Learn about Lender Fees, Third Party Fees, Pre-Paids & Escrows, Government Taxes & Fees, and the Truth about No Closing Cost Home Loan Refinance Mortgages
In addition to mortgage rates, closing costs are a major focus area for those looking to refinance. We'll take a look at the common refinance lender fees and mortgage closing costs you will encounter, and focus on the ones that will have the biggest dollar impact for your refinance.
We'll also take a look at the "No Closing Costs" refinance options you may have seen advertised, so you can learn that there really is a cost, one that could be quite substantial.
There can be a major difference in total closing costs for the same refinance program (mortgage rate and terms) among the various refinance mortgage lenders.
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The following is a list of common Lender Fees included in refinance closing costs. This is not an all-inclusive list, but reflects the most common charges. Be aware that lenders are always coming up with new names and fees to charge... also known as "Junk Fees".
There can be a vast difference in lender fees charged among refinance lenders, but the key is really just to compare the "Bottom Line" fee totals from each quote you receive.
Some mortgage lenders may only charge a couple items from the list below, where others charge a great number of the refinance lender fees (or variation of ) on the list. Again, the key is to add up all the charges and compare the bottom-line fee total.
We list the more common lender fees and focus on the ones with the biggest dollar impact for your refinance home loan.
To compare competing lender's closing costs, just add up the fees from each Good Faith Estimate received to reveal total cost
Closing Costs: Application Fee- The application fee is charged by refinance lenders to cover administrative costs. This fee typically is in the $750 range.
Just so you know, not all mortgage lenders charge this fee upfront, but the cost must be absorbed somewhere to cover overhead expenses. In most cases, it's better to have the application fee stated upfront on the good faith estimate as opposed to a higher interest rate or higher origination fee.
Closing Costs: Origination Fee- This is the main fee that a refinance lender charges to make money on a loan. You will most likely see this fee on any good faith estimate received, which covers the lender's loan origination,and is applied to closing costs.
The origination fee is stated in "percentage of the loan amount". For example, if you are refinancing $200,000 and the origination fee is 1%, the total origination fee would be $2000 for your loan. This is not a "junk fee", as the lender has operating costs and needs to make a profit to stay in business. Common and reasonable origination fees are between 1% and 2% of the loan amount depending on the size of the mortgage, but can go much higher, so be aware of this fee.
There may an instance where you receive a good faith estimate that shows no origination fee, or a very small percentage. Keep in mind that refinance lenders need to make money to stay in business, so take a closer look if the origination fee is lower that 1%. A low origination fee may be covered by a high application fee, processing fee, or combination of fees added to refinance closing costs.
Another reason for a low mortgage origination fee may be that the refinance lender is charging you a higher rate of interest than the par rate (lenders base rate) to make a profit through Yield Spread Premium (YSP). YSP is the cash rebate paid to a mortgage broker based on selling an interest rate above the wholesale par rate. Comparing good faith estimates from competing refinance lenders at the same rate of interest is the best way to compare the true origination charged by the mortgage lender.
Closing Costs: Processing Fee-Mortgage lenders ususally charge a processing fee to cover the cost of the processor's duties in coordinating the loan to closing. This fee is normally in the $750 range and just like the application fee, should be stated on the good faith estimate. It's another lender overhead fee that must be absorbed somewhere, and preferrably not hidden in a higher interest rate or origination fee.
Closing Costs: Underwriting Fee-Refinance lenders charge an underwriting fee to cover the expense of underwriting a loan. In the case of a mortgage broker (loans filled through third party lenders), this is normally a charge-back to the broker and passed back to the consumer's closing costs at the refinance lenders normal charge.
For a direct mortgage lender (underwrites the loan in-house), the cost of the underwriter is also passed back to the consumer. This is not a junk fee and quite normal in the mortgage industry. This fee commonly runs in the several hundred dollar range.
Closing Costs: Discount Fee (Discount Points)-Discount points are fees paid to a mortgage lender at closing in order to lower your mortgage rate. Each discount point generally costs 1% of the total loan amount and depending on the borrower, each point lowers your mortgage rate by one-eighth to one one-quarter of your interest rate.
For example, on a 30 year fixed rate $100,000 loan, each point would cost $1,000. Assuming the interest rate on the mortgage is 5.5% and each point lowers the interest rate by 0.25%. Buying 2 points will cost $2,000 and result in a mortgage rate of 5.0%.
To decide whether or not to buy discount points for your home loan refinance, you can easily figure the breakeven point to determine if it is worth the expense.
In the preceding example, with no points at 5.5%, the monthly principle and interest mortgage payment would be $567.79 per month. Buying 2 points would bring the principle and interest payment down to $536.82 per month at 5%. This results in a total monthly savings of $30.97 for a cost of $2,000. The breakeven point would be 64.57 for this example ($2,000 divided by $30.97).
If you planned on staying with the mortgage for more than 65 months, the discount points may be a good buy. In fact, if the loan were kept for the entire 360 months, total savings would be $9149.20. (360 x $30.97 - $2,000 discount point closing costs).
Mortgage Closing Costs: Third Party Fees
Third Party fees are the portion of refinance closing costs incurred through the use of third parties utilized to perform tasks during the mortgage loan process, but are not paid to the refinance lender.
