Taking the Confusion out of Refinancing . . .
Probably the most confusing part of home financing are the fees and costs involved. "Closing costs" include not only the lender fees but also include escrow, title, appraisal and other third-party fees, mortgage insurance (in some cases), taxes, homeowner's insurance and pre-paid interest. Often borrowers think of closing costs and lender fees as being the same thing. In fact, lender fees are the only costs that the lender controls and are simply a subset of the total closing costs of a home loan.
What is also confusing when shopping for a home loan is the relationship between lender fees and interest rates. It is important to understand that rate and fees are interdependent. Mortgage closing costs, mortgage broker fees, mortgage points, loan origination fees, discount fees and buy down fees are all synonyms for lender fees. And, they are all directly related to the cost of your mortgage interest rate.
As a general rule, the lower your mortgage interest rate, the higher the mortgage fees. To secure the lowest interest rate, you will pay more in fees. Conversely, if you pay discounted fees, reduced fees, or even no fees at all, this comes at the expense of a higher interest rate. Figuring out the correct balance between fees and interest rate is not always easy. It depends on your financial goals.
We offer our clients three options on fees and interest rate for our refinances:
1. True "No Closing Cost" Refinance
We pay your lender fees and other closing costs. This includes the title and appraisal fees, but does not include pre-paid items and reserves like interest, taxes and insurance (See discussion of prepaids and reserves below). We call it a "true" no closing cost loan because we do not add the fees and costs to your loan balance. This option comes at the expense of a higher interest rate.
This type of refinance makes financial sense if the "higher" interest rate is still lower than your current interest rate (which means monthly savings on your mortgage payment), if you don't anticipate being in the home long-term (less than 5 years), and if you don't want to have any out-of-pocket expenses.
2. Straight Refinance
This is the usual type of refinance for most borrowers. A straight refinance is where you pay your lender fees and other closing costs and get the lowest market rate available when the refinance is locked with a lender. With this type of refinance, you have the option of paying your lender fees and other closing costs at the closing of your loan. You can avoid paying these fees and costs at closing by rolling them into your loan balance. In other words, it increases the principal balance of your loan. The appraised value of your home dictates whether this option would be available to you.
The rolling of costs and fees into the loan balance is what others often refer to as a "No Closing Cost" refinance, but you are ultimately paying your own closing costs and fees by rolling them into your loan amount. It is really a "no out-of-pocket cost" loan. This is often a point of confusion for many borrowers. We try to make sure that our clients understand the difference between a "no out-of-pocket cost" loan and a "true no cost" loan so there are no surprises at closing.
Remember interest rate and fees are interdependent, if you are getting a "true" no closing cost refinance (where your loan balance is remaining the same), your interest rate will not be the best market rate available. If you get a quote for a refinance, and the rate is much lower than ever other quote you get, you are paying for that lower rate somewhere.
3. Rate "Buy Down" Refinance (also known as "Paying Points")
With this refinance, you pay discount points to "buy down" your mortgage interest rate. "Discount points" is a fancy term for prepaying some of the interest on your mortgage to have a lower interest rate over the remainder of the mortgage term.
Like a straight refinance, you have the option of paying your lender fees and other closing costs (including the "discount points") at the closing of your loan. You can also avoid paying these costs and fees at closing by rolling them into your loan balance. Again, the appraised value of your home dictates whether this option would be available to you.
This type of refinance makes sense where the cost of the "buy down" of the interest rate can quickly be recaptured from the monthly savings from the lower interest rate. This is referred to as the "break even point" of the refinance. For example, if you are saving $100 per month on your loan and the "buy down" of the interest rate cost you $1,000, your break even point is 10 months ($1,000/$100).
We provide our clients with simple refinance scenarios to help them determine what type of refinance makes the most sense for their financial circumstances and goals.
Quick Note about Prepaid Costs and Reserves
When we talk about closing costs we mean the actual costs of your refinance -- lender fees, title fees, appraisal fees, recording fees, etc. There are some items that the lender requires you to pay in advance, called "prepaids" or "prepaid costs." Prepaid interest on your new loan (interest from the date of closing to the first monthly payment) is one example. Lenders also often require advance payment of certain expenses called "reserves" or "impounds" that the lender holds in an escrow account to pay future insurance premiums and taxes that you will owe in connection with your home.
Prepaids and reserves are not "costs" of your refinance -- they are items that you would have paid anyway by owning your home. Having said that, even on a True No Cost Refinance, you are required to pay these pre-paids and reserves to refinance your loan. You can do this by bringing a check to closing to pay for these items or, if you choose, you can have these items rolled into the loan balance.
Prepaids and reserves appear on most cost estimates, and often confuse borrowers. We try to carefully guide our clients through our cost estimates so there are no surprises at closing.
If you already have a Good Faith Estimate from another lender, either scan/email it or fax it to 602-522-9495. I will prepare a Total Cost Analysis comparing it to our current rate and fee options to ensure you are getting a competitive deal..
Let me Help You Save Money!
Todd Bookspan, MBA
Certified Mortgage Planner
602.522.9494 ext. 201
Todd@BookspanTeam.com
