Closing Costs

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Quick Definition: Closing costs are costs associated with the loan closing, while settlement charges include closing costs, pre-paid interest, escrow reserves for taxes and insurance, and the down payment (if the loan is a for a home purchase).  Closing costs and settlement charges are listed on the Good Faith Estimate (GFE) during the loan application and on the HUD at the closing.

Keep in mind that with the exception of lender costs (which vary based on the point structure of your loan), the actual closing costs at closing will be the same for all lenders - because the majority of costs go to third parties like title companies/attorneys, closing agents, title insurance, tax stamps, etc.  Make sure you trust your mortgage company, the good ones will give you an accurate picture of closing costs.  The less than trustworthy companies will put anything on a loan scenario to have you commit - and there is not penalty for them at closing if they are off by even $5000!  Get a Good Faith Estimate (GFE) as these are now locked down in terms of what can change.

 General Information

Closing, or settlement, the term used for the process that finally makes you the official owner of the house you've purchased should be an exciting event. You have made an offer on the house, the seller has accepted the offer, you have been approved for a mortgage and taken care of other obligations necessary for purchase (home owner's insurance, etc.), and all that remains is to sign dozens of papers and pay your settlement, or closing, costs. Closing costs refer to the costs associated with purchasing and selling a property. It's the closing costs that dampens buyer's excitement at closing. This is largely due to the fact that people do not have a clear idea of what closing costs are or why they have to pay them. When you understand the individual fees, know the whys and wherefores of the fees, closing can again become an exciting event.
  
A lender's Good Faith Estimate provides you with the fees that you are likely to pay at closing. The lender will give you a Good Faith Estimate within three business days of receiving your loan application, as required by RESPA. The three words Good, Faith, and Estimate are key. The lender focuses on the word estimate, the buyer focuses on the word good, and faith is what brings the two together. When buyers have confidence in the business practices of their lender, then the faith is strong because they know there will be few surprises at closing. The fact remains that the Good Faith Estimate is only an estimate, and actual fees may differ from the estimate at closing.
 
To know exactly how much money you need to close, you can request the HUD-1 Settlement Statement on the day of, or sometimes the day before the actual settlement, as allowed by RESPA.  Let the lender know that you will want to see the HUD-1 Settlement Statement before closing and question any amount that you do not understand.

Some people ask "Why can't I know earlier exactly how much I need to bring to closing?"   Well, as soon as the HUD-1 is prepared, you can close.  Since most people want to close as soon as possible, that's why you find out the exact costs the day before or the day of closing!

 

Closing costs can be confusing for three reasons:

 

  • There is not an industry standard for the names of the various fees, and some state laws regulate the name of some fees.
  • There is not an industry standard practice for charging all or any fees, especially 'junk' fees. (which goodmortgage.com does not charge)
  • There is not a standard "cost" for these fees
  • Closing costs are not just determined by the lender, but also include local state, county and city fees, attorney or title company fees, pre-paid interest based on what day of the month that you close, pre-paid escrows based on what month of the year you close, and underwriting fees may vary based on the type of loan, and the rate (more on that later)

 

For those of you here for a quick explanation - the fees are typically:

 

  • Loan Origination or Broker Fee - 0-1% (depends on rate)
  • Discount Points - depends on rate
  • Administrative Fee - $0-250
  • Commitment or Underwriting Fee - $450 - 750
  • Processing Fee - $345 - 495
  • Wire Transfer Fee - $30-45
  • Document Preparation Fee - $50-150
  • Atty or title fees - $200-500
  • Tax Service Fee - $25-75
  • Flood Certification - $16-45

 

There are even no closing cost programs available.  The costs are still there (attorneys don't work for free), but the costs are paid by the lender.  There is a catch, the rates are higher. See the details here.

But before you decide on what plan is right for you, it's always good to consult the advice of a professional tax advisor about the deductibility of mortgage interest and points.

 

Now for the details.

The single most important thing to understand about closing costs is that lenders only control lender-related fees. Lenders have no control over title-related fees, government-related fees, or insurance-related fees. When you are comparing the fees charged to obtain loans from various lenders, compare only the fees that the lender controls. These fees are often called "garbage fees" because they are the means by which many lenders increase revenues, especially when they offer a comparatively low interest rate.
   
