Closing in on Closing Costs

Refi "Whys & Wherefores"

From the Editor

Rate Watch

Recent Refinancing

From the Editor:

As summer temperatures cool down, the refinancing discussions at many co-ops are heating up. With rates at levels not seen since the early 1960s, refinancing underlying mortgages will be a central topic for many boards this fall.

A key element in this discussion will be the cost of a new loan. Closing costs are substantial, so co-op boards need a clear understanding of every cost. "Closing in on Closing Costs" provides a quick overview of the main expenses involved in the refinancing process and it offers guidelines for each expense, as well as some tips on saving money.

I also want to draw your attention to the "Mortgage Masters" program on Page 4. I'm very excited by the overwhelmingly positive comments I've received from those who've taken the course. "Very informative-and very professional," remarked a recent graduate.

I extend an open invitation to other management firms to sign up. The course is free and helps managing agents better understand the complicated process of refinancing an underlying mortgage.

Once again, thank you for reading Co-op Financing Quarterly.

I hope your fall is both pleasant and colorful!

Patrick B. Niland
First Funding of New York

1998 by Patrick B. Niland

Closing in on Closing Costs

As interest rates have plummeted, your board probably has been thinking more seriously about refinancing your building's underlying mortgage. Since refinancing is such a complex and time-consuming process, everyone's first question is: "How much will it cost?" The answer to this question depends on the unique circumstances of your co-op.

However, closing costs-the actual out-of-pocket expense of finding, processing, and closing a new underlying mortgage-often play the largest role in determining whether a co-op enters the market before its existing loan comes due. Some refinancing costs depend on the size of your new loan, and some do not; some are fixed, while others are negotiable. Therefore, before you begin, it pays to know what's involved.

Refinancing costs fall into three main categories: "get ready" costs, "up front" expenses, and "actual" closing costs. "Get ready" costs include fees paid to your attorney, accountant, and managing agent for gathering and analyzing all of your co-op's records in preparation for the refinancing effort. Never skimp on these activities. Being well prepared before contacting lenders will pay big dividends later on.

"Up front" expenses include any amounts which lenders collect in advance as part of the application and underwriting process. For example:

  • Application Fees ($250 to $2,500)-Few lenders collect pure "application" fees. However, if collected, they are rarely negotiable and never refundable.
  • Good Faith Deposits (1% to 2% of the new loan amount)-Paid to lenders at time of formal application to show serious intent. Rarely negotiable, sometimes refundable.
  • Appraisals ($1,500 to $6,000)-Required by most lenders, except in extremely low loan-to-value situations. Usually performed by an outside firm with a Member of the Appraisal Institute (MAI) designation. Rarely negotiable, never refundable.
  • Engineering Inspections ($500 to $4,000)-Not always required. Somewhat negotiable.
  • Environmental Reports ($500 to $3,500)-Almost always required. Be prepared to pay for removal or remediation of any hazardous substances identified in the survey. Somewhat negotiable.
  • Credit Reports ($250 to $1,000)-Most lenders will check the co-op's credit record. Not negotiable, not refundable.

Once your loan application has been approved, a commitment letter will be issued. Most commitment letters include a list of documents and other information that must be supplied prior to closing. Virtually all of this documentation will be assembled or prepared by the co-op's attorney.

Once all of that legal work has been completed, a closing will be scheduled. At the closing, the new lender will pay off the outstanding balance of any existing loan, as well as the following expenses:

