You would think there would be no mortgage refinance fees in a no-cost refinance. However, there are plenty of mortgage refinance fees to be aware of! They just aren't apparent in the fee document.
Please remember nothing is ever free when it comes to a mortgage refinance. The costs are baked in somewhere because banks and lenders are for-profit companies.
In this article, I'll share with you all the mortgage refinance fees you actually don't have to pay if you do a no-cost refinance. Let me explain each one in detail based on a previous refinance of my primary residence. The reality is, the are mortgage refinances fees. They are just in the form of a higher interest rate.
One of my rental property mortgages is a 7/1 ARM at 2.625%. The loan amount is $700,711 and the new monthly payment is $2,814.41. Not only did this mortgage refinance cost me nothing, I was paid a $220 credit.
The only downside to my mortgage refinance was that it took a little over four months to complete. It was a real PITA, but I'm happy to have got it done. Over the next seven years, my cash flow will increase by ~$91,000 and my interest expense will decline by ~$95,000 had I not refinanced.
Common Mortgage Refinance Fees In A No-Cost Refinance
Although my mortgage refinance was considered a “no-cost refinance,” there are still plenty of mortgage refinance fees the lender ends up paying at closing. These mortgage refinances fees are very similar to a regular-cost refinance.
Just know that if you go the “no-cost refinance” route, you end up paying a slightly higher mortgage rate or get less credits back because lenders have to make money too. In other words, instead of getting 2.625% for my 7/1 ARM, I may have been able to get 2.5% if I was willing to pay $5,000+ in fees.
But I like the no-cost refinance route because you're automatically saving money each month. If you decide to sell a property soon after refinancing, you won't feel like a dummy for paying those fees. With a no-cost refinance, there is simply no need to stress about holding the mortgage long enough to break even.
Let me share all the mortgage refinance fees using the final fee schedule of my $700,711 mortgage refinance as an example. Review the final refinance statement and I'll go through each fee one-by-one.
Mortgage Refinance Fee Statement
New Loan Charges For Mortgage Refinance Fees
New loan charges are also called loan origination charges. These are charges made by the lender you plan to refinance with. In this case, the lender is Wells Fargo.
Processing fee: This is an unavoidable fee to pay someone to process your loan.
Relock at Market Rate: This fee is a rate extension fee. When you refinance, you will initially lock on a certain rate. After a particular period of time is over, usually 45 – 60 days, if the loan is not completed by then, the lender will file an extension. Unfortunately, you end up paying the fee for the bank's own inefficiency.
Tax Service: A random tax included in the refinance.
Rate Lock Extension: Because my mortgage took four months and one week to complete, Wells Fargo had to file another rate lock extension. Lenders could take much longer to refinance than they initial guide.
Appraisal Fee: A lender usually hires an independent appraiser to verify the value of your home. A qualified applicant needs to have at least 20% equity in their home. Example: f you want to refinance $800,000, your house best be worth at least $1,000,000. Appraisal fees generally range from $600 – $800.
Credit Report Fee: This fee is sometimes not covered directly by the lender during a “no-cost refinance.” Pulling your credit is a must. As of 2022, the average credit score for a qualified mortgage applicant is a healthy 760.
Not A Refinance Fee
Prepaid Interest: Prepaid interest is not an extra expense. It is the mortgage interest expense you would have paid anyway had you not refinanced your mortgage. Given a refinance can take anywhere from 1 – 4 months, you need to pay the mortgage interest owed to the original lender before closing.
Title & Escrow Charges For Mortgage Refinance Fees
Every mortgage refinance goes through a title company to make sure everything is legitimate.
Title – Escrow Fee: The fee you pay your title company for opening up the escrow account. The title company keeps track of the various stages of the transaction, ensures both sides abide by the contract, holds the money, and releases the money once conditions are met.
Title – Lender's Title Insurance: The lender and ultimately you pay for title insurance. This type of insurance is to ensure that you get a clean title upon purchase and that there are no liens or other owners against your property.
Title – Mobile Signing Fee: Mobile notary who comes to your house, office, or wherever you want to meet to sign the final documents. The notary will take your thumb print and sign a book that verifies s/he saw you sign all the required documents. You will be sent a final refinance statement within a couple days of closing.
Title – Recording Service Fee: This fee is to record the official owner and lender in the city records.
Recording Fees – The government charges your title company a fee to have an official record of your homeownership and lender in the city records.
