How Much Will it Cost to Refinance?

Finding a good mortgage broker is a matter of asking for referrals from people you know, doing due diligence on every broker you consider, and finally doing the research to find someone who has a good reputation and does not charge unnecessary fees. (See my blog post, Should You Refinance Now?)  Now that I have you thinking about the benefits of refinance, I’m getting a flood of emails asking, “How much does it cost?”

So now you’ve decided to refinance your home, and you’re going to use a mortgage broker. You’ve done your homework, and gotten recommendations from your Realtor®.  You’ve chosen a well-known company, and you feel confident you’re making a good decision.  However, there are some brokers who will charge you fees you shouldn’t have to pay, and who are not very forthcoming about how much they’re charging you or what the fees are for. What are some of the typical fees you might expect to pay?

This question is a tough one, because fees from one lender to the next will vary quite a bit. Some may be negotiable and some may not. So I feel the best way to answer this question is to tell you that you should ask your loan originator what each fee is for.

In the past some lenders were told to show the customer the least amount of fees that needed to be disclosed up front.  However with the new regulations in place we are finally seeing a level playing field. If a fee is not disclosed up front it cannot be charged on the Final HUD1 (that’s the form that represents the lender’s fees and approximate closing costs) at closing. The main reason this needs to be regulated is because time after time lenders were rewarded with business by providing the lowest quote, only to increase the fees at the last moment, essentially holding the client hostage in order to close the loan.

Examples of typical closing costs might include:

Escrowfees, for the preparation and recording of official documents. Typically required by institutional/commercial lenders to ensure documents are prepared correctly.

 Title service cost(s), paid for title searchtitle insurance, and possibly other title services. In some cases the attorney may do the title search or the title service and attorney fees may be combined. Required by institutional/commercial lenders.

Survey fee for a survey of the lot or land and all structures on it to confirm lot size and dimensions and check for encroachments. Required by some institutional/commercial lenders.

Recording fees, charged by a governmental entity for entering an official record of the new trust deed of the property. Required by the government for recording the deed.

Document or Transaction Stamps or Taxes, charged by a governmental entity as an excise tax upon the transaction. Required by law.

Mortgage Application Fees, paid by the buyer to the lender, to cover the costs of processing their loan application. In some cases, the buyer would pay the lender the application directly and prior to closing, while in other cases the fee is part of the buyer’s closing costs payable at closing.

Points, paid by the buyer to the lender. The single largest refinance cost.  Points are a form of pre-paid interest, charged by the lender as an alternative to charging a higher rate of interest on the mortgage loan. One point equals one percent of the loan principal.

Appraisal Fees, charged by a licensed professional appraiser. Many lenders will require that an appraisal be performed as a condition of the mortgage loan. The purpose of this appraisal is to verify that the amount of the new deed of trust on the property (upon which the underwriting of the loan is based) is equal to or less than the fair market value of the property.

Pre-paid Property Insurance  Lenders will typically require that a mortgaged property be insured at all times throughout the life of the mortgage, and will usually require that the first full year’s property insurance premium be paid in advance by the buyer. If the buyer has not already paid the insurance company directly, this would become another closing cost payable at closing.

Pro-rata Interest  The monthly mortgage payment is calculated and payable on a specified day each month. If the closing does not actually fall on that specified date (which is usually the case), then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due.

Other items in addition to the above may be common in some jurisdictions, and some transactions may include unusual or unique items as closing costs. In the United States, Federal law requires that all residential transactions financed by a mortgage have all closing costs documented in detail upon the standard HUD-1 form. This information must be provided to the principals but does not have to be sent to the government. If you’re not sure what fees you’re going to be charged by an online broker, ask.  If a fee sounds suspicious to you, check with other local mortgage brokers to see if this is a reasonable fee.

Should I pay points? Does a zero-point/zero-fee loan really exist?

The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:

♦  Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.

♦  Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month

♦  Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.

♦  The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.

If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!

Would you like an estimated cost analysis for your refinance?  Contact us at The Bremner Group. 310-571-1364.

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