Question by Lillian: Refinancing a Mortgage – Insurance/Taxes?
When I purchased my home, the following year’s taxes and insurance premiums were included in the closing costs. What happens to these payments when I refinance? In other words, do I have to pay a year’s worth of taxes/insurance again and get a refund for what I have already paid? Or are these fees waived when you refinance since I have already paid for the next year? I’m trying to estimate what my closing costs would be to refinance…
Answer by falsi fiable
You will have to pre-fund your escrow account for taxes and insurance. The pre-fund amount is typically 4-6 months worth of escrow payments.
You will also get a refund of your OLD escrow account within 30 days after refinancing.
Your lender gives you a 1/8 to 1/4 percent rate discount by using an escrow account.
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Your lender sets up an escrow account to be used to save up money until the taxes and insurance are due and payable. SO they are not paid ahead of time.
When you refi- the new lender needs you to set up a new escrow account (unless you are getting a loan that will allow you to pay those things direct). The old lender will refund your old escrow account (but not for about a month after closing on the new loan).
Sometimes- if you are closing very close to the time of the year those things are due- things can get confused. If the new company insists on paying the taxes thru the new escrow and the old company is paying the taxes thru the old escrow- then you are stuck talking to the tax people about a refund.
It depends on if you are refinancing with the same company. If you are, they will generally transfer it over, or give you a credit at closing, which will comp what you have to pay at closing for the new loan. If you are going with a different company, then you will have to pay up front and wait for a reimbursement from the old mortgage company. I’ve done it both ways. If your credit is high enough, they may not even require you to escrow the taxes/insurance and then you wouldn’t have to pay any up front. That is another option if you are able to save and not be tempted to spend what you are saving for your tax payment.
The refinancing process should begin with a little comparison shopping. Like any product, the prices and terms will vary between lenders, so it’s a good idea to have a few options from which to choose. This may also help gain leverage with the current mortgage holder in the somewhat likely event that they’ll attempt to keep your business by offering competitive rates. When getting a good faith estimate (GFE) from a lender, it’s wise to ask them to guarantee it, since in truth a GFE is merely an estimate of the loan’s costs, and it gives the lender an opportunity to add or amend fees. It is a huge comfort knowing that the figures you are quoted on an estimate will be the same ones you’ll be presented at the loan’s closing.
After choosing a lender, an application is submitted and a home appraisal is arranged. An appraisal of the value of the home helps determine the loan-to-value ratio (the value of the loan amount expressed as a percentage of the appraised value of the property) which in turn determines how much money the lender is prepared to lend. The higher the LTV ratio the more risk there is to the lender, so the fees and/or the interest rate will likely be higher.
It can be dangerous too, In a booming housing market when home prices are skyrocketing, there is often a rush to refinance since rising values translate into more equity. When the bubble bursts, however, and home values drop significantly, homeowners who have taken out too much equity from their homes can find themselves upside down on their mortgages. That is, they can be left with a mortgage balance that is higher than the actual value of their home, making it next to impossible to sell their home without actually owing money after the sale.