This article looks at the hidden costs of refinancing a mortgage. Click here if you’re interested in a step-by-step guide to calculating the total cost of a mortgage refinance.
Getting a mortgage used to involve a lot of unwelcome surprises – mainly big fees – at closing when it was often too late to walk away from the loan. That system of hidden costs changed in October 2015, when the federal government introduced a form called the Loan Estimate.
Lenders are required to give you this form within three days after you apply for a purchase-money or mortgage refinance. The form shows all the costs you’ll have to pay, including lender-specific fees and fees charged by other providers.
“With the new lending laws that have been put in place over the past decade, there shouldn’t be any hidden fees,” says Matt Roder, vice president of mortgage banking at BeMortgage.
“Borrowers should make sure that they review this document to understand what fees they are being charged so they can determine whether the cost is worth the benefit.”
Loan Estimate reveals hidden costs
The Loan Estimate form shows two types of closing costs: origination fees, which are paid to your lender, and third-party fees, which are paid to other companies involved in the loan process.
Lender origination fees and third-party fees vary by state, and the differences can be dramatic.
In Illinois, the title fees for a refinance are approximately $600, but other states could be two-to-three times as much”
Examples of lender fees include:
These fees have different names, but they’re essentially identical. They’re all amounts you pay the lender to underwrite, process, and originate your loan.
Examples of third-party fees include:
Title costs vary by state
Roder says these costs account for the biggest difference in third-party costs among the states and can add hundreds of dollars—or more—to the total cost to refinance.
“In Illinois, the title fees for a refinance are approximately $600, but other states could be two-to-three times as much,” Roder says.
“Hidden” costs: the no-costs loan
Exactly how much refinancing will cost you depends on the type of loan you choose and how much you borrow as well as what state you live in. To find out the specifics, you’ll have to apply and get a Loan Estimate form.
If all the lender and third-party costs are disclosed on the Loan Estimate, why do some people complain that the costs are “hidden”?
The answer is that sometimes the lender gives you a rebate at closing, which you can apply to pay your costs. That doesn’t mean the costs don’t exist, just that they’re not coming out of your pocket.
Jennifer Beeston, branch manager and vice president of mortgage lending at Guaranteed Rate Mortgage in Santa Rosa, Calif., says, “Lenders will say, ‘You do not have to come in with any money.’
But that doesn’t mean you aren’t paying fees. They may be increasing your loan balance or giving you a higher than ‘par’ rate to cover the fees.”
The par rate is the rate you would pay without paying discount points to lower your rate or receiving a lender rebate for a higher rate.
Should you get a no-closing costs loan?
The answer depends in part on whether you have the cash on hand to pay the costs upfront. If you don’t, the answer is an easy yes. If you do, you’ll need to compare your options to figure out which you prefer.
Even if you have the cash, you might want to keep it for other uses, rather than pay it out upfront to refinance. The choice is yours.
“It’s very normal to finance your costs into your new loan,” Beeston says. “Just make sure that the cost to refinance makes sense based on the loan program, the rate you’re moving into, and your long-term plans for your home.”
Ready to learn more about mortgage refinance lenders? Start by checking out these top 7 lenders:
Then, head over to SuperMoney’s mortgage refinance review page to compare other leading lenders side-by-side and find your best rate.