Are You Falling For These Mortgage Lender “Sucker” Fees?

It’s no secret that the best refinance rates are at historical lows and mortgage refinancing can save you thousands of dollars in finance charges on your home. The problem for many homeowners is that they become so focused on getting the best refinance rates at the expense of fees that they throw thousands of dollars away in the process. Here are several of my best tips before you refi to help you avoid falling for lender “sucker” fees when refinancing your home.

Best Refinance Fees Online

The Internet is a great resource for mortgage refinancing information and rate quotes; however, there are a few pitfalls you’ll want to avoid. One thing you can always count on online is that people have advice for you…and most of it is really bad advice. Take for example to two percent rule of mortgage refinancing. Most financial advisors will tell you the best rule-of-thumb when refinancing is that you should never take out a new home loan unless the new interest rate is two percent lower than your old mortgage rate. Some advisors peddle a modified version of the two percent rule and tell their clients not to refinance unless the new mortgage rate is one percent lower….still bad advice in my opinion.

Should I Refinance My Mortgage?

It makes more sense to answer the question “Should I refinance my mortgage?” by evaluating the costs vs. the savings of taking out a new home loan. This is really easy to do…simply add up all the closing costs including the loan origination fee and divide by the amount your payment will go down each month. Here’s a quick example:

Suppose you’re refinancing your home for $275,000. Your old payment was based on a mortgage rate of 6.5% and was $1,740 per month. The best refinance rates available to you are 5.75% which is less than the two percent rule allows but will get you a payment of $1,600 per month. This is a savings of $140 per month. Sounds good right? Saving a $140 per month could actually be a really bad deal depending on how much mortgage refinancing will cost you. In this example we’ll say your loan origination fee and closing costs total $5,000. (Average for most homeowners) Dividing $5,000 by the $140 per month that’ll you’ll be savings reveals that it will take you 36 months, (three years) to recoup your out-of-pocket expenses.

Is this a good deal? According to the Mortgage Banker Association the average homeowner refinances every four years so you can see how answering the question “Should I Refinance?” is subjective and depends entirely on you.

What About Getting the Lowest Refinance Rates

There’s more to lender fees than just accepting what you’re quoted on your Good Faith Estimate, that’s how “Sucker” fees come into the picture. First I’d like to discuss how getting the best refinance rates fit into the equation. Once you start mortgage rate shopping you might be disappointed to find that the lowest refinance rates you’re being quoted are higher than what lenders are advertising. This happens because advertised mortgage rates assume you have a credit score of 720 or better with a favorable loan-to-value ratio.

Your actual mortgage rates depend largely on your FICO score. Here’s an illustration to show the correlation between credit cores, mortgage rates and the amount you’re paying for your home over time.

The first thing you need to do before shopping for mortgage rates is make sure that your credit score is as high as possible. This isn’t hard to do; you can start by checking your credit reports at annualcreditreport.com for errors and paying down the balances on your credit cards. Also avoid opening new credit accounts for at least 90 days before refinancing and you’ll find what lenders are quoting you is more in line with what they’re advertising.

Never be a Sucker for Mortgage Lender Junk Fees Again

According to the HUD Secretary the number one reason most of your neighbors are overpaying for their home loans is because they didn’t do their homework before applying. Lender junk fees and overpaying the loan origination fee amount to thousands of dollars out of your pocket for no reason. Overpaying at closing lengthens the amount of time it takes to recoup your out-of-pocket expenses, often negating any benefit from mortgage refinancing.

Take the loan origination fee for example. It’s not uncommon to pay as much as three percent of your home loan amount to person arranging your mortgage refi; however, one percent is a perfectly reasonable amount to pay for this fee. Other garbage fees you’ll want to avoid include rate lock fees, application fees, third-party processing fees, and courier fees.