This discussion will break closing costs down into four categories:

  • Lender fees: the costs of getting a mortgage
  • Title fees: the charges for establishing and transferring ownership
  • Prepaid costs: not fees, but charges due at closing
  • Impound/Escrow accounts: not fees, but money deposited into an account for future bills

 

Lender Fees

The following lender fees may or may not be charged by various lenders.

goodmortgage.com is a lender, not a broker, and our fees are low compared to industry average. In the case of third party fees, we pass these fees directly to the borrower and do not increase these fees for profit. The typical costs associated with these fees are included with each fee description.
    

     Fee Based On Our Fee
     Discount Points Loan Amt Buyer's Choice
     Origination Points Loan Amt Buyer's Choice
     Application Fees Flat Fee $95
     Processing Fee Flat Fee $395
     Credit Report Fee Flat Fee $0
     Appraisal Fee Sq Ft of House $0 - 350 typical
     Survey Fee Flat Fee $0-325 typical
     Courier Fee Flat Fee $30-45
     Flood Certification Fee Flat Fee $16-35
     Tax Service Fee Flat Fee $35-85
     Administration Fee Flat Fee $995
     Underwriting Fee Flat Fee $0
     Document Prep Fee Flat Fee $0 or $150 typical
     Wire Transfer Fee Flat Fee $0-50
     PMI Application Fee Flat Fee $0
     Commitment Fee Flat Fee $0
     Lender's Inspection Fee Flat Fee $0
 

Title Fees

The role of the title company or closing attorney in a real estate transaction is twofold. First, the title company performs a title search, which verifies that the seller of the property is the legal owner of the property and that there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title. The search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. After completing the title search, and if the title company finds that the seller is indeed the legal owner of the property, then there is a certificate of title issued.

The second role of the title company is as a closing agent, or escrow officer. They follow escrow instructions from the lender on how the loan is to be documented and the funds disbursed. They will have collected all of the necessary exhibits from you, the seller and the lender. The closing agent will make sure that all necessary papers are signed and recorded and that funds are properly disbursed and accounted for when the closing is completed.


For these services, the title company will usually collect the following fees:


     Fee Based On Typical Charge
     Recording Fee # of pages recorded $1.50 first page,
less for each page following
     Notary Fee Flat Fee $10
     Title Insurance Loan Amount an insurance policy 
     Escrow Fee Loan Amount for services rendered

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Prepaid Fees


There are two required prepaid fees at closing:

 

     Fee Based On Typical Charge
     Interest Loan Amt Equal to the # of days from date of close to end of same month
     Homeowner's Insurance Property Value Equal to 12 months of payments

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Escrow/Impound Account


The Escrow/Impound Account really functions as forced savings for the buyer to ensure that insurance and taxes will be paid. A portion of your monthly mortgage payment includes monthly premiums for homeowner's insurance, taxes, and private mortgage insurance (PMI), if applicable. The allotted portion of your monthly payment for these items is placed in an escrow/impound account. The lender uses the money from the escrow/impound account to pay your insurance and taxes.


Section 10 of RESPA limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements.


At closing, depending on the size of your down payment, you may be required to deposit money into an escrow/impound account for:

 

     Fee Based On Typical Charge
     Homeowner's Insurance Property Value Equal to 2 months of payments
     PMI Impound LTV Ratio 1 month payment
     Property Tax Impound Varies Between 1 and 8 months of payments

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Lender Fee Descriptions


Discount/Origination Points

Discount Points
- These are "points" which are associated with the interest rate on your loan.  Generally, if you are willing to pay more in points, you will get a lower interest rate. 

 

Loan Origination Points or Mortgage Broker Fee – About seventy percent of loans are originated through mortgage brokers. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker.  Often you will earn a lower interest rate, and save time by having one firm "shop" rates for you.  Many low rate lenders are wholesale only and do not have retail divisions for the public. The loan origination fee is measured in "points."  One point is equal to one percent of the mortgage loan.  A simple loan will often cost only one origination point.  When situations are more difficult (i.e. recent credit issues) it is not uncommon for one to three loan origination points.

 

Other Lender Fees

This category can vary from lender to lender and cannot be associated directly with the cost of the loan. These fees cover costs of the lenders and are used to offset the fixed costs of loan origination. You will find some combination of these fees on your Mortgage Loan Disclosure Statement (MLDS) and the total usually varies between $550 and $1250.  In some cases, many of these fees will be "lumped" together under "Lender's Fees".

 

Underwriting Fee – It is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.  Sometimes this is lumped under administration fees.

