A Deeper Look into Refinance Closing Costs
Now, I know that most everyone hates the closing costs associated with refinance home loans. In fact, most people feel that any cost or fee for a new mortgage is completely unacceptable. But, before you hang up the phone on your friendly loan officer upon the first mention of mortgage closing costs, please review the whole financial picture for your mortgage scenario, or you may be throwing tens of thousands of dollars in benefit out the window for spite.
First things First. There are actual and legitimate costs associated with a refinance mortgage home loan. Fees must be paid for title searches, attorneys, title insurance, closing agents, etc. Also, depending upon your state of residence, there may be a state mortgage tax. Most home refinance lenders will also charge a fee for your application and loan processing along with an underwriting fee, which are real overhead expenses incurred by your mortgage lender of choice.
First things Second. Most lenders will also charge an “origination’ fee, which is a percentage of your total loan amount and the real place where a lender makes their money, since the previously mentioned costs go to either third party vendors or for operating overhead, the origination fee is where the real profit lies.
First things Third. A borrower may choose to “Buy-Down” their interest rate using discount points, which are added upfront to closing costs. One discount point equals one percent of your total loan amount. A lender does not typically make any money when a borrower uses discount points, except in the case of a mortgage broker that sells a borrower a higher rate of interest than the “Par” or “Even” interest rate, whereby the broker receives a rebate back from the bank holding the mortgage.
As you might guess, refinance closing costs can add up rather quickly, especially for those utilizing discount points and for those that have rather large total loan amounts. A potential borrower may look at the bottom-line closing cost amount and quickly jump to the conclusion that their lender is trying to rip them off, but that is most likely not the truth. What you may view as a large closing cost sum could be one of the best long-term investments you will ever make.
As previously mentioned, a home mortgage lender really makes their money or profit from the origination fee that they charge, since all other costs are going to cover third party vendors and the overhead cost of running their business, including the processing of loans.
If the refinance lender charges, say a 1% origination fee on a $300,000 loan amount, that leaves $3,000 for the coffers. Now, you might feel that is even too much, but consider the following.
Of that $3,000, your refinance lender has to pay the loan officer that handled the loan, which generally may be a 50/50 split. The remaining $1,500 will then be hacked down again for a loan loss reserve, which could be as high as $500, leaving $1,000 for lender profit.
Now consider that the $1,000 profit is for a loan, which of course, closed. As we all should be aware, a percentage of mortgage applications never make it to closing, yet the lender has invested time, resources and money into these loans at a loss, which eats into the profit of successfully closed loans.
You now may be getting an idea to one of the reasons why so many mortgage lenders have closed their doors in the past several years.
From a mortgage borrower’s perspective, it is easy to understand why the “alert” radar kicks in after reviewing their good faith closing costs totals, but that may be an uninformed assessment at first glance.
Yes, there are mortgage refinance lenders that charge more than others, and may inflate processing, application, and title fees.
Also consider there are huge loan processing and customer service differences among home loan lenders. Comparing lenders on fees alone, without taking their “service” level into account could be a costly error.
The preceding closing cost information is meant as a general overview of closing costs and how lenders make their money, but is not how every lender operates. In any event, the information should give you a better general understanding of refinance closing costs and in an odd sort of way, actually make you feel better about them when you understand that your lender is not socking away all those closing costs into their pockets.
Now to the moral of the closing costs story:
Say you are offered a competitive refinance rate on a new 30 Year Fixed Rate home loan that will save you $200 per month. The total closing costs amount to $3,000, which are rolled into your new loan. The closing costs will have paid for themselves in 15 months ($3,000 divided by $200). If you stay in you new mortgage for more than 15 months, it looks like a good deal. If you stay in your new mortgage for the loan term, you will have saved $69,000 in total (360 months minus 15 months breakeven times $200/month savings), which is a great deal.
If you scoffed at the deal originally because of the $3,000 closing costs, that could come back to haunt you in the future. Also keep in mind that most refinance closing costs are rolled back into your loan amount so you are not paying that money out of pocket at closing. In a sense, you are using the mortgage lender to finance your long-term benefit, just like big business operates. If your timeframe for your new mortgage is longer than the breakeven point, then closing costs can be viewed as a great deal, and smart business.
Having the proper perspective on refinance closing costs is particularly crucial with today’s refinance rate environment, as interest rates are pretty much at historic lows. If you reject a new home loan deal because you deem that closing costs are too high, your “benefit” time horizon may pass you by as interest rates rise. Always look at your bottom-line benefit and your expected loan timeframe before closing the door on a potential home refinance opportunity.
Working with a lender that quotes upfront and guaranteed closing costs will be a big help for a refinancing homeowner. Your prospective new lender should be able to detail all closing and settlement costs, plus go over your breakeven analysis with you. In the end, the numbers will tell the story and you can act in your own best interest based on your bottom-line benefit in conjunction with your loan timeframe. The numbers just may result in a very pleasant surprise for you, even with closing costs.
If you are considering a refinance now and need some help, have questions, or need some competitive rate quotes, please check out the popular Refinance Tool Box. Just give a call at 888-850-9888 or fill out a Rate Quote Request online for professional assistance without the aggressive high-pressure sales tactics.
