How much does it cost to refinance a home?

There are many reasons to refinance and this post is a follow up to the post: Should I refinance my home mortgage?

The closing costs for a refinance can vary greatly from one mortgage to the next. The difference in closing costs between loans is due to 3 main factors; the type of loan, the rate selected and the mortgage company. Let's talk about each of these individually.

The type of loan

There are a large number of loans for borrowers to choose from in today's mortgage market and many factors that go into the loan program choice. The main four groups of loans chosen currently are conforming (conventional), jumbo, FHA and VA.

• Conforming loans are the ones you hear about quite a bit. With 20% or more equity in a property, borrowers typically choose a conforming loan because it doesn't have any monthly or annual mortgage insurance, the rates are very competitive and it doesn't have a program specific upfront fee. With less than 20% equity, borrowers will have a monthly mortgage insurance premium or an upfront mortgage insurance premium, but not both.
• Jumbo loans have higher loan amounts than the conforming loan limits. The choices and guidelines vary greatly because they are typically lender specific, not determined by Fannie Mae, Freddie Mac, VA or FHA. The closing costs will vary greatly because the programs are so varied. 
• FHA loans are very popular because they allow for just 3.5% equity in a property and some the guidelines (rules) are a little less strict for certain situations. FHA mortgage rates are also very competitive, but new loans taken out are subject to both upfront and monthly mortgage insurance fees. FHA loans currently have an upfront mortgage insurance premium of 1.75% of the loan amount (this amount is typically added to the loan amount, although it can be paid at closing by the borrower). FHA loans also have a monthly mortgage insurance premium that varies depending on the loan term and the amount of equity in the property. Monthly mortgage insurance on FHA loans may last for the life of the loan depending on down payment and loan term. 
• VA loans are a little less popular, but only because they are reserved for those homeowners who have served our country and their spouses. Many VA loans do have an upfront funding fee, but it is less than FHA and some homeowners are exempt, such as disabled veterans and surviving spouses. VA loans allow veterans to borrow 100% of their home's value with no cash out and 90% of their home's value with cash out, which are both higher figures than the other two programs mentioned.

There are other programs available such as USDA and portfolio mortgages, but the four listed above represent the greatest share of refinances today. It is worth noting that Fannie Mae, Freddie Mac, FHA and VA all have no appraisal options for loans that qualify. These loans are meant to streamline the refinance process and provide some assistance for underwater borrowers.  The costs can be reduced in these situations and it is best to consult a local mortgage professional to determine whether you qualify.

The mortgage company

Rates, fees, and loan options will vary from one mortgage company to the next, even on the same program. Available rates, company overhead, loan officer pay, operations staff pay, advertising and other factors all play a part in how much a company needs to make on a loan to be profitable. It is best to call a few reputable mortgage professionals in your area on the same day (a true comparison) to see what they have to offer.

When selecting a mortgage company, homeowners should take into account the terms they are being offered, the general feeling they have when consulting with the loan officer and the reputation of the company and loan officer. I have worked with both excellent and horrendous loan officers, sometimes at the same company. It's important to select someone you feel will get the job done on time and deliver the terms you have chosen to the closing table.

The rate selected

After a borrower has consulted with their mortgage professional and chosen the loan program, it is time to choose the rate and fees that best suit their needs. Most people reading that last sentence would probably say "Easy, I'll take the best rate with the lowest fees". Unfortunately, that is not how it works in the mortgage industry. Rate and fees move inversely. This means that as rate goes up, fees go down and as rate goes down, fees go up. By choosing a lower rate with a little more upfront cost, your monthly payments are lower and over time you'll save you money (in most cases). This is not, however, a good short term plan. If you are paying extra points and fees upfront to lower your monthly payment, but you are only in the home 2-3 years, you may not recoup the upfront costs in monthly savings.

The "No Cost" loan misconception: Many lenders will offer to refinance a homeowner at "no cost". While this may be a good option in some cases, it's important to note that this loan isn't truly no cost to the borrower. Every refinance has work to be done and costs to be paid. What's really happening is that the borrower is choosing a higher interest rate and in return, the lender or broker pays the closing costs on behalf of the borrower in the form of a credit. The lender or broker can afford to do so because the loan will earn more interest over time because of the higher interest rate. On a "no cost refinance", the borrower is paying a little more in interest each month in order to keep the upfront costs down.

What are the fees involved specifically?

This is a tough question to answer because it varies depending on loan program and mortgage company chosen. The Good Faith Estimate (GFE) provided by each mortgage company will break down the best estimate of what's involved in a refinance. Different companies will charge different things; origination fees, broker fees, underwriting, processing, etc. The most important line for comparing quotes on a GFE is the one with a huge letter A on it, Your Adjusted Origination Charges. This provides a lump sum figure for all the fees involved so that you can truly do an apples to apples comparison. The figures listed on line B will be fairly consistent between mortgage companies as most of them are beyond the control of that company.

To compare refinance offers, simply compare the charges on line A of the GFE, but make sure you are comparing them for the same rate and program or it is not a true comparison.

Wrapping up

Refinancing is a helpful tool and it has helped countless people save money, accomplish their goals and generally improve their situation. There are many refinance options between programs and rates, so it is important to choose a mortgage professional that will help you wade through all the choices and select the best one for your unique scenario.

If you are in Arizona, I would be happy to be that mortgage professional.

Thanks for reading my blog!

Website: Arizona Mortgage Pro

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