 

Document Preparation – Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans and is usually in the neighborhood of $200.

 

Appraisal Review Fee – Even though you will probably not see this fee on your MLDS, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure, especially on the higher valued properties in the San Francisco Bay Area. This fee is in the neighborhood of $150.  In special (usually high property values) circumstances another full appraisal may be required.

 

Warehousing Fee - Some lenders have a warehouse line of credit in order to fund your loan at closing time.  This is more common in specialty lending.

 

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Application Fees
Application fees cover the initial costs of processing your loan request. Application fees are largely charged because of consumer comparison shopping. Costs associated with your loan are incurred from the minute that your loan request is started. Charging application fees covers these fees in the event that a comparison shopping buyer does not close the loan with the lender. Often, the application fee is credited towards closing costs if you close the loan with the lender. If you do not close with the lender, the application fee is not refunded.


When goodmortgage.com charges an application fee, we do NOT charge an appraisal or credit report fee.   The appraisal charge is paid to the appraiser, and any excess we collected is refunded.

 

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Processing Fee
Loan processing is the gathering of documentation and information necessary to submit your loan application to the lender. This includes employment and depository information (W2s, bank statements, verifications, etc.), ordering credit reports, appraisals, and surveys (if required), and other necessary documentation (divorce decree, bankruptcy filing and discharge, etc.); whatever supporting documentation and information is required by the lender's underwriting department to create the true picture that supports your loan application. A broker will submit all this paperwork according to the lender's requirement.

goodmortgage.com charges a flat fee of $145 - $395 (by state) for loan processing.


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Credit Report Fee
Lenders require your credit report, your credit history, as part of the application documentation. Lenders may order credit reports from more than one bureau or they get a report from a company that combines credit bureau reports.


goodmortgage.com charges the exact fee charged by the a company that combines credit bureau reports, currently $18.


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Appraisal Fee
The appraisal fee pays for an independent appraisal of the home you want to purchase. The lender requires this opinion or estimate of the market value of the house to ensure that the house is worth the purchase price. The lender pays for the appraisal at the time the service is rendered and charges you for it at closing.


At goodmortgage.com, our appraiser's fee is dependent on the square footage of the appraised house. For a conforming loan for a single family home, the fee is typically $275 to $350. Regardless, goodmortgage.com charges the exact fee for the appraisal.


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Survey Fee
States differ in whether or not they require a survey of the home's property. The survey determines whether the property associated with the home is within property lines and that the property lines have no been crossed by other structures.


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Courier Fee
Lenders use couriers to deliver documents. Some lenders will list this fee individually or include it in the administration fee or processing fee.


At goodmortgage.com, the processing fee includes the cost of courier services.


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Flood Certification Fee
Federal law requires flood insurance if the property is located in a flood zone. Normally, an independent company is used to research the FEMA maps to determine if the home lies in a flood zone. The one time fee is for the life of the loan, as the FEMA maps are checked annually to determine if your property has moved into or out of a flood zone. If your property is reclassified at any time during the life of the loan, the lender will notify you whether or not you should drop or obtain flood insurance for your property.

goodmortgage.com charges $22 for flood certification.


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Tax Service Fee
The Tax Service Fee covers the service that a company provides to verify that the property tax payment sent to the assessor's office was credited to the correct parcel. It's immaterial whether you pay the property tax directly or the lender pays it from an escrow account; on the front of every single tax bill from every single assessor's office in the nation is the following statement: Tax Collector Not Responsible if Paid on Wrong Parcel. The only way to know if a clerical error has occurred (short of tax foreclosure) is if there is a service that checked for payment. The one time fee is for the life of the loan.

goodmortgage.com charges $85 for tax service.


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Administration Fee
Administration Fee is another name for Underwriting Fee or for Documentation Preparation Fee. It may include charges for underwriting, documentation preparation, or both. When an Administration Fee is charged, there should only be one of either Underwriting or Documentation Preparation Fee charged in addition to the Administration Fee, or there should be no other fees charged for underwriting or documentation preparation.


Administration Fee – If an Administration fee is charged, you will probably find there is no Underwriting Fee. This is not always the case.

 

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Underwriting Fee
Loan underwriting is the process of evaluating your loan application to determine whether or not to approve your loan. Underwriters verify that your supporting documentation does support your loan application. Common-sense underwriting makes sure that your loan application and documents also make sense, that is, that the appraisal on your house is consistent with comparables, that your liabilities are consistent with your income level, etc.


