With a potential war with Iran emerging, refinancing now may be a smart move. Investors may flee to the safety of bonds and mortgage rates will subsequently decline once more. If you missed the large refinance window in 2H2019, it’s coming back again!
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 given I just finished refinancing my primary residence mortgage.
My new loan 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
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.
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.
New Loan Charges
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: It’s hard to tell what tax is being paid for. But as we all know in life, taxes are unavoidable.
Rate Lock Extension: Because my mortgage took four months and one week to complete, Wells Fargo had to file another rate lock extension. Be aware that 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. Nowadays, a qualified applicant needs to have at least 20% equity in their home. In other words, if 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 2019, the average credit score for a qualified mortgage applicant is a healthy 760.
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 mortgage 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
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. Title 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.
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. 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 an appraisal 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. These include:
- Big purchases like a car or another property
- Big deposits or withdrawals
- Credit inquiries
- Change 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.
Take Advantage Of Lower Interest Rates
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 rates, check out Credible. They allow you to get free, competitive, real refinance quotes in one place from multiple qualified private lenders in under three minutes.
Readers, anybody else taking advantage of lower rates and refinancing again? Anybody doing any cash-out refinancing given home equity has risen to all-time highs in many parts of the country?