This post will show you how to reduce mortgage fees and get the best rate possible. I have been refinancing and taking out new mortgages since 2003. As a result, I've become an expert at squeezing as much value as possible out of every mortgage.
Mortgage fees are an inevitability. How do you expect anybody to make money without them? I have no problem paying a fee for services rendered. However, some of the fees we pay are often hidden, illogical, or excessive.
To reduce mortgage fees, let me first explain what mortgage fees entail. I'll also explain the point system and the incentive based pricing system.
How To Reduce Mortgage Fees: Understand The Fee Chat
To reduce mortgage fees, the first thing to understand is the makeup of mortgage fees. Mortgages fees are largely FIXED independent on the size of your mortgage. Therefore, the smaller the mortgage, the more expensive it is to proceed.
Below is a precious mortgage refinance fee schedule on a ~$1M mortgage refinance.
You can immediately see the bank should have the flexibility to wave the Application Fee ($100) and Commitment Fee ($915) for $1,015 in savings. $1,015 is 28% of the mortgage fees you can potentially reduce right there.
The Vendor Fees and Title and Escrow Fees are a little harder to reduce because they are outsourced to independent third parties. There was a time when banks were able to use in-house appraisers to help push through loans because loans are dependent on loan-to-value ratios. However, after the financial crisis, this is no longer allowed due to one too many fictitious appraisals.
The point of understanding the mortgage fees line item by line item is to know what you are playing for when negotiating with the bank. My refinance fee will cost roughly $3,136 after all is said and done because I'm getting a $500 credit off the $3,636.50 fees which I'll explain in further detail below.
Mortgage Point System
Now that you've got an idea of what the common mortgage fees are, you must now understand the point system banks use to assess additional fees. Here's an example of what my bank e-mailed me when I checked the rates on a 5/1 Jumbo ARM.
2.25% with 0.375% points
2.375% with 0.00% points
2.500% with -0.375% points
Points are another form of fees a potential borrower pays in addition to standard mortgage financing fees ($3,636.50 in the example above). Consider the point system as a VARIABLE COST where the larger the mortgage, the higher the cost or the higher the credit.
Let's say the mortgage I'm looking to refinance is $1,000,000. Let's look at the cost to refinance the mortgage based on various points.
The Cost To Refinance A Mortgage Based On Various Points
- 2.25% = $1,000,000 X 0.375% points = $3,750. Total cost = $3,750 + $3,636.50 (standard mortgage fees) = $7,386.50
- 2.375% = $1,000,000 X 0.0% points = $0. Total cost = $0 + $3,636.50 = $3,636.50 <– what I've elected.
- 2.5% = $1,000,000 X -0.375% points = -$3,750. Total cost = -$3,750 + $3,636.50 = -$113.50 <– I might change my mind and go this route in the end.
Notice that if I elect the higher interest rate of 2.5%, I will get a $3,750 CREDIT. Thus, if I go with the 2.5% 5/1 ARM, instead of spending my own money to refinance, the bank will pay me $113.50 + give me a $500 credit for opening up an IRA.
To choose the proper refinance terms depends on your belief of where mortgage rates are going; how long you plan to own the property; how long you plan to have a mortgage; and your cash flow.
Try Not To Pay Points
My general rule of thumb is to never pay points. It's kind of like paying taxes up front with a Roth IRA. The banks and government are guaranteed a win and you are left hoping that time and good luck will allow you to win in the end! If you do pay points, at least the cost is deductible.
Personally, I like doing no-cost refinances to ensure that I benefit the very first month. Just know that you will pay a higher mortgage rate to not have to pay fees. The bank needs to make money some way or other.
Incentive-Based Mortgage Pricing
Now that you understand the point system and basic mortgage fees, take a look at the difference in points based on deposits of less than $1,000,000 (CDs, savings, brokerage account) and deposits of $1,000,000 or more at Citibank.
