, Julie. All About Mortgages. United States; Dearborn Trade Publishing, 2004.

Milligan, Edie, Sutton, Jamie, and Milligan, CFP. The Pocket Idiot's Guide to Mortgages. Indianapolis; Alpha Books, 2003.

Sutton, Garrett. The ABC's of Getting Out of Debt. New York: Warner Business Books, 2004. 

Goodman, Jordan Elliot. Everyone's Money Book. Chicago; Dearborn Trade Publishing, 2001.