Understanding Closing Costs on a Refinance Loan
I am using a broker and I would like to know if the costs associated with the loan are unreasonable. Are they negotiable?
I am in the process of refinancing and combining my first and second mortgage. I am using a broker and I would like to know if the cost associated with the loan are unreasonable and are they negotiable? Also can I look at the Good Faith Estimate and derive how much profit the broker is making?
You are wise to do your homework before committing to a loan. Many borrowers fail to ask questions or comparison shop. They end up paying a more for their loans than if they would have taken the time to do some basic research and then shopped around.
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Fees You Will Pay
How much you should expect to pay in refinance closing costs for your potential loan is difficult to precisely estimate. Refinance closing costs are generally calculated as a percentage of the your total loan amount. On average, closing costs range between 3% and 6% of the total amount of the loan, according to the Federal Reserve.
There are variety of refinance closing costs you should expect to pay. Some are charged to you directly by your lender, such as
- Loan application fees
- Loan Origination Fees
- Discount points you pay up-front to buy down your interest rate
Other fees are charged by third parties, not by your lender, even if they're included in your loan costs, such as fees for:
- Title insurance
- Flood certification
- Title search
Your refinance closing costs can be very confusing. There is no uniformity in how fees are named or listed. A lender can advertise that it charges no application fee up-front, but may hit you with a document processing fee on the back side. It is your responsibility to carefully review each loan proposal you consider, to compare the various costs listed and make sure that you are not overpaying.
You asked if you can negotiate your fees with your lender. Great question! To some extent, everything is negotiable. Lenders may charge you points, an application fee, origination fee, underwriting fee, or processing fee. You are best served comparing different offers from different lenders, figuring out your total costs for each, then determine loan which is best. It can be hard to compare loans side-by-side, because the terminology can differ from lender to lender.
Certain third-party costs may be billed through your lender. Some are non-negotiable, like flood certification and your appraisal fee. (A lender can require you to use a specific appraiser- and keep in mind that even if you pay for an appraisal ordered by a lender, the appraisal belongs to the lender, not to you. If you switch lenders, you will have to pay a fee).
Other third-party fees are negotiable or are open for you to shop around to find a better deal than the lender is offering you, such as certain title fees and mortgage insurance. If the premium on the mortgage insurance plan you shop for is lower than the one your lender is offering, elect is lower than that provided by the insurer selected by your lender, you can instruct the lender to obtain your insurance from your preferred provider.
Good Faith Estimate
One tool you can use to compare loans is the Good Faith Estimate (GFE) that lenders are required to provide you. Federal law requires your lender to give you a GFE within three days of your loan application. A GFE is not a guarantee; it's an estimate that is supposed to give you a good idea of what kind of fees you can expect to pay. Keep in mind that the good faith estimate does not include such out-of-pocket costs as state mortgage taxes, homeowners insurance and property taxes, which you may be expected to pay at the time of closing. In fact, your total tab at closing could be more than originally estimated.
The GFE gives you a basis to compare different loan proposals and also gives you something to compare to the actual loan documents you sign at closing. If you notice that the final costs are nowhere near what showed on your GFE, that should be a warning sign that something is wrong.
Even the required mortgage disclosure forms can be very confusing. In early 2013, the Consumer Financial Protection Bureau (CFPB) is scheduled to release a uniform and simplified mortgage disclosure form, making it easier for you to compare one loan against the other.
Right of Rescission- Canceling Your Loan
You have three days, from the time you sign your closing documents, to change your mind and cancel the loan. This is called your 'right of rescission.' Right of rescission applies to refinance loans and not purchase loans and exists to protect you from committing to a loan that isn't in your interest. Some borrowers are pressured to sign loan documents that benefit the lender, but not the borrower. The three day right of rescission gives you a chance to review the documents with a third-party, to make sure that you are happy moving forward with the loan. If you have a gut-feeling at your signing that you're signing a bad deal, be sure to review it within the three days the law gives you to change your mind.
Yield Spread Premium
Federal law now makes it easier for you to figure out what a mortgage broker is earning from your loan. A broker can no longer receive a fee from you and one from the lender that is processing your loan. In the past, a broker could steer you towards a higher interest rate and collect a fee from the lender and you would have no way of knowing. This fee is called the "yield spread premium" (YSP). Now, you can see the costs the broker is charging you or collecting from the lender when you view the HUD-1. According to the CFPB, "Upon request, you have the right to receive your HUD-1 with as much information as available on the business day before the date of settlement or closing. Contact the company that is conducting your closing about receiving a copy of your HUD-1 Settlement Statement. The final HUD-1 should be given to you at closing."
When it comes down to it, however, it really is far less important how much money a lender or broker makes from handling your loan, than whether you got the best deal available.
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