Rates And Points Based On Total Deposits <$1,000,000
2.25% with 0.375% points
2.375% with 0.00% points
2.500% with -0.375% points
Rates And Points Based On Total Deposits >$1,000,000
2.250% with 0.125% points
2.375% with -0.25% points
2.5% with -0.625% points
Based on this example, Citibank will give me a 0.25% point credit if my total deposits are over $1,000,000. Currently, I have about $750,000 in brokerage and savings with Citibank. How do I magically come up with $250,000 within the next couple of months before the close of refinancing?
How To Take Advantage Of Incentive-Based Pricing
The solution is to move money over from another financial institution. Money has no loyalty. I have about $350,000 in a Rollover IRA with Fidelity that I'll transfer over in-kind to Citibank. Filling out the rollover authorization form is easy.
Citibank has not only offered a -0.25% point incentive for transferring over more assets, they've also offered a $500 cash incentive that will be deposited in my Rollover IRA once transferred for a total incentive of $3,000 based off a $1,000,000 mortgage (0.25% points X $1M + $500).
One downside with this transfer is that Citibank charges $20/trade instead of $7.95/trade at Fidelity. Further, Citibank doesn't have commission free trades with 60 different ETFs. As of 2021, Citibank no longer charges a trading commission.
Another downside to the transfer is concentration risk with one institution. Citibank better not go belly up! But if large financial institutions didn't fail in 2008-2010, then with the new tier 1 capital requirements in place, I don't think they ever will.
Always ask your banker whether they have any incentive based pricing systems to reduce your fees or lower your mortgage interest rate.
Incentive-based pricing can sometimes be called relationship-based pricing. There are other downsides to relationship-based pricing as well.
Get Multiple Banking Products To Lower Fees
Finally, a banker's dream client is one who opens multiple accounts, never welches, and stays for a very long time. In the banking business, they call this “cross-selling.” The more banks can cross-sell, the stickier their clients will be and the more reoccurring profits they will potentially earn.
If you like the service your bank provides, you might as well open up as many accounts as needed. There will be a correlation with even better service and better terms the more accounts you have.
Just remember that the FDIC insures only up to $250,000 per account per individual and $500,000 per account per married couple.
Overview Of How To Reduce Mortgage Fees
1) Get as many competitive quotes as possible.
My Citi mortgage officer asked me to forward her e-mail proof that Chase was offering X so she could beat X by -0.125 points. An easy way to check the latest mortgage rates online.
Quality lenders will compete for your business with no obligation. Or you can go to various banks one-by-one online or walk into each branch to check. I prefer checking online. The more quotes you get, the better you can negotiate.
2) Understand each mortgage fee
Ask your mortgage officer to explain all the fees and ask which ones can be waived. Mortgage fees are generally fixed, so the larger your mortgage, the better deal you are getting. I've heard from readers who are paying as much as $10,000 in fees. That sounds wrong.
Make sure you're not confusing the property taxes and mortgage interest you would have paid anyway as part of the fee schedule. In fact, it may be better to pay a small mortgage fee than get a large credit.
Starting on May 1, 2023, borrowers with higher credit scores will now be paying slightly higher mortgage fees. The Federal Housing Finance Agency (FHFA) has recalibrated the fee structure for loan-level price adjustment (LLPA) by lowering fees for lower credit score borrowers and hiking mortgage fees for higher credit score borrowers.
Therefore, all the more reason to understand the various mortgage fees and negotiate. If you can't lower your fees from your bank, trying to get some seller credit or reduced commission from the real estate agents, if you are buying a home.
3) Do a cost benefit analysis on paying points.
The larger your mortgage the bigger the dollar value of your point discount or point cost. Points usually work in 0.125% increments. I'm not a fan of paying points up front unless you're absolutely certain you plan to hold your mortgage for a very long time.
Consider using a three-year break even point, and no more than a seven-year break even point if you plan to pay points. Break even point is defined as the time where the lower mortgage rate you're paying equals the cost of the points. Points are deductible from your income.
4) Ask about incentive based pricing.
