How to lower the cost of refinancing
Even as mortgage interest rates remain near historic lows, some homeowners have put off refinancing their current mortgages.
Why? Because refinancing costs money. For some borrowers, saving $100 or $150 a month won’t justify parting with thousands of dollars in cash upfront.
But there are ways to lower the cost of refinancing that can save you money upfront and in the long run.
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7 tips to lower refinance costs
Following these tips could trim the cost of your refinance, saving you a lot of money moving forward. These tips include ways to lower your refinance rate and your closing costs.
1. Shop around for mortgage lenders
Mortgage refinance lenders compete for your business just like grocery stores and restaurants.
So you should always check with several lenders to make sure you are getting the lowest rates and fees possible.
It’s not enough to compare lenders’ advertised rates since they won’t apply to your unique personal finances; you’ll need to start the application process and analyze loan estimates from each lender you’re considering.
Compare rates, but also be sure to compare lender fees, which contribute a lot to closing costs.
2. Negotiate for lower fees and a lower interest rate
Some closing fees are non-negotiable, but others can be changed. Loan origination fees, for example, tend to range from 0.5% to 1.5% of your loan amount. If you’re being charged 1% or more, why not ask your loan officer to lower the fee?
Or, if you’ve accepted a higher loan origination fee, ask your lender to waive the application fee or the processing fee.
You can also negotiate for a lower interest rate, especially if you have another offer from a different lender that’s willing to go lower. Show this offer to the other lenders you’re considering.
Your type of loan will influence how much you can negotiate. With a VA loan, for example, the Department of Veterans Affairs is already capping closing costs. Your lender may not be willing to go lower.
3. Keep the same title insurance company
It can cost nearly $1,000 or more for a title search and title insurance. Ask the company carrying the title insurance policy you have now to reissue the policy for a new loan.
This can help keep your refinance costs low. The fee will cover the cost of searching the property’s records to make sure you are the owner and to check if anyone has put a lien against your home.
4. Ask for a no closing cost refinance
A mortgage refinance will always cost money. When mortgage lenders advertise no-closing cost loans, you’ll still be paying closing costs in the form of a higher interest rate.
But if you’re strapped for upfront cash, this may be just the deal you need. In today’s low rate environment, you could still save long-term even with closing costs factored into your new rate.
Some lenders will also roll closing costs onto your new loan balance. This will increase your principal, and you’ll need enough home equity to absorb the higher loan amount.
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5. Double check with your current lender
Before you commit to a new lender, see if your current lender will be willing to offer lower rates and fees.
Competition is tough with such low mortgage rates. To keep you as a customer, your current mortgage lender may be willing to exceed the best mortgage rate you’ve gotten from a different lender.
Or, your current lender may be willing to waive some of its fees to keep your business. It never hurts to ask.
6. Consider a streamline refinance program
Streamline refinance loan programs exist to keep your mortgage in line with today’s best mortgage rates.
This won’t work with a conventional loan. But if you have a government-backed mortgage — like an FHA, USDA or VA loan — be sure to ask your current lender about a streamline refi.
In many cases, you won’t need a new home appraisal or a credit check. This saves money on your closing costs. (No appraisal means no appraisal fee, for example.)
You couldn’t get a cash-out refinance, and streamline refinances will work only on the same type of loan: For instance, an FHA streamline won’t work on a VA loan and vice versa.
If you do have a conventional loan, check out Freddie Mac’s Refi Possible or Fannie Mae’s RefiNow programs which could save on closing costs.
7. Work on your credit first
One of the best ways to save on your refinance is by raising your credit score. The higher your credit score, the lower the mortgage rates you’ll be offered on a refinance.
Since homeowners looking to refinance have already been making their mortgage payments, there’s a chance their credit history has improved over the years.
While your credit report won’t directly affect your closing costs, a higher credit score could give you more negotiating power.
For example, if your credit history justifies a lower interest rate, you’ll have more room to raise your rate to cover closing costs.
Check your refinance eligibility. Start here
Which refinance closing costs can be negotiated?
Some borrowers think of “closing costs” as a single expense.
In reality, closing costs are a collection of charges covering the variety of professional services needed to close a home loan.
Looking at these charges individually will help you learn how to negotiate for lower closing costs:
- Lender’s fees — negotiable: These are administrative costs charged by your lender. They usually include a loan origination fee that’s based on the size of your loan but can also include processing fees, underwriting fees, rate lock fees, and even application fees. You can negotiate these fees with many lenders.
- Third-party fees — harder to negotiate: Your lender passes these fees on to you but they’re actually charged by third parties such as the home appraiser, credit bureaus, and escrow company. It’s hard to negotiate these fees, but you could choose a less expensive service provider in many cases.
- Legal fees — harder to negotiate: An attorney can help make your real estate transaction legally binding through a title search and by recording the deed properly with your local government. You can compare attorneys in search of the best deal or ask your real estate agent or loan officer for suggestions.
- Front-loaded charges — non-negotiable: Depending on when you close your loan, you could owe property taxes or homeowners insurance premiums in advance. You can’t negotiate these costs, but they balance out eventually. Chances are you already have enough saved in your current lender’s escrow account and will be reimbursed after closing.
- Mortgage insurance fees — non-negotiable: Depending on your type of loan, you may owe upfront mortgage insurance premiums. USDA, FHA, and VA loans will charge this upfront fee as a percentage of your loan amount. Conventional loans do not charge upfront mortgage insurance.
