When interest rates are low there's usually a big rush to refinance mortgages. There are many good reasons why you should consider refinancing. For instance, you may be able to secure a lower interest rate or you may want to roll all your other debts into the mortgage so you only have to make one payment. But not everyone runs out to the bank to do so. You may have your own reasons not to refinance—after all, it may cost you more to do so. But in order to realize the savings, you have to stay in your home long enough to recoup the money you spend on the closing costs. Thankfully, you don’t have to pay full price when it comes to refinancing closing costs. Keep reading to find out how.
- Consider shopping around if you want to lower your refinance closing costs.
- No-closing cost refinances are possible, but they may come with higher interest rates.
- Ask your current lender what your loyalty is worth.
- Try negotiating a reduction in some or all of the lender fees.
Closing Costs: An Overview
Before we take a look at how you can lower the closing costs when you refinance your mortgage, let's refresh your memory about these fees.
Closing costs are any fees you incur when you complete a real estate transaction. These are charges that you pay above the total purchase price of the property. You pay these costs when the deal closes and the property's title is transferred from the buyer to the seller. You also have to pay these costs when you refinance your 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—the following:
- Loan origination fees
- Appraisal fees
- Title insurance
- Title search fees
- Survey costs
- Fees for your credit report
While you may not know exactly how much you'll pay, your lender is required to provide you with a good faith estimate (GFE) of your closing costs along with a list of what fees you'll be expected to pay before you sign. So don't worry, you won't be left completely in the dark and you won't have any surprises when it comes to signing the paperwork for your refinancing.
Shop Around for Your Lender
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? You need the same discipline when you seek out a mortgage refinance that you do when you're looking for a great deal on a brand 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.
But how do you do it? 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 you with a GFE of the costs to close your loan when you shop for your mortgage refinance. With this figure in hand, you can make an accurate comparison of what other lenders are going to charge you in closing costs.
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 nonclosing 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 Can Have 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. 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 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 or get the financial institution to lower the charge. The maximum percent a lender can charge you in origination fees is 2%.
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.