The major refinance fees in this area are related to title company charges and the appraiser. Again, we will list the more common third party fees and focus on the ones with the biggest dollar impact for your refinance home loan.
Closing Costs: Title Insurance-Title insurance is protection against loss arising from problems connected to the title to your property. Mortgage lenders will always require title insurance and fees will vary depending upon the size of the loan, the property location (title insurance rates vary from state to state and market to market), and the title company used by the lender.
The cost of title insurance can vary widely, but is generally around .5% of the loan amount. It is important to note that many mortgage brokers have an interest in, or own the very same title companies utilized for the loans they originate. They must disclose this relationship, usually including the disclosure with the RESPA documents that you receive to satisfy compliance requirements.
Closing Costs: Closing Fee -This fee is paid to the title company or attorney for conducting the closing. The closing fee is usually between $150 and $400.
Closing Costs: Appraisal-The appraisal is required to determine the fair market value of the home.
A home appraisal is almost always required by a refinance lender before loan approval is given, to ensure that the mortgage loan amount is not more than the value of the home and proper. The lender also wants to be certain the pre-qualified the Loan-to-Value ratio remains intact.
Home appraiser fees are usually between $300 and $500.
Mortgage Closing Costs:
Pre-Paids and Escrow
Closing Costs: Pre-Paid Interest- This is interest you pay at closing in order to get the interest paid up to the first of the month. It varies depending on your mortgage rate and the day of your home loan closing. For example, if your loan closing is on the tenth day of the month, you will pay 20 days worth of interest on your loan to cover the period before your first payment is due on the first of the next month.
Closing Costs: Upfront Mortgage Insurance- This pre-paid item only pertains to FHA home loans and is paid upfront (usually added to the loan amount) in the amount of 1.5% of the total loan amount.
Closing Costs: Property Tax and Homeowners Insurance Escrow Deposit- Mortgage lenders may require you to make monthly payments equal to one twelfth of your yearly total taxes and insurance into an escrow or impound account for the payment of your taxes and insurance when your loan amount is more than 80% of the appraised value of your home. The lender will use this money to pay your taxes and insurance when the bills are due and will more than likely require an initial deposit to ensure adequate funds. You may be required to deposit an additional two months' worth of payments at closing to make sure the lender will have enough money to pay the bills in the event the taxes and insurance are higher in the following year.
We will use a simple property tax deposit example to illustrate how escrow deposits are calculated.
Assume $1200 per year property taxes are due and were paid on January 1st and your new refinance is set to close on March 15th with your new payments beginning on April 1st .
By the time the taxes are due the following January 1st , you will have made 10 monthly escrow payments of $100 totaling $1000. Since you would be $200 short your initial deposit would be $400 to account for the 2 months shortfall and the extra 2 months' worth of reserves.
Keep in mind that the escrow deposit belongs to the borrower. The remaining balance of the escrow deposit plus interest is refunded to the borrower once the mortgage balance is paid-off in full.
Mortgage Closing Costs:
Government Taxes and Fees
Many states and local governments will charge taxes when you refinance your home. Taxes and other state and local government fees will vary widely.
These closing costs will depend solely on your location and are not controlled by your refinance lender.
Closing Costs: Recording Fees- Recording fees vary widely depending on municipality. This is a fee charged by the local recording office for the recording of certain legal documents in the public land records such as your deed or mortgage.
The Truth About "No Closing Costs" Refinance Home Loans
Most looking to refinance have undoubtedly viewed the "No Closing Costs" and "No Points" refinance mortgage programs advertised on TV and the internet. The truth of the matter is that these hyped refinance programs do have a cost, a cost that can add up to multiple thousands of dollars over the term of the mortgage. More accurately, these refinance loans should be termed as "lender paid closing costs". Does that mean that the good-natured mortgage lender is paying your closing costs for you? Not exactly.
Remember the old saying that "if it sounds too good to be true, then it probably is". The truth is that the borrower is paying the closing costs by paying a higher rate of interest as compared to the rate of interest they would be eligible for when paying the closing costs directly.
For instance, suppose you are taking a 30 year fixed rate refinance for $300,000 (with closing costs rolled in) and the normal closing costs for this loan is $5000. Based on your qualifying income, credit, and equity, you qualify for a market or "par" rate of 6% interest. This would result in a monthly principle and interest payment of $1,798.65.
With a "no closing costs" option, this same loan now has an interest rate of 6.625% and a loan amount of $295,000. The resulting principle and interest for this loan is $1,888.92. The no closing costs loan actually will cost you $90.27 more per month.
If you stay in the loan for less than 55 months, then this is actually a good deal for you ($5000 closing costs divided by $90.27 additional payment per month). On the other hand, if you stay in the mortgage for the entire 30-year term, you will be paying an additional $32,497.20 in mortgage interest. So much for No Closing Costs!
You can see by the preceding example that there are situations when a no closing costs refinance loan makes sense, but other instances where it can cost the borrower tens of thousands of dollars.
In our opinion, those who advertise "No Closing Costs" refinance home loans steer toward deception to prey on those not educated in mortgage finance and rely on those who do not ask questions.
A borrower's best option is to work with an upfront mortgage lender, one that will review all your options so that you can make an informed decision for your new refinance mortgage.