When interest rates are low, there’s usually a big rush to refinance mortgages. But some homeowners hold back on scoring a lower interest rate because of the cost of refinancing. Realizing the savings from refinancing generally means staying in a home long enough to recoup the money spent on closing costs. But there's a silver lining: Borrowers don’t necessarily 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 may come with higher interest rates, which often end 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.
Typical Refinance Closing Costs
Closing costs are any fees that 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. They are also paid when refinancing a mortgage. Closing costs normally range between 3% and 6% of the total purchase price of the home and may be paid by either the buyer or the seller—or both.
Closing costs include but aren't necessarily limited to:
- Origination fees
- Appraisal fees
- Title insurance
- Title search fees
- Survey costs
- Credit report fees
Lenders are required to provide you with a loan estimate form that includes closing costs along with a list of expected fees.
Compare Mortgage Lenders
Most consumers don't think twice about shopping around when it comes to making a large purchase such as a car or TV, so why not do the same for a mortgage? Borrowers need the same discipline when seeking out a mortgage refinance as when they look for a great deal on a new sofa. As 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. As 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 that your existing lender will do what they can to keep your business.
Before you sign, though, check out what the competition has to offer. Be sure to include a credit union, 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 loan estimate form that includes the closing costs. With this figure in hand, you can make an accurate comparison of what other lenders are going to charge you to close.
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, either with the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development (HUD).
Ask for a No-Closing-Cost Refinance
Homeowners who don’t have the money saved for closing costs 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. 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 immediately paying the closing costs.
This strategy may work in your favor if you plan on refinancing again or 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 fierce competition for mortgage business. As mentioned above, this means your current lender will want to keep your business. To do so, it may go to great lengths to continue being your mortgage loan provider. However, 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.
How to Negotiate a Reduction in Lender Fees
Not all fees are created equal; one lender is going to charge different rates compared with another one down the block. While some closing costs aren’t going to be negotiable, there are areas where you can get a reduced rate.
You can ask the lender to waive the application and processing fees, for example. 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 between 0.5% and 1% of the loan amount. With a $300,000 refinance, the origination fee should be $3,000 at most. If you deal with lenders that charge more than 1%, it's definitely worth it 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 it wants you to use, but that’s only a suggestion. The one area where you won’t be able to negotiate a lower price is the appraisal, because the lender orders that one for you.
The Bottom Line
Refinancing into a lower-interest mortgage is going to save you money but, just like everything else, isn't going to happen for free. You still have to pay closing costs — the same way you would when you take out your 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 can also help you lower what you pay for a refinance.