Each bank has different promotions they can offer clients, depending on what they see in you. I've seen $100,000, $250,000, $500,000, and $1,000,000 worth of deposits for various incentive based pricing. You should also give your bank a positive update about how your career or business is doing. Tell them that if all goes well, you plan to deposit more funds with them over time.
Remember, a bank ideally wants wealthy long term clients. It's much easier to do business with clients who grow into their wealth than try to attract new wealthy clients. Make them believe in you by selling potential.
5) Open multiple accounts where needed and be a loyal client.
Everybody needs a checking and savings account, and probably should carry at least one credit card. If you're looking to get better pricing, you might as well open at least these three accounts with your bank. Other account considerations include a CD, wealth management account, HELOC, and personal line of credit.
The bottom line. The more money and accounts you have with one financial institution, the better you'll be treated. If you can follow my advice above, you'll get much better terms than someone who doesn't.
Invest In Real Estate More Strategically
Now that you know how to reduce mortgage fees, you should focus your attention on investing in real estate. Real estate should be a strong investment going forward due to negative real mortgage rates and work-from-home trends.
If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise. Fundrise manages over $3.5 billion and has over 400,000 investors. It is my favorite private real estate investment platform.
Real estate is a key component of a diversified portfolio. Investing in real estate beyond where you live helps stabilize your real estate investments and take advantage of big demographic trends.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look.
Shop Around For The Latest Mortgage Rates
Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation.
How To Reduce Mortgage Fees And Get The Best Rate Possible is a Financial Samurai original post. Financial Samurai began in 2009 and is one of the most trusted and largest personal finance sites today.
43 thoughts on “How To Reduce Mortgage Fees And Get The Best Rate Possible”
It’s crazy how many fees there are. This type of stuff makes my head spin. You really do know your stuff Sam! Good point on everything being negotiable!
Having reached FI without ever owning a single piece of real estate, thanks for this one. Am going to buy in 2018, and want to be armed with knowledge about negotiating fees. Helpful to have the breakdown of what is and isn’t negotiable as well as how you think about the trade off between points and interest rates. Thanks, Sam!
UGH!!! Rates have shot up since last week! Any thoughts on where they’re heading? Do you think it’s worth waiting for them to come back down before refinancing? Thanks Sam! (or anyone else kind enough to answer)!
I’d hold tight and wait. Tell the bank, “when the rate gets to X, give me a call” so they know you are interested in doing business with them. The stock market is rolling over again, and I bet investors bid up bond again.
Great article Sam!
I work in this industry. I don’t have a mortgage of my own but I am familiar with the process.
When you say… shop around, each bank is charging fee in their own way. There are hidden fees and there are hidden clause.
The only thing that can actually help you lower the cost is if you know what your requirements are.
Thanks for taking the time to write this.
I’m trying Lending Tree and 5 banks want my social security number to run a credit check. Is it necessary for them to run a credit check (I told them I have excellent credit in the high 700’s), and if so, is it worth having your credit checked 5 times to do this? Thanks for any thoughts from anybody!
I don’t think LendingTree runs a credit check when they are searching for the best rates for you based on your profile. It’s only after you’ve paid an application fee after you’ve locked down a rate due the banks start running credit checks to see if you will qualify. It costs money to pull a credit report by the banks.
I had no idea there were these sort of fees associated with mortgages. I just assumed that’s the overhead that’s paid for by the interest rates.
The only reason I can think it wouldn’t be is so you could say your interest rate is really low and then go “Also you have to pay all this other stuff now that we have you interested.”
I’m starting to see this more and more and it’s becoming very annoying. Renting a place, buying a car, etc.
The key is to have the seller pay the closing costs and if that isn’t an option just stack whatever the closing costs are in your offer and then the seller will “pay your closing costs” since they are getting exactly what they asked for, and then you are aren’t having to come in with money up front.
Sale Price: 100,000 (And the seller wants the full 100,000 and is un willing to budge:
Closing costs: $5,000 (rounded number not accurate by any means)
Your offer: $105,000 (with 5,000 seller paid closing costs)=Seller nets the full 100,000 and you save 5,000 of upfront costs.
