Fees and No Fees, What’s the Difference
Any loan where the lender pays all of your closing costs (title & escrow fees, appraisal, lender’s fees, etc.- any non-recurring expenses), is commonly referred to as a “no-cost” loan. A true “no-closing cost” loan differs from both a “no lender fee” loan or a loan in which the lender adds the closing costs to the amount financed. A “no lender fee” loan, sometimes advertised by banks, usually will not cover the title, escrow, and other outside charges you may need to complete the refinance.
With a true “no-closing cost” loan, you can refinance for any incremental drop in your interest rate since the transaction costs are zero. Even in a declining rate market, where you believe rates may continue to fall, a no-cost loan will make sense. Should rates continue to decrease you will have invested nothing in the loan costs, and can simply refinance at any time. Some borrowers refinance every year or less!
There are a variety of interest rate and point combinations available to the borrower at any point in time for the same product or loan type. As an example, for a loan amount of $200,000 a borrower can be quoted 6.75% with .875% points, 7.0% with zero points, or 7.25% with no closing costs. All three of these quotes are for a 30 year fixed rate mortgage. The lender allows the borrower to choose amongst rate and point combinations since some people prefer a lower rate immediately, while others prefer minimizing how much they pay out of pocket up front. Thus, the borrower can select the combination which feels most comfortable to their personal situation. For some borrowers, the no closing cost option of 7.25%, while providing a slightly higher rate, still requires the least investment up front and therefore is the best option.
No cost loans will always carry a slightly higher rate than a loan that does not pay your costs. In general, a no cost loan is the better strategy if you plan to keep your loan for the next two and a half to three years. Longer than that, you should consider paying the costs yourself to get a lower rate. Over time, the lower rate will save you more money. And if you plan to keep the loan for four to five years, it often makes sense to pay points to get an even lower rate.
When your loan includes fees, there are several fees associated with refinancing a loan The fees described below are the charges that you are most likely to encounter in a refinancing.
Application Fee. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.
Title Search and Title Insurance. This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. Be sure to ask the company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.
Lender’s Attorney’s Review Fees. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the lender. You may also be required to pay for other legal services relating to your loan which are provided to the lender. You may want to retain your own attorney to represent you at all stages of the transaction including settlement.
Loan Origination Fees and Points. The origination fee is charged for the lenders work in evaluating and preparing your mortgage loan. Points are prepaid finance charges imposed by the lender at closing to increase the lender’s yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $75,000 loan would be $750. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on market conditions and the interest rate to be charged.
Appraisal Fee. This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.
Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies by state, type of lender, and type of loan. Prepayment penalties are forbidden on various loans including loans from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which you prepay your loan.
Miscellaneous. Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.
A homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. Because costs may vary significantly from area to area and from lender to lender, the following are estimates only.
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