Refinancing your mortgage means you will pay closing costs in one way or another. There are several ways to do it and even ways to negotiate refinance closing costs. Understanding what you need to pay, your options for paying the costs and which ones you can negotiate can help you make your refinance the right decision for you.
What Closing Costs will you Pay?
Every lender differs in the costs they charge, but there are general similarities across the board. These costs include:
- Application fee – This fee covers the costs of running your credit, evaluating your application and determining if the lender has a program for you. This is one of the easiest closing fees to negotiate since many lenders do not charge it and the ones that do have room to waive it and still make a profit.
- Processing fee – Lenders who do not charge an application fee often charge a processing fee. The idea is the same – the lender charges this fee to cover their costs for going over the loan and getting it into underwriting. This too is a very negotiable cost.
- Origination fee – If a lender does not charge either of the above fees, they often lump them into an origination fee. The difference with this fee is the lender figures it as a percentage of your loan amount. Lenders usually charge between 1 and 2 points for this fee. Either you can negotiate the entire fee or you can ask for a lower percentage to decrease the amount you have to pay.
- Discount fee – This fee helps you lower your interest rate. Lenders make their profit by charging the discount fee up front and in exchange, they can provide you with a lower interest rate. The amount of the discount fee and the subsequent interest rate decrease depends on the lender and leaves room for negotiation.
- Underwriting fee – Lenders that do not charge lump sum fees often charge an underwriting fee. This fee differs from the processing fee as it is the cost of paying the underwriter to work on your loan. This fee may or may not be negotiable.
3rd Party Fees
Other fees that most lenders charge originate from third parties. This includes things like appraisal fees and title fees – each of which is necessary and sometimes non-negotiable.
- Appraisal fee – The appraiser charges the lender to conduct an appraisal and the lender in turn charges you for the service. This fee is usually not negotiable and most lenders already have an appraiser they use. If you want to lower the cost and you know an appraiser, you will have to see if the lender will accept the appraiser for use on your loan.
- Title search – Every lender requires a title search before they close on the loan. This ensures your home is free and clear of any liens except your current mortgage. If there are other liens, such as tax liens or mechanic’s liens, you have to clear them before you can close on the loan or the lender can lose their first lien position. This fee is non-negotiable as well as the lender uses a specific title company that already has fees in place.
- Title insurance – This fee is another required fee. Every lender requires title insurance in order to protect the lender from any type of loss. The fees are preset and non-negotiable.
Ways to Negotiate Refinance Closing Costs
There are several ways you can negotiate refinance closing costs. You can flat out ask the lender if they can reduce or waive specific fees or you can negotiate a no-closing-cost loan. Here’s how they both work:
Negotiating Specific Fees
If you shop around with different lenders, you can compare the Loan Estimate, which each lender must provide you within 3 business days of your loan application. Look at the breakdown of each fee and compare them. If one lender charges a much higher processing fee, for example, but they have a lower interest rate, you can negotiate the processing fee by showing them the Loan Estimate from the other lender.
If you think a lender wants too much for an origination fee or discount fee, you can discuss with them the option to lower those fees as well. Remember, these fees often tie into your interest rate, so make sure you compare apples to apples when you compare the costs of different loans from different lenders. It never hurts to ask if the lender can lower the fees, though.
Ask for a No-Closing-Cost Loan
One way to avoid paying any closing costs at all is to ask for a no-closing-cost loan. This means that the lender waives all closing costs. In order to do so, however, they charge you a slightly higher interest rate. This enables the lender to make a profit on your loan as they would with the collecting the closing fees up front. The difference is the lender makes the profit down the road, not up front, when you close on the loan.
There are many was to negotiate refinance closing costs, but you have to know what you want before you start negotiating. If you are unsure about the costs, what the lender charges them for, or what you can negotiate, you could end up paying more than you want for a loan. Make sure to ask for a specific breakdown as well as where there is room for negotiation to ensure that you get the best deal on your loan.