Sam – awesome article and perfectly timed for me. I’m currently working with a large national bank on a mortgage… I asked them about their fees and was quotes with the following:
$995 Commitment Fee
$23.54 Credit Report Fee
$80 Tax Service Fee
$685 Appraisal Fee
Is it safe to say the first 3 fees are total b.s. and shouldn’t be accepted?
Just an update to the above… no luck thus far with those fees. Insisted “its not like the old days” where they could eliminate fees for clients.
Despite Sam’s advice I have refi’d to a 30 year for specific reasons. Although I am a high net worth customer at TDBank I did no better there than a walk up customer would have. I eventually found a broker who met my needs and budget on closing. The sad part for TD is that they not only lost my mortgage but the lack of special attention to a big customer makes me want to start moving money elsewhere. There is no reason to be loyal to them.
My current rate on my loan is 2.750% on a $245,000 loan (5/1 ARM). I negotiated this back in 2014. One of the best things you can do for yourself is to get quotes from 3 solid companies and go from there. Comparing the different companies side by side and pitting them against one another to get the best rate has always worked for me in any situation for any typoe of service you may need or are seeking. Remember it is your money and there is a competitive market out here to get it.
Always learning something new!
My last refi I did well on the interest rate negotiation, but didn’t think to negotiate the fees.
Knowing everything is negotiable is one thing.
Putting it into practice is obviously another…
Great article Sam! I don’t have a mortgage of my own but I am familiar with the process. Your point 1 is the main point for me…shop around. Each bank has different incentives and deals that can really help lower the cost. Then, you aggregate the discounts,realize that all items can be negotiable, and negotiate with each bank to see which one will give you the best deal.
Thanks for taking the time to write this.
Currently refinancing my California home through Bank of America.
No cost refinance, jumbo loan 7/1 ARM at 2.625%.
I’ve refinanced three times in the past two years!
I’m currently in the market to buy my first house, and when I first began researching mortgages and comparing rates I was taken back a bit at all the additional fees.
I always knew mortgages came with additional fees, but a few additional thousand bucks in fees on top of the down-payment can put a damper on a budget.
Do not be afraid to take more negative points on an initial purchase though – especially if you know you will refi quick. 18 months ago, I signed up for a 5.75% 30 year fixed rate that gave me -2% points on a $600,000 balance with no prepayment penalty. I was doing a rehab and needed construction financing too, so in knew I would refi within, at most, 6-12 months into a permanent facility and “go long” with rates.
In the end, the lender paid me $12k at closing which covered all my transaction costs including funding my escrow for property taxes, insurance and paid the real estate transfer taxes. I refinanced 3 months later after making 2 payments into a facility with construction financing at 4.375% for $2200 in costs. Note this was not available at the time of acquisition because to get construction financing, I needed plans, contractors, etc.
Eventually, I got into a US Bank 30 year fixed at 3.5% with only $1800 closing costs (net of $1000 for opening a Platnium checking account with $100). My best 10/1 year rate was only 3.25% and my best 5/1 year rate was 2.95%, so I felt it wasn’t worth the rate risk as I plan to be in this house for at least 10 years.
If you have a plan, negative points can be an interesting option at acquisition.
Great tip on going to individual banks. I used a mortgage broker in the past but they can’t give you the client relationship discount :(
If you get a 5/1 ARM and then turn the property into a rental after 5 years; would your savings with lower ARM rate not be wiped out by the potential higher rental rate v/s having a 30 yr Fixed rate and just turning that into rental after 5 years?
When you mention title do you need to pay for your lender’s title insurance as well as your own title insurance?
Great article. I would add a few things on appraisal fees:
1. They are rarely negotiable
2. They can differ greatly by state or county. $400-450 is common in my area for homes up to $1M.
3. An appraisal may not be required if your loan-to-value, or ltv, is very low. The bank/lender may be able to use an automated valuation or desktop appraisal which can be very low cost to free.
well i have all this to look forward to when i get a house one day…
It seems utterly crazy that there are so many different fees applied. We don’t own a home yet, so we haven’t gone through this process (nor will be for a while, making an IVF baby first).