May the Mortgage Refinance Rates be with You!
Refinance Tool Box
First things First. There are actual and legitimate costs associated with a refinance mortgage home loan. Fees must be paid for title searches, attorneys, title insurance, closing agents, etc. Also, depending upon your state of residence, there may be a state mortgage tax. Most home refinance lenders will also charge a fee for your application and loan processing along with an underwriting fee, which are real overhead expenses incurred by your mortgage lender of choice.
First things Second. Most lenders will also charge an “origination’ fee, which is a percentage of your total loan amount and the real place where a lender makes their money, since the previously mentioned costs go to either third party vendors or for operating overhead, the origination fee is where the real profit lies.
First things Third. A borrower may choose to “Buy-Down” their interest rate using discount points, which are added upfront to closing costs. One discount point equals one percent of your total loan amount. A lender does not typically make any money when a borrower uses discount points, except in the case of a mortgage broker that sells a borrower a higher rate of interest than the “Par” or “Even” interest rate, whereby the broker receives a rebate back from the bank holding the mortgage.
As you might guess, refinance closing costs can add up rather quickly, especially for those utilizing discount points and for those that have rather large total loan amounts. A potential borrower may look at the bottom-line closing cost amount and quickly jump to the conclusion that their lender is trying to rip them off, but that is most likely not the truth. What you may view as a large closing cost sum could be one of the best long-term investments you will ever make.
As previously mentioned, a home mortgage lender really makes their money or profit from the origination fee that they charge, since all other costs are going to cover third party vendors and the overhead cost of running their business, including the processing of loans.
If the refinance lender charges, say a 1% origination fee on a $300,000 loan amount, that leaves $3,000 for the coffers. Now, you might feel that is even too much, but consider the following.
Of that $3,000, your refinance lender has to pay the loan officer that handled the loan, which generally may be a 50/50 split. The remaining $1,500 will then be hacked down again for a loan loss reserve, which could be as high as $500, leaving $1,000 for lender profit.
Now consider that the $1,000 profit is for a loan, which of course, closed. As we all should be aware, a percentage of mortgage applications never make it to closing, yet the lender has invested time, resources and money into these loans at a loss, which eats into the profit of successfully closed loans.
You now may be getting an idea to one of the reasons why so many mortgage lenders have closed their doors in the past several years.
From a mortgage borrower’s perspective, it is easy to understand why the “alert” radar kicks in after reviewing their good faith closing costs totals, but that may be an uninformed assessment at first glance.
Yes, there are mortgage refinance lenders that charge more than others, and may inflate processing, application, and title fees.
Also consider there are huge loan processing and customer service differences among home loan lenders. Comparing lenders on fees alone, without taking their “service” level into account could be a costly error.
The preceding closing cost information is meant as a general overview of closing costs and how lenders make their money, but is not how every lender operates. In any event, the information should give you a better general understanding of refinance closing costs and in an odd sort of way, actually make you feel better about them when you understand that your lender is not socking away all those closing costs into their pockets.
Now to the moral of the closing costs story:
Say you are offered a competitive refinance rate on a new 30 Year Fixed Rate home loan that will save you $200 per month. The total closing costs amount to $3,000, which are rolled into your new loan. The closing costs will have paid for themselves in 15 months ($3,000 divided by $200). If you stay in you new mortgage for more than 15 months, it looks like a good deal. If you stay in your new mortgage for the loan term, you will have saved $69,000 in total (360 months minus 15 months breakeven times $200/month savings), which is a great deal.
If you scoffed at the deal originally because of the $3,000 closing costs, that could come back to haunt you in the future. Also keep in mind that most refinance closing costs are rolled back into your loan amount so you are not paying that money out of pocket at closing. In a sense, you are using the mortgage lender to finance your long-term benefit, just like big business operates. If your timeframe for your new mortgage is longer than the breakeven point, then closing costs can be viewed as a great deal, and smart business.
Having the proper perspective on refinance closing costs is particularly crucial with today’s refinance rate environment, as interest rates are pretty much at historic lows. If you reject a new home loan deal because you deem that closing costs are too high, your “benefit” time horizon may pass you by as interest rates rise. Always look at your bottom-line benefit and your expected loan timeframe before closing the door on a potential home refinance opportunity.
Working with a lender that quotes upfront and guaranteed closing costs will be a big help for a refinancing homeowner. Your prospective new lender should be able to detail all closing and settlement costs, plus go over your breakeven analysis with you. In the end, the numbers will tell the story and you can act in your own best interest based on your bottom-line benefit in conjunction with your loan timeframe. The numbers just may result in a very pleasant surprise for you, even with closing costs.
If you are considering a refinance now and need some help, have questions, or need some competitive rate quotes, please check out the popular Refinance Tool Box. Just give a call at 888-850-9888 or fill out a Rate Quote Request online for professional assistance without the aggressive high-pressure sales tactics.
May the Mortgage Refinance Rates be with You!
Refinance Tool Box
Labels: business, finance, home loans, money, mortgage rates, refinance, refinance rates, refinancing
posted by Jim Bisnett at
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