When interest rates are low there's usually a big rush to refinance mortgages. There are many reasons borrowers consider refinancing, such as the prospect of a lower interest rate or ability to roll all other debts into one mortgage payment. But not everyone runs out to the bank to do so.
Part of the reason some homeowners don't consider refinancing is that it may cost more to do so. In particular, in order to realize the savings, homeowners have to stay in their home long enough to recoup the money spent on the closing costs. Thankfully, borrowers don’t have to pay full price when it comes to refinancing closing costs.
- Borrowers should shop around if they want to lower their refinance closing costs.
- Refinances without closing costs are possible, but they may come with higher interest rates, which often ends up being more expensive than paying the closing costs immediately.
- Instead, borrowers can try to negotiate a reduction in some or all of the lender fees, such as application and processing fees.
Closing costs are any fees borrowers incur when completing a real estate transaction. These are charges paid above the total purchase price of the property. Closing costs are paid when the deal closes and the property's title is transferred from the buyer to the seller. But closing costs are also paid when refinancing a mortgage.
Closing costs normally range between 2% to 5% of the total purchase price and may be paid by either the buyer or the seller—or both.
Closing costs include, but aren't necessarily limited to:
- Loan origination fees
- Appraisal fees
- Title insurance
- Title search fees
- Survey costs
- Fees for your credit report
Most consumers don't think twice about shopping around when it comes to making a large purchase such as a car or a TV, so why not do the same for a mortgage? Borrowers need the same discipline when seeking out a mortgage refinance as they do when looking for a great deal on a new sofa. Since every lender offers different interest rates, terms, and costs to borrow money, borrowers have to shop around to get the lowest closing costs.
Start with your existing mortgage lender. Since you're a loyal customer, they may be able to help you out. If you mention that you're going to shop around, there's a good chance they'll do what they can to keep your business.
Before you sign with your existing lender, check out what the competition has to offer. Be sure to include a credit union, a local bank, or even an online lender in your analysis. Try to get at least three quotes comparing the same fees and expenses. As noted above, lenders are required to provide a GFE of the costs to close. With this figure in hand, you can make an accurate comparison of what other lenders are going to charge you in closing costs.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Ask for a No-Closing Cost Refinance
For homeowners who don’t have the money saved for closing costs, they can ask their lender to waive the closing costs. This is called a no-closing cost refinance. While you won’t have to bring money to the table when closing on the new loan, it may cost you more in the long run. In order to waive the closing costs, the lender usually charges a higher interest rate over the entire length of the loan. This often ends up being more expensive than paying the closing costs immediately.
This strategy may work in your favor if you plan on refinancing again or if you don’t plan to stay in your home for more than five years. After all, it can take that long to recoup the closing costs. The extra interest payments often won’t be as much as the closing costs if you act sooner rather than later.
Loyalty Has Its Benefits
Record low-interest rates lead to stiff, fierce competition for mortgage business. As mentioned above, this means your current lender will want to keep your business. In order to do so, they may go to great lengths to continue being your mortgage loan provider. But the lender isn’t going to offer you discounts if you don't ask for them.
To potentially reduce some of the closing costs of a refinance, ask for closing costs to be waived. The bank or mortgage lender may be willing to waive some of the fees or even pay them for you to keep you as a customer.
Negotiate a Reduction in Lender Fees
Not all fees are created equal, which means one lender is going to charge different rates compared to another one down the block. While some of the closing costs aren’t going to be negotiable, there are areas where you can get a reduced rate.
For instance, you can ask the lender to waive the application and processing fees. The application fee covers administrative costs that come with applying for the refinancing, while the processing fee is the cost to put the loan through.
Lenders may not be willing to lower their origination fees, but knowing how much you'll pay on average can also help when you're shopping around. The origination fee is typically 1% of the loan amount. With a $300,000 refinance, the origination fee should be $3,000. If you deal with lenders that charge more than 1%, it may be time to shop around.
Lenders are able to charge you a maximum loan origination fee of 2% of the loan amount.
You can even lower the amount you pay for title insurance by shopping around. Sure, your lender will have a preferred insurer they want you to use but it’s only a suggestion. The one area where you won’t be able to negotiate a lower price is with the appraisal as the lender orders that one for you.
The Bottom Line
Refinancing into a lower mortgage is going to save you money, but just like everything else, it doesn’t happen for free. You still have to pay closing costs—the same way you would when you take out your very first mortgage. How much you pay in closing fees varies from one lender to the next, which is why shopping around is almost always a requirement. Asking for discounts and seeing what loyalty gets you with your existing lender are also ways to lower the amount you pay to refinance your loan into a lower interest rate.