From what I’ve seen so far, there aren’t quite so many fees in Australia as you’ve listed here. Definitely worth trying to get the best deal you can, as it can save $1000s in fees and interest!
Thanks for sharing Sam. It sucks that the wealthier you are, the more bankers just look at you as a pot of gold to be milked for all you’re worth.
I’m actually in the process of of a first-time home buy, and was in talks for waiving a few fees; however, we ended up going with a state-funded first time homebuyer program that had a higher interest rate, but gave us $15,000 downpayment assistance. Since it’s a first home, and my income is around $37k a year, that was a better deal for me.
No cash out of pocket, a guaranteed grant of $15,000 if I stay in the home for five years, and they waive the intangible and doc stamps since it’s a government loan. If I’m still in the home, which I’m hoping to turn into a rental once my income goes up, I’ll just refinance to a conventional to get rid of the interest rate and FHA PMI.
It seems like rates just keep staying low. I should have read some of your refinancing posts before I locked into a fixed rate because I was scared about adjustments. I’m thinking about taking your advice and going with an ARM since the adjustments are capped and rates usually don’t go up overnight.
Appreciate the emphasis on negotiating away some fees and getting the rate lower – good things to think about.
I am guessing this works with refinancing student loans right? I recently refinanced a large amount of law school loans with Earnest and reduced my interest rate by 4%. Now that I’ve converted these federal loans to private loans, i.e., the “cats out of the bag”, I’m shopping around and already see better terms with SoFi and surprisingly, First Republic Bank. Since there are NO fees to refinance, what is stopping me from refinancing multiple times? I wonder, can I refinance with SoFi, then go back to Earnest, then back to SoFi based on terms?
Arent you essentially suggesting having financial institution A pay off your debt with financial institution B and give you a whole new loan at a lower rate, then repeating the process until you can’t anymore? I would think each new loan would hurt your credit, especially if you tried to do this rapidly, making you a less appealing borrower each time. Plus, you’re likely getting into interest rate territory where it simply wouldn’t be worth the return for the bank to loan you the money when they have other lending methods with higher ROI available to them. On top of all that, you’ve demonstrated zero loyalty so you’re not likely to get any preferential treatment. I’m all for shopping around to do right by yourself, and pitting two banks against each other for your business is good practice but there is a limit before you just become a douche in their eyes and they move onto another less douchy law student who will stay longer and require less effort. Just food for thought, not saying you’re a douche, friend! Good luck killing your student debt!
Kendall is right, in my opinion. At some point, playing around with the refi game with student loans is likely to burn you, most notably your credit score. Obviously, you just don’t have equity in the situation like you would likely have with a home mortgage.
If I weren’t so close to riding myself of my boat anchor of a student loan, I would probably refi with SoFi tomorrow. At this point, I am not interested in spending the time on the process just to save a couple dollars.
Hey Sam – I am currently in the middle of a refinance from our current 5/5 ARM at 3.625% to a 3/1 ARM at 2.25%.
We opted for the 2.25% rate as it came with ZERO loan origination fees we didn’t want to pay any points either.
We did have to pay $495 for an appraisal and will have to pay for title, escrow is free since my wife is in the business :)
After everything is said and done we will pay about $1,500 to get the refinance done. We are set to close at the end of the month.
This is awesome – congrats! Can you share which lender/investor? Is it in CA?
Dan – The loan is through Navy Federal Credit Union. They seem to always be super competitive, probably because they are a credit union and you have to be a memeber.
Which lender/investor offers 2.25%? the lowest you can get on all the sites (zillow, lendingtree) is 2.625%
Best of luck on your refinance! Lots of great tips in this post. Fees are so important to take into consideration when refinancing. I think a lot of people overlook them or don’t bother negotiating. It’s always worth asking for a better deal!
