How to Reduce Closing Costs for Mortgage Refinancing

If you're having your existing mortgage loan refinanced, you can improve your cash position by taking advantage of the drop in mortgage refinancing rates. There are some fees you'll have to pay, but there are also closing costs you can negotiate when refinancing a mortgage.

In some cases, the value of the property mortgaged may have increased due to some recent developments in the area-- this could make your property eligible for lower fees.

The lending institution will check your qualifications and will assess your income, your credit score, and your equity. Based on these three factors and if all of them are assessed as favorable, there is a likely chance that your application to refinance your mortgage loan will be approved.

However, it would be to your advantage to know the closing charges that banks usually impose, to avoid getting entangled in hidden fees and charges you are not ready for.

In line with these, consider taking the following steps:

1. Ask for a written estimate or quotation of all the fees that the lender will charge you as mortgage closing fees. Ordinarily, they will include the following:

Application Fee, Processing Fee, Loan Origination Fee, Discount Fees, Appraisal Fee, Title Insurance Fee and Prepayment Penalty on Existing Mortgage.

2. Find out your lender’s policies about closing charges; whether they are subject to change without prior notice or they are willing to guarantee that the written estimated costs will stay the same up to the time you finalize your refinancing bid. Of course, you will have a better deal if you negotiated with the lender who offers the latter option.

3. Be wary of lenders who do not charge mortgage closing fees or offer to take care of the closing costs for you, this will only mean that it will be added to your refinanced loan stipulated at higher rates, and will likewise earn interest charges.

4. Analyze each of the fees being charged. The Application Fee, Processing Fee, Loan Origination Fee, Discount Fees may vary from lender to lender. However, if you have good credit qualifications, you can negotiate with the lender to lower them. To do this, you should have an idea about the usual rates or charges imposed regarding these specific fees.

So what fees should you pay when refinancing a mortgage?

Application Fee

This is usually charged to cover the administrative costs and ranges from $250 to $750. This is also classified as a “Junk Fee” and you can make an appeal to the lender to waive them in your favor; should the lender give in to your request this will be your savings as a borrower.

Processing fee

This is another fee, which the lender may waive in your favor to form part of your cost saving strategy. There are actually lenders who do not charge this fee even without any requests from the borrower. In case the lender imposes such a fee this may range from $500 to $740 to pay for the expenses of the processor.

Origination fee

This is paid to the bank or lender from where your mortgage loan originated to compensate them for the services they rendered in processing and closing your loan. To help you in negotiating this fee, the normal rate charged is at 1% of the loan amount closed at their end. Hence, if your originating lender closed a $200,000 loan, then your origination fee is equivalent to $2,000.

Take note that the rate by which this fee is computed is at 1% or lower and can only reach a maximum of 2%. Hence, this can be an important tool for negotiating a lowered origination fee.

Discount fee

The discount fee is paid in order to lower the monthly interest rate imposed on your loan by way of prepaying interest at least 1% of the principal amount. Hence, if your refinanced loan is $200,000, you will be required to pay $2,000 representing interest paid in advance; this technically lowers your interest rate. If the interest rate of the loan is 8.5% and the principal is $200,000 payable within 30 years, the bank’s equivalent table of computation is a monthly amortization of $1,502.53/month for principal and interest. Upon payment of the $2,000 discount, which is, technically interest paid in advance, your monthly amortization becomes $1,484.99/month, resulting to the lowering of your interest rate at 8.125%.

Title Insurance Fee

Title insurance will be required to protect the interest of the mortgage company concerning possible losses that may arise in the title of the property. The amount may vary depending upon the loan amount, locality, and state. This is normally 0.5% of the borrowed amount. If in case the mortgage company owns the insurance business, ask for a disclosure about the insurance fee.

Appraisal Fee

This will cover the cost in determining the fair market value of the property if it will qualify for the loan. This may range from $300 to $500.

Prepayment Penalty on Existing Mortgage

If you are a borrower with good credit, the purpose of this particular fee means you are making a large down payment and your interest rate is lowered. However, if you are a borrower with poor credit standing, a Prepayment Penalty on Existing Mortgage will only mean a large down payment will be made and does not necessarily entail a lowering of your interest rate. Nonetheless, if you will be prompt with your payments for the next two years, you can arrange with your lender for a lowering of your interest rate.

Mortgage companies and lenders differ in the closing costs they charge their borrowers. To find the best refinancing deals, it would be best for you to compare the most competitive cost being charged by these lenders.

Photo courtesy of morguefile.com