Curious to know what are all the mortgage refinance fees you have to pay? Let me explain each one in detail from firsthand experience refinancing my primary residence mortgage. It was a long and arduous process.
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. There was no cost to do this refinance. In fact, I was paid a $220 credit.
The only downside to my mortgage refinance was that it took four months and one week to complete. It was painful, but in the end, worth it. I will be saving over $90,000 in mortgage interest over seven years had I not refinanced.
Mortgage Refinance Fees To Pay
Although my mortgage refinance was considered a “no-cost refinance” where I didn't have to pay any fees, there are still tons 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.
Let me demonstrate 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 in 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.
Here's a further explanation from my mortgage officer:
What a relock lets you do is float down the rate to the current market rates only if we can provide you with a lower rate. I can only speak to WF cost and guidelines. To relock the rate to the current market rate we do charge a .125% relock to market rate fee. Generally we can cover this relock cost as we did on your home loan refinance.
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: A relock at market rate and a rate lock extension are two different things.
Generally, refinance rates are locked for 60 days in a normal market and when rates dip low out of the blue rate locks are general taken up to 90 or 120 days because banks see that they will be back logged with refinance loans. If for some unseen reason your bank was not able to close your loan in 60 days they would have to extend the rate lock.
The rate lock fee can fall on either the borrowers (if they caused delays) or the lender (if because of capacity we could not close in time). In my case WF had to extend the rate do to overflow. They paid this extension cost for me. On the settlement statement they have to disclose the fee that is associated with a rate lock extension and then in my lump sum lender credit WF offsets the fee dollar for dollar.
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.
If WF did not have to extend the rate, in my case, I would not see this fee. WF did pay for the rate lock extension because it was their delay in processing that caused the rate lock to expire before we could close your loan. On the settlement statement we have to disclose the fee that is associated with a rate lock extension and then in my lump sum lender credit we off set the fee dollar for dollar.
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 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. The average credit score for a qualified mortgage applicant is roughly 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 refinance 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 insure 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 12 months.
You'll notice on the Final Refinance Statement that there's a credit of $6,131.22. That credit covers all fees plus gives me a $220 balance due. Therefore, this refinance is truly a “no-cost refinance” to me.
You'll also notice a credit at the end 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 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 is 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.
These transactions included credits from my various real estate crowdfunding investments across the heartland, capital calls for a couple private equity and venture debt funds, expense reimbursement checks, and more.
Take Advantage Of Lower Interest Rates
Despite the tremendous pain to refinance a mortgage nowadays, refinancing a mortgage to increase your cash flow and reduce your mortgage interest payments is great over the long run.
I recommend refinancing if you can save at least 0.25% and break even within 12 months. What I like to do is refinance whenever I can save at least 0.25% with all costs baked in. That way, if I ever sell the property or pay off the mortgage, I'm not wasting money.
1) Shop around for a lower mortgage rate: Check the latest mortgage rates online where the largest networks of lenders 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. Compare multiple real quotes, all in one place for free. When banks compete, you win.
2) Explore real estate crowdfunding. If you're looking to diversify your real estate investments, I recommend signing up for Fundrise, the best real estate crowdfunding platform today. It's free to sign up and explore the various commercial real estate projects all across the country. I've personally invested $810,000 in 18 real estate projects in the heartland because valuations are lower and cap rates are higher.
About the Author: Sam worked in investment banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.