I’m always frustrated when I see mortgage rates advertised that are lower than the rate I am currently paying. I don’t want to pay a single cent more toward my mortgage than I have to. But, the fees associated with refinancing will frequently swallow any and all savings a lower interest will give you. What we really needed was to refinance our mortgage with NO FEES.
That’s where Mr. C and I found ourselves for several years. Interest rates would dip a little, but we could never see the benefit in paying thousands of dollars to save a few hundred in interest every year.
Yes, it can be overwhelming to know when the refinance. For starters there are the fees, different repayment lengths, changes in monthly payments, and how long are you going to keep that house anyway? And then, what if you decided to make additional payments so you can kiss your mortgage goodbye early?
But, there is one kind of refinance that ALWAYS saves a homeowner money: When the lender pays all the fees.
Make the Lender Pay Your Fees
Yep! It happens!
Just to clarify, I’m not talking about a refinance where you roll the fees into the final loan amount. In that case, you still end up paying all the fees, just over time. Say you have a $200,000 mortgage. If the fees for the refinance reach $6000, suddenly your new mortgage that is SUPPOSED to save you money is now at $206,000. Your net worth just dropped a shocking $6,000!
No, I’m talking about a mortgage where the lender actually pays your fees. That leaves you with a mortgage refinance where you pay no fees whatsoever.
The catch? A higher interest rate.
So, why am I saying this will always save you money? Because it takes all the unknowns out of the equation.
It’s sooooo simple: If the new interest rate is lower than your current interest rate, and the lender is paying all your fees, you have absolutely NOTHING to lose.
Mortgage Refinance Fees Dilemma
We recently refinanced, and our dilemma was similar to what many people go through. The fees eat away any savings!
We were sitting at a respectable 3.125% with about 23 years left on the mortgage. As we recently paid off our rental property (yay!), Mr. C and I decided that we would like to take what we were paying on our rental property and pay off our own mortgage early. A local credit union was advertising a 15-year mortgage at 2%. That would knock off eight years of mortgage payments! The bad news? After getting an estimate in writing it looked like we would end up paying over $6,000 in fees! Yikes!
We quickly entered our old mortgage information as well as our proposed new mortgage into a debt payoff calculator and realized that, although the new mortgage would save us a ton of interest, it would save us very little money overall thanks to the higher loan amount needed to cover all the fees.
And then there were the unknowns: What if we started putting even more money towards the mortgage when I go back to work? What if we decided to move? What if we move, but keep the house as a rental? Are we going to keep the home long enough to recoup those fees?
The only thing we knew for sure was that we could lose a lot of money if we decided to move within about five years. That’s a long time.
Yeah, it didn’t make any sense.
The Mortgage Refinance That Charges NO FEES
Having worked in the mortgage industry for several years prior to becoming a stay-at-home mom, I knew there were a few “no-cost refi” mortgages out there. Sadly, they aren’t common, and many times what is advertised as “no-cost” really means, yeah, pay for the fees over time thanks to your new larger loan amount (yuck!).
One thing that was making it difficult to refinance with no fees was our loan amount. Our mortgage was lower than average, we refinanced about $170,000. Unfortunately for us, banks like high loan amounts because, well, more interest to them.
However, I finally found a mortgage broker in Southern California that, legit, would pay our fees.
Here’s how it went.
I contacted this mortgage broker and told him exactly what we wanted: an interest rate lower than our current rate (I didn’t immediately disclose the rate), the lender pays all the fees, and we don’t really care what term (10, 15, 30 years). We talked about the home, like how much we thought it was worth (I looked at Zillow), how long we had lived there, and of course, if it was our primary residence. So, could he lower our rate while we pay no fees!?!
He said sure! I thought, “Yeah, right.” But the estimate came over and actually looked good. The 15-year loan term gave us the best interest rate at 2.375%. The reviews online from this company looked awesome, too.
Here’s the interesting thing: The going rate was actually 1.875%, but instead of the lender paying our fees, we would have had to pay all fees PLUS an additional 1% origination fee. If we KNEW we would stay in our house for several years and that we wouldn’t be trying to pay our mortgage down faster, the lower rate would have been the way to go. However, those are REALLY, REALLY big unknowns for us.
Long story short, we ended up funding in less than two weeks. Yeah, two weeks! Remember, I’ve worked in the mortgage industry. I knew what documents they needed and where they were. They were sent over that day. I also knew what they didn’t need–we didn’t report any rental income or dividend income, our debt ratios were fine without that mess. Paystubs and W-2’s are quicker. They also didn’t need all of our retirement and brokerage account information. Our savings account was enough to ensure over 12 months of payments in reserve.
It was also extremely helpful that our credit and equity in the home were strong enough to skip the lengthy process of an appraisal (and save us $600!). The new loan came out of underwriting without any additional paperwork or verifications needed, and we were clear to close.
Our Actual No-Fee Mortgage Refinance Numbers
Our final fees for the loan were very close to the original estimate. The only thing I negotiated was the credit report fee. It was $125 originally. That was too high and I asked that it be removed or drastically reduced. Here are the actual numbers:
NOTE: The only things not included in the table above are prepaid interest or escrow account funding (we actually opted out of an escrow account and will have to pay taxes and insurance on our own). That was on purpose. Seriously, don’t worry about prepaid interest and escrow!
If you have a mortgage, you will pay interest anyway. Likewise, if you own a home, you will pay taxes and insurance. These line items will all come out in the wash. Since mortgage interest is paid in arrears (you pay interest from the previous month), that prepaid interest line item will let you will skip a monthly payment after you refinance. And although you will need to fund an escrow account (unless your lender lets you skip this, as we did) you will get a refund from your current escrow account for any taxes and insurance that hasn’t been paid yet. Escrow accounts and interest charges are highly regulated by law. You won’t get scammed here!
How Much We Save Each Month
In the end, we paid $71 to have a new mortgage at 0.75% below our previous rate. At a loan amount of $170,000, this translates into a savings of just over $100 in interest that first month alone! One month in and we have already saved more than we paid! Yes, our overall payment is a little more, but we had already decided to start paying additional to the principal every month. Now we will pay off our mortgage even faster, and pay a whole lot less in interest over however long we decide to live here. And if we move next year, no problem! We won’t have remorse over all the useless fees we paid to refinance!
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