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. I’m currently locked into a 5/1 jumbo ARM at a juicy 2.35% with 0 points and around $3,100 in fees, which is at least 0.15% lower than anywhere else I’ve found.
In this article, I’ll show you how you can pay the lowest mortgage fees possible while also getting a great interest rate as well. You will understand what mortgage fees entail, the point system, and the incentive based pricing system.
MORTGAGE FEE CHART
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 my 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. The cost to refinance at:
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.
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.
INCENTIVE BASED 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?
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. I don’t have to sell a single position. I just have to fill out a transfer authorization form.
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. Good thing I’m not an active trader with my Rollover IRA. 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.
MULTIPLE PRODUCTS AND TIME
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.
TO RECAP 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 is through a large online marketplace like LendingTree. You’ll get pinged with 4-5 offers within an hour with no obligation to commit. Or you can go to various banks one-by-one online or walk into each branch to check. I prefer checking online.
2) Understand each mortgage fee being charged. 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.
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.
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Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Updated for 2020 and beyond.