The most common mortgage refinance mistake I see is focusing on getting the lowest possible rates at the expense of fees. This often results in overpaying thousands of dollars in closing costs, negating any benefit gained from mortgage refinancing. Here are several tips to make sure your refinance closing costs don’t lead to throwing away thousands of dollars on your next home loan.
Mortgage Refinance Closing Costs
Every home loan has closing costs and mortgage refinancing is no exception. Mortgage lenders often use fees to boost their profits at your expense, robbing you of any benefit you’d receive from today’s low refinance rates. What refinance closing costs can you reasonably expect to pay and what are lender junk fees?
Closing costs are supposed to serve a purpose. The loan origination fee or instance is paid to the broker arranging your home loan. The problem is that these fees vary significantly from one lender to the next, including junk fees that serve no purpose other than boosting the lenders profit at your expense.
How to Shop for a New Home Loan
Mortgage refinancing is supposed to benefit you as homeowner by lowering your payment with today’s low interest rates. The problem is that the majority of lenders are more interested in separating you from your cash than they are in helping you.
What should you look for with your refinance closing costs? Mortgage lenders like to brag about their low Annual Percentage Rates (APR) when quoting refinance rates; however, relying on APR when choosing a home loan often results in the highest closing costs. This is largely because lenders are not held to a standard for calculating their APR and use some creative accounting when it comes to discount points.
One problem with refinance rate shopping from different lenders is the terminology they use for fees on their Good Faith Estimates. This makes it incredibly difficult to make an apples-to-apples comparison of refinance quotes from different lenders. The best way to shop for the best mortgage refinance deal is to compare the total fees including the loan origination fee.
What About Discount Points?
Recognizing discount points is an important part of refinance rate shopping. Discount points are a way of buying down your refinance rates as a form of prepaid interest. Most lenders quote rates that include discount points first meaning you’ll have to fork over the cash to get that interest rate. Refinance rates are near historic lows so there is very little benefit gained from paying points, driving up your out-of-pocket expenses making it more difficult, even impossible to break even recouping your closing costs. When comparing refinance rate quotes focus on the zero point offers, comparing refinance rates AND fees. In today’s market there really no benefit gained from paying discount points, despite what your loan officer tells you.
Don’t Be Afraid to Negotiate Fees
Because fees vary so much from one lender to the next there are fees you can negotiate. The loan origination fee is an example of one refinance closing costs that you can negotiate. One percent for loan origination is standard; however, I’ve seen origination fees as low as $400 from a community based credit union.
There are also junk fees you’ll want to avoid. Paying for things like document preparation, processing fees, lender inspection or courier fees are junk fees lenders use to boost their profits (at your expense) and have nothing to do with closing your mortgage loan. Never agree to pay an application fee to get a quote or a rate lock fee to lock in your refinance rates. The exception is if you have poor credit or a complicated financials that require more documentation and work for the lender.
When shopping for refinance rates and fees you’re going to encounter third-party fees that cannot be avoided. These fees include appraisals, taxes, recording and attorney fees. Any third-party fees incurred should be the exact cost of the service being provided by a third-party. Some lenders attempt to mark up third-part charges so it’s important to compare these fees from a variety of lenders to determine what’s reasonable for your area.
The last suggestion I have is to try and limit your refinance rate shopping to a 14 day period, thus reducing the number of credit inquiries. When you request refinance rate quotes from a broker always provide your social security number so the quote you get will be based on your individual situation. The refinance rates you see lenders advertising are often based on a credit score of 820 meaning your results will vary based on your situation. If the rate quotes you’re getting are coming in higher than what you’re seeing advertised you may need to invest some time cleaning up your credit reports before refinancing.
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