Reduce Refinancing Closing Costs

Bloggers are wondering what’s next for "The Biggest Loser" tough girl trainer Jillian Michaels. The mortgage industry could use her direct style of conflict resolution to hold lenders true to closing cost estimates.

The decision to refinance hinges heavily on how much you expect to pay in closing costs. The trouble is, you often don’t know your exact closing costs until it’s too late to turn back. That’s because lenders are not required to guarantee their “good faith” estimates. As a result, higher fees can show up on closing day, and change the whole economics of your refinance.

Don’t be a victim of this bait and switch. First, determine if you even need a new loan. If the goal is to lower your payment, you might try accomplishing that with a mortgage loan modification, which has no closing costs.

Shop and negotiate

If you don’t qualify for a modification, start shopping. Gather quotes from lenders that guarantee their estimates. Then, approach other lenders. Tell them you’re comparison shopping for low, guaranteed closing costs, and see how many more guaranteed estimates you can get.

Once you’ve compiled a set of competing offers, compare line items. Several will show fees that lenders charge to cover routine tasks associated with closing your loan. Hone in on these items first, because they’re the easiest to negotiate. These include fees for:

• Underwriting
• Document preparation
• Administration
• Wiring

Ask each lender to explain these fee items to you. Try negotiating them down as much as possible, using your various quotes as ammunition. You can say for example, “Your underwriting fee is $250, but this other lender only charges $125. Can you work with me on that?” Get a new written estimate to document your negotiations.

Odds and ends

Once you’ve worked down the lender’s fees, you’ve realized most available savings. Many of the other fees on your good faith estimate are charged by third-parties, such as title companies, for their services. Here are some tips for managing those expenses:

• Appraisal fee. Refinance lenders should require a home appraisal, which adds about $300 to your upfront costs. If the home has been recently appraised, ask if you can use the existing appraisal instead.
• Settlement fees, closing fees, and attorney’s fees. These all generally refer to the same thing. Question it if you see two or three of these line items on the same estimate.  
• Mortgage and homeowners insurance. Your credit score may impact the rates you pay for these two items. Make sure your credit report is accurate, and keep your credit accounts current.
• Title search and examination. Some title agents charge for these items separately, and others lump them together. Compare these items as two parts of a whole to find the best deal.

Unfortunately, there are enough closing cost line items that an unscrupulous lender could try to slip something in unnoticed. If you see something suspicious, you could channel Jillian Michaels and start yelling—but it’s easier just to select another lender.