So you've been thinking about refinancing your mortgage? Perhaps you missed out on the recent ultra-low mortgage rates of recent months but the current rates are still lower than what you're paying now? Or maybe you're thinking that mortgage rates might dip back down again and you want to be ready to take advantage when they do?
The key question you have to ask yourself is, will refinancing save you money? It's not enough just to obtain a lower interest rate - a big part of the answer to that question depends on the fees you'll need to pay to refinance.
A refinance is just a new mortgage
It shouldn't come as any surprise that refinancing your mortgage is going to cost money. After all, refinancing a mortgage basically means issuing a new mortgage for the same property - so naturally, you're going to be paying many, but not all of the same closing costs you did when first buying your home. And if you're not careful, those fees can quickly eat up any savings you realize from refinancing your mortgage.
It doesn't matter whether you're going through a goverment program such as Making Home Affordable or working directly with a lender on a private refinance - you'll still have to pay closign costs.
According to the Federal Reserve, borrowers can expect to pay from 3 percent to 6 percent of their outstanding balance in fees when they refinance a mortgage. That means any reduction in your mortgage rate has to balance out those fees to make refinancing worthwhile. For most homeowners, that usually means about a 1 percent reduction or more, although those with a jumbo or other large mortgage may be able to benefit from even smaller reductions, since the potential savings are greater.
Just like with a purchase mortgage, closing costs offer an opportunity for some lenders to pad on additional fees you may not or should not have to pay. Some fees are fairly standard and unavoidable, but there are others you may be able to get waived or reduced through negotiating or simply going to another lender who doesn't charge them. All should be disclosed in your Good Faith Estimate and the HUD-1 Settlement Statement provided before closing.
The U.S. Real Estate Settlement Procedures Act specifies that the HUD-1 should be provided to you at least a full day before closing, though in practice some lenders may provide it only a few hours before. Reviewing it in advance will give you the opportunity to identify and challenge questionable fees. If you wish, you can also hire a real estate attorney to review the document; this may cost several hundred dollars, but should provide assurance that you're not paying for anything unnecessary.
The following are some of the fees you'll likely have to pay, some you may have to pay, and some you shouldn't have to pay when refinancing a mortgage. The list is not all-inclusive or absolute; consult with your financial advisor or an attorney to determine which may or may not apply to your situation or in your area, or which other ones there may be. All may vary widely from lender to lender, which is why it pays to be attentive to them when shopping for a refinance.
Fees you'll probably have to pay
Loan Origination fee (or points): This is the main fee you pay the lender for making the loan. This may be charged as a separate item or be expressed as points (one point = 1 percent of the loan amount).
Application fee: This is an up-front fee that you pay to have your loan application processed. It is typically non-refundable if your loan is rejected.
Appraisal fee: Even though your house was appraised when you first bought it, your lender is going to want to have it appraised again when you refinance to determine the current market value that is supporting the loan.
Credit report fee: Just because you qualified for your current mortgage, it doesn't mean a lender is automatically going to offer you another one to replace it. They're going to want to check your current credit status.
Recording fees and taxes: These cover the cost of registering your transaction with the county. Though the property hasn't changed hands, the deed has to be updated to reflect the new mortgage and lender. However, check to see what your county charges; these are sometimes puffed up as a profit source for the lender or title company.
Title search/title insurance: Again, just because your title search came up clean on your first mortgage doesn't mean your new lender is going to take your word for it. They're going to want to verify that you are the actual owner of the home and that there are no other outstanding leins on the property.
Attorney fees: Lender's cost of paying attorney to review all documents prior to closing; you may want to hire your own attorney to do your own review.
Closing fee: Charge paid to the attorney or title company that conducts the closing. You do not need to accept the one recommended by your lender; you may be able to save money by shopping around.
Fees you may have to pay
Discount points: These are typically optional, and are what you pay to obtain a lower rate. As a rule of thumb, each point (one percent of the loan principal) paid in addition to the loan principal equals a reduction of 1/8 of a percent on the interest rate. These might be worth considering if you plan on staying in the home long enough for the savings on interest to make up what you pay for the points.
Yield Spread Premium: This is what you may pay when going through a broker and they can be controversial. One the one hand, brokers say the YSP is merely their markup over the retail cost of the mortgage. Consumer advocates, including the Center for Responsible Lending, say they're simply kickbacks that lenders pay brokers for steering customers into a higher interest rate. The key is how much you're paying: anything more than a quarter of a percent (e.g., 25 basis points) is likely going to be a rate that's higher than you could have gotten shopping around on your own, unless you have damaged credit. Again, shop around and compare brokers.
Reconveyance fee: Typically charged by your existing lender to convey the property interest back to you and to your new lender; may not have to pay if you refinance with the same lender.
Fees you may not or should not have to pay
Underwriting fee: Consumer advocates say this is simply an add-on for services that should be covered by the origination fee. In some cases, it may be a back-end fee paid in exchange for a lower rate.
Settlement fee: Again, consumer advocates say this is a charge that should be covered by the loan origination fee. Some lenders may break it out separately to keep the origination fee down; the key is to pay attention to the total cost.
Wire transfer fees: This is a charge for electronic transfer of funds to close the transaction, though some lenders will mark it up far in excess of their own charges. Be wary of anything much in excess of $30.
Document preparation fees: Again, some lenders will make up their charges for document preparation as a means of generating extra profit. Be suspicious of anything that seems excessive - you can often negotiate to have this eliminated or reduced.
Processing fee: This is another fee to cover the lender's costs in originating the loan; many say it should be included in the loan origination fee. Survey fee: You shouldn't need a new property survey for a refinance.
Again, there may be other fees that are required or apply in your give situation; be sure to use your Good Faith Estimate and HUD-1 to review and address any questions you have about fees in advance of the closing.