Sometimes the Underwriting Fee includes the Documentation Preparation Fee. Sometimes the Underwriting Fee is called an Administration Fee, and that Administration Fee may or may not include the Documentation Preparation Fee.


Underwriting Fee – Once again, it is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.

 

The lenders goodmortgage.com uses typically charge between $350 and $650. The lenders with the higher rates have the lower underwriting fees.  

 

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Documentation Preparation Fee
Once underwriting has approved your loan, the legal and miscellaneous documents required at closing must be prepared. These documents include the mortgage note, deed of trust, Truth in Lending forms, and escrow instructions.


At goodmortgage.com, the Documentation Preparation Fee is typically $150. (There is no Documentation Preparation Fee for those lenders that absorb this fee into the Underwriting Fee.)


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Wire Transfer Fee
Mortgage lenders generally wire the funds to the escrow company handling the loan closing. Funds are wired through the Federal Reserve System and done through commercial banks that are members of the Federal Reserve Bank. Usually, banks charge mortgage lenders a fee for the wire transfer service.


goodmortgage.com works with only one lender that charges a wire transfer fee and that fee is $50.


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PMI Application Fee
If your down payment is less than 20%, you will be required to have private mortgage insurance (PMI). When processing your loan, two "loan packets" need to be prepared: one for the lender underwriter; one for the PMI underwriter. You may be charged a fee for this additional processing.


goodmortgage.com does not charge a PMI Application Fee.


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Commitment Fee / Lender Rate Lock
Most lenders charge a fee for a rate lock that extends beyond 60 days.


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Lender's Inspection Fee
If the appraisal uncovers anything that needs to be repaired or fixed (the roof is the most commonly required repair) or if, during the appraisal, something is currently being repaired or completed (i.e. a pool), then an inspection is usually required by the lender.


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Title Fee Descriptions


Recording Fee
The Recording Fee is charged for recording the deed and mortgage at the local court house. Usually the fee is based on the number of pages recorded, where the fee can be $1.50 for the first page and less for each page following. The deed of trust is typically five pages and the mortgage loan note is typically two pages. The number of pages recorded will vary due to the number of riders also recorded with the deed of trust and the mortgage loan note. Rider is a contractual term which refers to a legal document which in and of itself carries little meaning, but must be coupled with other documents to have meaning; hence, the name, rider, as the document must "ride" with another document to have meaning. Typical riders include the Planned Unit Development rider, which explains the CC&R's associated with the purchased property; the Adjustable Rate rider, which details the adjustments to the interest rate for an adjustable rate mortgage; and the Environmental Endorsement rider, which explains that the owner of the property is responsible for damage to the environment that occurs from activities on the property while they own the property.


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Notary Fee
Before the mortgage deed of trust can be recorded at the court house, the signature of the borrowers must be notarized. An individual certified as a Notary Public witnesses the signature on recordable documents as true and correct. The fee is usually a typical notary public fee of around $10.


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Title Insurance
Even though there is a title search performed to establish the seller's legal right to sell the property, there may be hidden defects in the title which an examination of the records could not reveal. For instance, the previous owner could have incorrectly stated his marital status, resulting in a possible claim by his legal spouse. Other problems include things like fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. These defects can arise after you have purchased your home and jeopardize your right to ownership. Title insurance protects against any tax liens, unpaid mortgages, or judgments missed in the research of the history of title on the property. If a claim is made against your property, title insurance will, in accordance with the terms of your policy, assure you of a legal defense and pay all court costs and related fees. Also, if the claim proves valid, you will be reimbursed for your actual loss up to the face amount of the policy.


There are two types of title insurance: owner's title insurance and lender's title insurance. The owner's policy protects you, the buyer. The seller usually pays for the owner's title insurance policy. The lender policy protects the lender, or rather, protects the lender's collateral for the mortgage loan and benefits the lender. You pay for the lender's policy. Title insurance is a one-time charge.


Title insurance is non-transferable, even for a refinance. In the event of a refinance, lender's title insurance is still required, but usually at a reduced rate.


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Escrow Fee/Settlement Fee/Closing Fee
Regardless of the name of the fee, the fee is charged for the services of the escrow agent, explained above. Normally, the buyer and seller share this fee, each paying 50% of the total fee, which is usually $150 minimum.

For a refinance, this fee is normally reduced by one half of the normal charge.


