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What you need to know about refinancing costs

Money changing hands.

Money changing hands. Credit: iStock

When you refinance, you face several different choices that will directly affect how much you pay. There are also several factors over which you have no (or almost no) control that will play directly into the refinancing cost. Here are some facts about refinancing (and financing) mortgages that account for the differences in what people pay:

-Lowering the interest rate means higher closing costs. If you choose to have a lower interest rate, you can pay "points" (a point is 1 percent of the loan amount) to buy down the interest rate. Points count as part of your closing costs, and, while they're deductible, you have to amortize the cost over the life of the loan when you refinance. If you're buying a home, you can deduct points in the year of purchase.

-"No Cost" refinancing costs you very little. But you'll get a slightly higher interest rate than what is otherwise being offered to the best customers.

-Credit history and scores are reflected in price. Today, the best interest rate and lowest closing costs are being offered to those with the highest credit scores (and best credit histories). Lenders will pull credit histories and scores from each of the three credit reporting bureaus, Experian, Equifax, and TransUnion. The middle score is the one that's used to qualify you, and if that middle score isn't above 760 (780 in some cases), you might have higher closing costs.

-Title insurance costs vary. Title insurance can be the single most expensive line item on the HUD-1 (the government mandated closing statement form used in most residential loan closings), and the cost varies from state to state and even from county to county within some states. Some states have very good title insurance lobbyists, and the costs are higher than in others.

-Lender costs are a big component of total cost. Sometimes tthe biggest closing costs are processing and underwriting fees, along with those fees charged by the escrow company (title insurance and escrow).

-Prepaid costs can vary. Depending on the day you close, you'll have to prepay the interest you owe from that day (and including that day) through the end of the month. This gets tacked on to your closing costs. So, if you close on the first of the month, you'll have 30 days of prepaid interest. If you are getting a $420,000 loan, that could be a tidy sum of money. You may also have to prefund your tax and insurance escrow (you'll eventually get a check from your old mortgage company with whatever is left in that escrow account), and that can add to the total closing costs as well.

Ilyce R. Glink's latest book is "Buy, Close, Move In!" Distrobuted by Tribune Media Services

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