Even though interest rates have been hovering at record lows for years now, some people still haven’t taken advantage of it and refinanced their mortgage. While the reasons for not refinancing varies, one thing is for sure, it can save home owners a lot of money each month. But in order to realize the savings, homeowners have to stay in their house long enough to recoup the money they spend on the closing costs. Thankfully, borrowers don’t have to pay full price when it comes to refinancing closing costs. (For related reading, see: 4 Reasons Not to Refinance Your Home.)
Shop Around for Your Lender
Consumers wouldn’t think twice about shopping around when it comes to buying a car or a TV and that same discipline needs to be applied to a mortgage refinance. Every lender is going to offer different interest rates, terms and costs to borrow money which is why borrowers have to shop around for their lender to get the lowest closing costs. Start with your existing mortgage lender but also contact others. Include a credit union and a local bank in the analysis. Try to get at least three quotes comparing the same fees and expenses. Lenders are required to provide you with a good faith estimate of the costs to close the loan when you are shopping for your mortgage refinance. With that good faith estimate in hand you can make an accurate comparison of what other lenders are going to charge you in terms of closing costs. (For more, see: 9 Things to Know Before You Refinance Your Mortgage.)
Ask for a No-Closing Cost Refinance
For homeowners who don’t have the money saved for closing costs, they can ask their lender for a non-closing cost refinance, which means they won’t have to bring money to the table when closing on the new loan. There is a trade-off when going this route: a higher interest rate. Often lenders are willing to waive closing costs but will charge you a higher interest rate over the life of the loan in exchange for covering the closing costs. This could often end up being more expensive than paying the closing costs up front. This strategy does make sense 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 and if you plan on moving in a short period of time, or you plan to refinance again, then it may make sense. The extra interest payments often won’t be as much as the closing costs if you act sooner rather than later.
Loyalty Can Have Its Benefits
Thanks to the record low interest rates, competition for home borrowers’ business is fierce which means your current lender wants to keep your business and will go to great lengths to remain your mortgage loan provider. But the lender isn’t going to offer you discounts unsolicited. If you want to reduce some of the closing costs with your refinance, then you have to speak up and ask. 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 the other 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 fee and processing fee. The application fee is the charge to cover administrative costs with applying for the refinancing, and the processing fee is the cost to put the loan through.
Lenders may not be willing to lower their origination fee, but knowing the average cost for that can also help you when 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 are dealing with a lender that charges more than 1% than its time to shop around or get the financial institution to lower that fee. The maximum percent a lender can charge you in origination fees is 2%.
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. (For more, see: How to Negotiate Your Closing Costs.)
The Bottom Line
Refinancing into a lower mortgage is going to save you money but it doesn’t happen for free. Similar to taking out a first mortgage on a home, there are closing costs associated with a refinance. How much you pay in closing fees is going to vary from one lender to the next, which is why shopping around is almost 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.