Nice article Sam. How would it work if i paid all cash instead and then later got a home equity line, fee wise?
I am currently re-financing and this is what I was quoted:
Process Fee : $495
Doc Review Fee: $295
Credit Report $20
Flood Cert $14
Settlement Fee: $895
Recording Fee: $76
Tax Stamps: $352.8
State Tax Stamps: $1058.4
Total Fees to Pay During Closing: $4819.04
Nice work on your refi! Holy cow, that’s a low rate. Did you compare the interest savings vs. the points over the 5 year period of the rate lock? Usually when I run those numbers, the dollar value of the points being charged are almost exactly equal to the interest savings over 5 years. So my rule of thumb is that if I think I might refi or sell within 5 years, I won’t pay points, and if I think I’m likely to keep the loan longer than 5 years, then I don’t mind paying the points to get the long term benefit. The math doesn’t always shake out so simply, but often it’s pretty close.
Also, nice work playing the banks off of each other. I got BofA to waive some of their closing costs on my refi by providing them with a comp through Lending Tree. And now I have all of my accounts and mortgage at BofA, which makes my relationship with the bank better and makes my life easier because I can just auto-transfer payments and track balances all in one place. Gotta love that!
Yes. It’s under 3 years, but I’m still unwilling to pay points. I never want to lock in a loss, even though I will probably keep my property forever (but hopefully not my mortgage).
About two years ago, we decided to refinance in order to roll in a second mortgage that was maturing. After a little shopping, we decided to stay with the big bank that we had used for our other mortgages and checking accounts.
As you said, a number of the fees were negotiable, but what got us was the appraisal. There had been some “unusual” incidents in the neighborhood which had driven down a few comps. Our mortgage lender was not willing to push the appraiser (post 2008 meltdown) and we wound up having to pay $25K extra out of pocket.
So much for getting better service from a bank where you have other accounts.
Was the $25K used to pay down the existing mortgage in order to get the rate? If so, it might not be all that bad since less debt is generally always a good thing, you got the lower rate, and the “return” on the 25K is probably pretty good compared to the stock market which hasn’t gone anywhere.
It was more of a leverage issue than a rate issue. Due to the bad comps, the appraised value came in very low. In order to keep the leverage for the new combined 1st and 2nd mortgage under 80%, we had to pay in the additional $25K in equity.
It bothered me because (1) we weren’t expecting that we would have to come out of pocket to complete the refinance and (2) the whole experience with our mortgage lender was miserable.
Among the many issues we had, she indicated to us that following the 2008 housing bust, lenders were no longer allowed to “communicate” with the appraisers about the valuation. Ms. Financial Slacker is in commercial real estate and she works with her appraisers all the time to get to the values that they need. Our lender indicated this no longer happened in residential real estate.
What’s been your experience?
Yep, makes sense if you can’t get the appraised value. If you plan to own your home for the long term anyway, it’s not bad to pay down $25,000 of principle. I haven’t had appraisal problems here in San Francisco because so far the market is very strong.
The house on refinancing has a loan to value ratio of around 35 to 40% since I’ve owned it since 2005. And my latest home was bought in 2014 with 20% down on the price is below market because it was a fixer. It has since resident value by 30% or so because I spent about 10% of it fixing up the value so the rest is what about 10% of it fixing up the value so the rest is sweat equity.
Interesting, I guess I am a sucker.
I thought all the fees were non-negotiable in the home buying process, kind of treated them like those “I read the terms and conditions” check boxes, you have to check them or you don’t get to move on.
I was surprised to get a personal call from US Bank a few weeks ago asking if we needed anything – I don’t have a ton of money with them but they referenced how long I have been a customer (about 12 years) and to reach out if anything came up. I figured that was all done through mass email at a company that size.
Everything is negotiable. For big banks they operate out of a hub and spokes model. Each branch has a branch manager and they are in charge of gathering as many assets as possible. So there is definitely ownership I’m on the local branch communities.