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Prepaid Fee Descriptions


Interest
Interest on your mortgage is paid in arrears. Your payment, usually due on the 1st of the month, pays interest accrued for the previous 30 days. Your first mortgage payment is on the 1st of the second month after closing; so, if you close in the month of January, your first mortgage payment is March 1st. The March payment includes interest that has accrued during the month of February.

Pre-paid Interest – Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay ten days of pre-paid interest.

The only interest that you prepay is at time of closing. At closing, you pay for the interest that will accrue from the date of your closing to the end of the month. So, if you close on January 19, you pay for interest from January 19 to February 1. The worst case scenario is that you are charged for 30 days of interest, if you close at the beginning of the month.

Note: This example is based on a purchase loan.  For a refinance, you have a rescission period.  That means the loan actually closes on midnight of the 3rd business day after closing. 

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Homeowner's/Hazard/Fire Insurance
You are required to pay your one year premium for homeowner's insurance at or before closing (if you choose to pay the insurance company directly, in which case, you bring proof of payment to closing). The lender requires that you have homeowner's insurance to protect the collateral of the mortgage loan.

Your homeowner's insurance is then paid monthly, 1/12 of your insurance premium, as part of your mortgage payment. The lender places each monthly payment into an escrow/impound account. At the end of each year, the lender has collected your annual premium and pays your annual premium when the payment is due. More details about this under the Escrow/Impound Account details.

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Escrow/Impound Account Descriptions


Homeowner's Insurance Impound
If your down payment is less than 20%, you will be required to put 2 months' worth of the annual homeowner's insurance premium into the escrow account, otherwise you will place 1 month into the account. Your monthly mortgage payment will include 1/12 of the annual premium in the payment, which is kept in the escrow account until the annual premium is due. If your down payment is less than 20%, you will have a two-month "cushion" in the escrow account. Cushions are allowable but limited under RESPA; in other words, RESPA accepts the practice of the lender's wanting to cushion the escrow account but limits the amount of the cushion to a reasonable amount.

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PMI Impound
Private Mortgage Insurance (PMI) protects the lender in the event that you default on the mortgage loan. It is usually required if your down payment is less than 20%. (More on PMI if you click here.) You have to deposit 1 month's worth of PMI premiums into the escrow account, depending on the lender.

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Property Tax Impound
How much you need to deposit in the escrow account for property taxes depends on three factors:

  • When are property taxes due in the state where the property is located?
  • Are the property taxes paid in arrears or in advance?
  • What month are you closing in?
In Arizona, property taxes are paid semi-annually and in arrears. Payment due on March 1 pays for the last half of the previous year. Payment due on October 1 pays the first half of the current year.

In California, property taxes are paid semi-annually, with one payment in arrears and one in advance. 

Your monthly mortgage payment includes 1/6 of your semi-annual property tax. Therefore, you will need to deposit the number of months worth of property taxes into the escrow account that will yield 6 months worth of property taxes in the account at the time that property taxes are due. For example, in Arizona, let's assume your first mortgage payment is due January 1. The next property tax payment is due in March. You will make three mortgage payments (January, February, and March) before property taxes are due. That means that your property tax payment will be short three months worth of payment. Therefore, you need to deposit three months worth of property tax into the escrow account. That way, come March, the lender can pay the property taxes.

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More on fees vs rate

 

Can I drop closing costs?
Yes, you can drop the fees that are the lenders fees. But your rate will be higher.  

 

What are lender fees?
Lender fees are charged for various services rendered by the lender. Common fees include origination fees, application fees, administration fees, processing fees, underwriting fees, and funding fees.

 

Are there any other fees?
Your loan may still have third-party fees. Among these are fees for appraisal, courier, notary, title insurance, and recording. Because other parties charge these fees, we have no control over them.  We may pay these fees, but again, the rate will be higher.   Please note that on your interest rate, your loan may include discount points. Loan discount points are different from fees and are used to buy down the interest rate.

 

What are lender fees typically worth?
While fee amounts vary depending on your loan amount, loan product, and state, most loans have fees in excess of $1,800.

 


Refinancing Associated Costs

 

Interest - When you close the transaction on your refinance, there will most likely be some outstanding interest due on the old loan.  For example, if you close on January tenth (and you made your last payment), you will have ten days interest due on the old loan and twenty days prepaid interest on the new loan (see section above for prepaid interest).  Your first payment on the new loan would not be until March 1st since you have already paid all of January's interest when you closed the refinance transaction.