- Optional charges: You could buy discount points to lower your mortgage rate. You could also get title insurance to protect your investment if a company or individual claims ownership of your home later. These closing costs aren’t required but you may need them.
All in all, closing costs average 2% to 5% of your loan amount. They tend to reach a higher percentage of smaller loan amounts but a lower percentage of larger loan amounts.
Two strategies for saving on a refinance loan
Costs for refinancing fall into two broad categories:
- Your refinance rate: The amount you’ll pay in interest over the life of the loan
- Your upfront costs: The amount you’ll pay upfront to close on the loan
These two broad categories can be interrelated, especially if you’re going with a no-closing cost loan. But it’s important to consider them separately when you’re looking for ways to save.
Negotiate a lower refinance rate
Many first-time mortgage applicants don’t know they can negotiate interest rates with their lenders.
You’ll have more negotiating power when you have a strong credit history, plenty of home equity, and the ability to go with a shorter loan term.
But it’s most important to shop around among several different lenders. If you get a lower rate quote from one lender, show it to the other lenders you’re considering. One of them may be willing to beat your best mortgage rate offer.
Even if you plan to accept a higher interest rate in exchange for lender credits to cover closing costs, you should still negotiate for your best mortgage rate first.
How to reduce closing costs
You can also reduce closing costs by using the power of negotiating and comparing lenders.
Lenders can lower their loan origination and other lender fees. These fees cover overhead costs, so you shouldn’t expect a lender or mortgage broker to waive its fees completely.
But you can make a case for paying less, especially when you’re taking out a larger loan amount — and especially when you’re holding a lower fee quote from another lender.
Some closing costs pass through the lender: the home appraisal fee, for example, which is charged by a third-party home appraiser.
A lender typically won’t lower this fee since it’s simply covering its costs. But you can ask for a different appraiser in advance if you can find one with a lower appraisal fee.
If you do need to accept a higher rate so the lender will cover some or all of your closing costs, you should still try to negotiate for lower fees.
How to lower refinance costs FAQs
Can you negotiate refinance rates?
Yes, you can negotiate refinance rates, especially when you have a strong credit profile and more than 20% in home equity. (You may have this much equity if you made a large down payment and have had your loan for a few years.) Comparing rate quotes from at least three different lenders will improve your chances. Lowering your rate will lower the monthly payment on your mortgage loan.
Are refinance costs negotiable?
Some refinance costs are negotiable, especially fees charged directly by the lender. Your loan origination fee, for example, could range from 0.5% to 1.5% of your loan amount. This is a huge range: 0.5% of a $250,000 loan would be $1,250 while 1.5% would equal $3,750. If your lender is charging 1.5% why not ask for a 1% fee which could save $1,250 on borrowing costs? You could also ask your lender to lower your underwriting or processing fee.
What mortgage refinance fees are negotiable?
Fees lenders charge directly such as a loan origination fee or underwriting fee will be easier to negotiate than third-party fees such as the appraiser’s fee or the credit report fee. Other costs, such as upfront mortgage insurance fees or prepaid property taxes, are not negotiable.
How can I lower the cost of refinancing?
You can lower the cost of refinancing by shopping around for the best mortgage rate and lowest fees. Even with FHA loans, which are regulated by the Federal Housing Administration, lenders may have some room to lower fees and rates.
What are typical closing costs on a refinance?
Typical closing costs for most refinance options resemble costs homebuyers pay on a new mortgage. They include lender fees, legal fees, charges for third-party services such as the home appraisal, and prepaid deposits for property taxes and homeowners insurance. Average closing costs range from 2% to 5% of a loan amount.
Can you avoid closing costs when refinancing?
You could avoid paying closing costs out of pocket, but you’ll still be paying them in the form of a higher interest rate. This doesn’t mean you couldn’t still save on your monthly mortgage payments with a no-closing cost refinance. But you would be cutting into your potential savings. Depending on how long you keep the loan, you could pay more in extra interest than you would have paid in cash upfront. A refinance calculator can help you see whether avoiding upfront closing costs is a good idea for you.
Is refinancing worth the closing costs?
Refinancing is worth the closing costs when you stay in the new loan long enough to benefit from its lower interest rate. Refinancing can also pay off by eliminating an FHA loan’s ongoing mortgage insurance or by shortening the mortgage term from 30 to 20 or 15 years. A shorter mortgage term increases monthly payments but can save on long-term interest.
How much are closing costs on a refinance?
Average closing costs range from 2% to 5% of the loan’s amount. This percentage tends to skew lower for larger loan sizes but higher for smaller loan amounts. For example, refinancing a $125,000 loan may require 5%, or $6,250 in closing costs, while a $500,000 refinance may require only 2%, or $10,000.
Do you have to pay closing costs when you refinance?
Yes, any new mortgage loan requires closing costs. A streamline refinance option normally costs less in closing costs because it’s a low-documentation loan. You may not need a credit check or a home appraisal. Streamline refis work only for the same loan type you already have and only for government-backed loans.
Check current rates
While there are many reasons to refinance on a mortgage, the best reason is that rates are near historic lows. Lower rates increase long-term savings and can make paying upfront closing costs less painful.
Finding out the rates that are available to you is a great first step in deciding if now is the right time to refinance.
