With mortgage rates at their lowest levels in decades, many American homeowners have opted to refinance their homes. In fact, according to the Washington, D.C.-based Mortgage Bankers Association, refinancing activity in 2002 increased more than 600 percent over 2000 levels.1
Refinancing your home may allow you to save thousands of dollars over the life of your loan. But high transaction fees and related refinancing costs may eat into your potential savings. If you’re thinking the time is ripe to refinance, consider some of the following tips to help control your refinancing costs.
Shop around for the best deal
Like a standard mortgage, a refinanced mortgage is basically a ‘product’ offered by a variety of different financial institutions. As with other products you might purchase, it’s a good idea to shop around for the lowest price and the highest service to ensure that you’re getting the best deal. Consider contacting several lenders to find not only the best interest rate, but also the best fees and terms associated with the loan. Closing costs will typically average $2,000 to $3,000 to refinance $150,000 over a 30-year term.
If you opt for a “no-cost” or “no-fee” loan, be sure you know what you are buying before signing on the dotted line. Although such loans may not charge closing costs, you’ll likely pay more in interest charges over the life of the loan than if you paid for closing costs up-front.
Certain costs are unavoidable
You can except to pay several required fees during almost any home refinancing transaction. For example, when refinancing or applying for a new home mortgage, you’ll likely be charged an appraisal fee, which covers the costs of having an independent expert determine and document the market value of your home. Other fees include:
• Credit report fees, enable a lender to access and review your credit history and other financial information, which may include a credit score that reflects your overall credit risk.
• “Points” are fees you pay to cover the lender’s administrative costs or to lower the interest rate on your loan. Each point equals one percent of the amount borrowed. You can usually pay points in cash or finance them as part of your total loan amount.
• Title insurance fees pay for an insurance policy that protects a lender or owner against loss in the event of a property ownership dispute. If a legal claim is made against your property, for example, title insurance can help cover costs for a legal defense and pay court costs.
You can also expect to pay certain administrative costs related to the filing and processing of your loan, such as a loan origination fee, a title search and recording fees.
Getting a ‘Good-Faith’ estimate
When you apply for a mortgage, lenders are required by law to give you a ‘good-faith estimate,’ a document that details the estimated closing costs for your mortgage. The good-faith estimate is just an estimate and fees can change prior to closing, lenders are required to give their best estimate and the good faith estimate should provide a fairly reliable basis for you to compare offers from other lenders.
As you review the good faith estimate, ask your lender to fully explain the various fees listed. Ask about the purpose of each cost if you’re unsure and who will receive the fee. More importantly, ask if certain fees might be eliminated or reduced. A lender who wants your business may agree to waive certain refinancing fees, such as document preparation and processing costs, or even reduce your overall interest rate. However, during times when lenders have as much business as they can handle, don’t be surprised if there is little or no leeway in fees.
Been there before? Consider ‘recycling’
If you’re refinancing your home for a second or third time, you may be able to cut closing costs by ‘recycling’ certain services you’ve already paid for. If you’ve had your home appraised in the past year for example, you may be able to ask your previous appraiser for a ‘recertification of value,’ which can cost several hundred dollars less than a full appraisal. Similarly, you may be able to save money on your title insurance by simply updating your existing policy, rather than writing a completely new one.
Hiring the same attorney you used during a previous home refinance can also help reduce costs. Because your attorney will have already completed much of the background work required for your current refinancing process, you may be able to pay less in legal fees.
Compare your estimate
to your settlement statement
After you’ve chosen the refinancing deal that’s best for you, you will receive at closing a settlement statement, also known as a HUD-1 document, which is a standard form that lists all of the loan’s closing costs and charges. The form shows how loan proceeds are paid out and who will receive them.
You should ask to see a copy of the completed settlement statement at least one business day before the loan closing. Compare your settlement statement with your good-faith estimate. You may want to focus on the total amount of your closing costs rather than quibbling on individual fees. But if you notice a large disparity between the documents, ask your lender to explain it.
If the fees seem unreasonable, remember that you have the right to cancel a refinanced mortgage within three days of closing. The lender is required to refund your money, without penalty, unless the loan is from a state agency or is a closed-end refinanced mortgage with no new advance of money from the same lender as the loan you’re refinancing.
Learn more
If you’re unsure whether now is the right time for you to refinance your home, consider consulting your financial advisor. Working with you to review your long-term goals and current financial situation, your financial advisor can help you weigh your options to make a solid, well-informed decision.
1MBA weekly mortgage application surveys, www.mbaa.org
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American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer.
David G. Miller
Financial Advisor
A financial advisory branch American Express Financial Advisors, Inc.
1600 Valley View Boulevard, Altoona, PA 16602
Bus: 814.944.3572 — email: axpmiller@aol.com
