Refinancing your mortgage means paying closing costs all over again. Each lender charges different fees. Some charge points while others individually charge for each cost of processing a loan. There are also some lenders who charge closing fees and discount points. They do this because the borrower wants a lower interest rate. Usually the more you pay up front, the lower your interest rate. So how should you find the refinance lender that is right for you? It is a detailed process.
What are Points?
You can look at points in two ways:
- A fee that lowers your interest rate
- The closing fees lumped into one category
The way the lender uses them will determine your loan’s outcome and the choice of the right lender.
If you want a lower interest rate, you may have to pay for it. A lender will tell you the rate you qualify to receive. Sometimes this rate is the one you see advertised and sometimes it is higher. If it is higher, it could be because you pose a higher risk than the average borrower. Maybe your credit score is lower than average or you have a lot of debt. Both of these issues make lenders increase the interest rate so they can offset the risk. If you default on your loan, the lender at least has the satisfaction of making a profit on the interest while you made your payments.
Some lenders, however, lump their closing fees into one cost and call it an origination fee. They charge the fee as a percentage of the loan amount. For example, 2 origination points equals 2% of your loan amount. If you have a $100,000 loan, you would pay $2,000 in closing fees. Keep in mind, these are strictly the lender’s fees. You still have the third party fees, such as the appraiser, title company, and credit bureau’s fees.
Paying Points Versus Paying the Higher Interest Rate
Assuming you find a lender who offers you the option to pay points or take a higher interest rate, what should you choose? There is no right or wrong answer across the board. You must evaluate your situation to come up with the right decision. Here is what to consider:
- How long will you be in the home? If it is only for a few years, paying the points for a lower interest rate might not make sense. You can calculate the difference between the interest you would save and the fee you would pay to lower the interest rate to see what makes sense.
- Consider how long it will take you to pay off the points if you pay them. For example, if you pay $3,000 in fees to lower your interest rate and you save $150 a month with the lower rate, it would take you 20 months to pay the fees off. If you move or pay off the loan before then it would not make sense to pay for a lower rate.
What you need to do in any situation is find out your break-even point. As discussed above, see when you will start seeing the benefits of paying a lower interest rate. Then you can gauge how long you will be in the home and enjoy the savings. If you will only save a little money, it might not be worth coming up with the lump sum at the closing.
Shop Around to Find the Right Refinance Lender
Every refinance lender charges different fees. In fact, every lender has different programs. You might find a lender willing to refinance your loan without paying any points. If you want to pay the fee, find a lender willing to charge you as little as possible, though. In addition, try to shop the closing fees. Every refinance lender has different fees they charge. For example, if you use your current lender, they may be able to slightly streamline the refinance process. In return, you may have lower closing costs, allowing you to save more money.
Before you settle on a refinance lender or specific loan program, consider all of your options. Take a long, hard look at your long-term plans and determine how your loan will be affected. If you know this is your forever home and you are in the loan for the long haul, you obviously want the lowest interest rates possible. However, if this is a temporary home or you know you will pay the loan off sooner rather than later, you have some number crunching to do to find the best choice for you. There are many lenders out there, make sure you weigh your options before jumping at the first offer provided to you. This could prevent you from overpaying fees and wasting money you could have used to pay your principal balance down.
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