Payoff of First Mortgage – Principal Balance – This is the balance of the first mortgage you plan to refinance.
Additional Interest – This is the mortgage interest owed based off your first mortgage's interest rate. The additional interest is usually due to a mortgage rate extension. A mortgage is paid in arrears e.g. Feb 1 payment is for January mortgage.
Demand Fee – A random fee that has no purpose
Recording Fee – The borrower's portion of the city recording fee.
Miscellaneous Mortgage Refinance Fees
Homeowner's Insurance Premium – The refinancer must pay the full year's hownerhomer's insurance premium in order to successfully complete their refinance.
Lots Of Mortgage Refinance Fees!
As you can see from the final refinance statement, there are a lot of mortgage refinance fees, even in a no-cost refinance. The only fees that could possibly be reduced or eliminated are the Rate Lock Extension fee, the mobile signing fee, and the appraisal fee.
The Rate Lock Extension fee should not be born by the borrower if the bank's underwriting department is backed up. The Mobile Signing Fee can be eliminated if you go to the title company's office. Finally, you might be able to convince your lender to skip the appraisal if you've had one done with the past 6-12 months.
You'll notice on the Final Refinance Statement that there's a Lenders Credit of $6,131.22. That credit covers all my fees plus gives me a $220 balance due.
Still Have To Come Up With Cash To Refinance
You'll also notice a final credit at the very bottom for $5,111.17. That was actually a check I had to come up with at closing. In other words, even though I completed a “no-cost refinance,” I still had to come up with thousands of dollars.
How come? The $5,111.17 was necessary for the following reasons:
- Having to pay the entire year's homeowner's insurance premium of $1,267.05.
- Having to pay $3,844.12 in mortgage interest at 4.5% from 9/1/19 – 10/11/19. The statement says I only owed $3,464, which is why I have a $220 balance due.
Therefore, the $5,111.17 check I wrote is money I owed anyway. I had previously elected to pay my annual homeowner's insurance premium in monthly installments at no extra charge. But in order to refinance, the law requires the annual homeowner's insurance premium to be paid in full.
With money all paid up until 10/11/19, the next mortgage payment came due on 12/1/2019.
Avoid Big Financial Moves During The Refinance Period
During your refinance period, don't make any sudden and large financial changes. If you do, you run the risk of delaying your refinance as the lender requests more paperwork. Big financial moves during the refinance period may also ultimately lead to a rejection of your application.
Here are some big financial moves you should not make during the refinance period:
- Big purchases like a car or another property
- Big deposits or withdrawals
- Credit inquiries
- Experience a large change in your income
- Change jobs
- Lose your job
- Changes to your revocable trust
Expect every single financial move to be scrutinized during the normal refinance window. If you end up having to extend your rate lock, then you need to be extra careful.
With each extension, you have to send new bank statements and brokerage statements because they expire after two months. After sending new statements, you will often be asked to explain in writing a number of transactions.
For example, after the second rate extension, the mortgage lender asked me to explain 36 transactions that occurred in my checking account and savings account. That took a while!
These transactions included credits from my various real estate crowdfunding investments, capital calls for a couple private equity and venture debt funds, expense reimbursement checks, and more.
When To Refinance Your Mortgage
Despite the time it takes to refinance a mortgage nowadays, refinancing a mortgage to increase your cash flow and reduce your mortgage interest payment is great over the long run.
I recommend refinancing if you can save at least 0.25% on interest and break even within 12-18 months. If you go the no-cost refinance route like I did, then your breakeven is immediate, even if the interest rate is slightly higher.
If you're looking for some competitive mortgage rate, you can get free mortgage rate quotes online with Credible. Credible has a platform of multiple lenders that compete for your business. The more quotes you get, the more confidence you know you're getting the lowest rate possible, no matter the environment.
Diversify Your Investments Into Real Estate
In addition to refinancing your primary residence, you should get truly long real estate by buying more than one property. The combination of rising rents and rising capital values is a very powerful wealth-builder.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $954,000 with real estate crowdfunding platforms. Now, I'm earning over $100,000 a year in passive real estate income.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for all investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and primarily invests in the Sunbelt region where valuations are lower and yields are higher. The real estate company manages over $3.5 billion and has over 500,000 investors. For most people, investing in a diversified private fund is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
All The Mortgage Refinance Fees In A No-Cost Refinance is a FS original post. FS began in 2009 and is one of the largest personal finance sites in the world today.