  • Origination or Commitment Fees (0% to 2% of the new loan amount)-This amount is somewhat negotiable and usually will be reduced by the amount of any good faith deposits submitted earlier.
  • Title Insurance (roughly $3 per $1,000 of new loan)-Every lender requires a new title insurance policy covering the amount of the new loan. Since the fee comes from a standard schedule, it is not negotiable. However, it often is possible to save some money by updating the policy from your old loan.
  • Prepayment Penalties-If you are refinancing an existing loan before its maturity, you may owe a prepayment penalty. Call your current lender to verify. Sometimes negotiable.
  • Pay-Off Letter-The old lender will send a representative to your closing to pick up a check for the outstanding balance on your old loan (unless those funds are wired) and deliver a "satisfaction letter." They also will send a bill for $200 to $800 for this service.
  • Mortgage Recording Tax-In New York State, all mortgages that are recorded in the county clerk's office are subject to a tax. This tax ranges from 1% in outlying areas to 2.75% on larger loans in the five boroughs of New York City. However, there is a provision in the law that allows an existing lender to assign the old mortgage to the new lender. Assignment transfers a credit for any taxes already paid on the old loan to the new lender. Therefore, the new lender will collect mortgage recording tax only on the "new money" advanced. No lender is required to assign or accept assignment. Most, however, will do both.
  • Survey-Most lenders will require a new survey of the property being used as collateral for the new mortgage. Depending on the work involved, this might cost $300 to $3,000. You can save some money by updating and recertifying your old survey.
  • Legal Fees-Your co-op will be represented by an attorney and so will the lender. As borrower, you get to pay for both. Each side's legal fees are somewhat negotiable between a minimum of $2,500 (for loans up to $500,000) to $20,000 (for loans over $10 million).
  • Searches and Recordings-Before closing your new loan, both attorneys will search the public records for anything that could effect the integrity of the new loan, e.g., unsatisfied mortgages, mechanic's liens, unpaid taxes, building violations, easements, etc. Further, the new lender will insist that all important documents be recorded in the public records at the county clerk's office. For these two activities, expect to pay a total of $500 to $1,000.
  • Brokerage Commissions-If your co-op retains the services of a mortgage broker to arrange the new loan, you also will pay their fee at closing. Brokerage fees typically equal 1% of the new loan amount, but often they are negotiable.

Lastly, most lenders will require that your co-op's property insurance be prepaid for the entire year after closing. They also will collect one-twelfth of the annual total of your co-op's real estate taxes and water and sewer charges for every month that has elapsed since these items were last paid. They do this to establish an escrow account to which they will add an additional one-twelfth every month. This escrow account will allow the lender to continue to pay all of these items directly when they next come due.

As you can see, refinancing an underlying mortgage is a very expensive process. Therefore, it should not be undertaken lightly nor without extensive preparation and involvement by all the co-op's professional advisors. Nevertheless, a refinancing can produce significant long-term savings if the process is completed properly.

Since closing costs add up quickly, it pays to get a detailed estimate before applying to any lender. A co-op's professional advisors (attorney, accountant, managing agent, and mortgage broker) can provide these estimates as well as other important information that will help the board make an educated decision about when - or whether - to refinance.

Recent Refinancings

Building Name or
Co-op Address

A four-story building with 16 units that was converted in 1990.
94% sold, 25% owner-occupied.

Queens $675,000 30 years 8.75%

A nine-story building with 16 units that was converted in 1982.
100% sold, 81% owner- occupied.

Manhattan  $900,000 15 years    7.60%

A former warehouse with 17 loft apartments that was converted in 1984.
82% sold, 53% owner-occupied.

Staten Island $900,000 15 years 8.75%
215 WEST 78th STREET

A 10-story building with 39 units that was converted in 1979.
77% sold, 77% owner-occupied.

Manhattan $499,000
15 years 
Credit line

Refi "Whys & Wherefores"

Q. Our board currently is having a major disagreement over the relative benefits of sticking with our current loan until maturity versus refinancing at today's lower rates. We've been at a complete standstill for three months but need to get the process moving again. What can we do?

A. Any co-op contemplating the refinancing of its existing mortgage should first consult all of its professional advisors: managing agent, attorney, and accountant. While each of these advisors will provide important information to the board, the co-op's accountant is the best person to compare the economic benefits of refinancing to the related costs.

If you have not done so already, convene a meeting of all of your professionals to discuss whether refinancing is right for you. You also might invite a mortgage broker to this meeting to give you the latest market information.

If you have a question for "Refi Whys and Wherefores," please e-mail it to, fax it to the publisher at (716) 473-6305, or snail-mail it to our office.