Refinancing your mortgage can get costly if you are not careful. In general, you can expect to pay between 3-5% of your loan amount in fees. This does not mean every loan will have such exorbitant fees, though. If you know where you can negotiate with lenders and how to avoid certain fees, you can minimize the cost of refinancing your home. Home refinance penalties and fees should not deter you from lowering your interest rate or taking equity out of your home.
Find out About Prepayment Penalties
The first step is to check with your current lender regarding a prepayment penalty. Generally, these penalties are not allowed, but if you have a loan which you originated a while back, there may still be some type of penalty hanging on. In order to find out if your loan has a penalty, you can call your current lender or check your closing paperwork. You can find the prepayment penalty clause on your mortgage deed. It will tell you the amount of the penalty as well as when it expires. Most penalties expire after 3 to 5 years, so if you are still within this window, you should find out what it may cost you to refinance.
Negotiate your Fees
Almost every refinance loan requires you to pay fees in order to close. This is how the bank operates; otherwise, they could not afford to continually write new loans. This does not mean you have to take the fees at face value, though. You have the option to negotiate each and every fee the lender charges, but where you will have the most luck is the following two fees:
- Origination fee – the lender charges this fee as a lump sum for all of the work they do on the loan. This fee is a percentage of your loan. If the lender charges 2 points, it means 2% of your loan amount. If your loan amount equals $200,000, you will pay $4,000 in fees. If you were to itemize your fees to process a loan, chances are they would not equal $4,000 with the exception of the fees paid to third parties, which the lender cannot control. Basic fees, such as underwriting, processing and credit report fees do not equal $4,000.
- Discount fee – This fee ties directly into your interest rate. If you want a lower interest rate, you will likely have to agree to pay a discount fee. It works the same as the origination fee as far as the points. One point equals 1% of the loan amount. For every point you pay, you can generally lower the quoted interest rate by 0.5%. You can negotiate this fee and its impact on your interest rate with the lender, though.
Third Party Fees
In addition to the standard lender fees are the third party fees you must pay for your loan. These fees are typically less negotiable since a third party charges them. The most common fees are appraisal and title fees, but there are also attorney fees (if applicable) and county recording or tax service fees. These fees are generally set in stone unless you have a reason to negotiate them, such as you know an appraiser or a title company. Generally, however, lenders want to use the professionals they are used to using for loan closings.
Avoiding the Home Refinance Penalties and Fees
Now that you understand the home refinance penalties and fees, you can determine how to avoid them. The easiest fee to avoid is the prepayment penalty. Your mortgage or deed will clearly detail when the penalty expires. If you are still within the time where you would pay a penalty, it is best to wait until it expires. If you are in a situation where you have to refinance, you need to figure in the penalty to determine if the savings will have as much of an impact on you as you think they will. Sometimes paying the penalty negates any savings, which makes it better to wait until the penalty expires.
The refinance fees are the easier charge to avoid. You have two options with these fees:
- Negotiate with the lender to see how much they can lower the fees. You can do this with one lender or several, if you shop around. When you have offers from several different lenders you have more leeway when it comes to getting your way. Lenders will be more willing to reduce their fees if they see you have a better offer from someone else.
- Ask for a no-closing cost loan – If you cannot or do now want to negotiate your fees, you can ask for a no-closing cost loan. In this case, the lender pays the third party fees and waives their own fees. They do this in exchange for you taking a higher interest rate. This way the lender makes their profit, but you do not have to come up with any money at the closing.
There are several ways to avoid home refinance penalties and fees; they just require you to do a little research. Do not jump at the first offer given to you and make sure you know whether you loan contains a prepayment penalty. This way you can negotiate the cost of the loan and maximize your savings when you refinance your home loan.