The average American mortgage refinance costs between 3 and 6 percent of the home loan's value. For example, if a borrower is refinancing a $100,000 mortgage, the closing costs will range between $3,000 and $6,000. The range depends on a variety of factors, including the state in which the mortgage is located and any points paid to buy down the rate. The total cost of the new mortgage is listed on the Truth in Lending Statement.
Good Faith Estimate
The Good Faith Estimate is a listing of all the fees associated with a mortgage refinance. On this document, you can easily see what fees the lender is charging and how much each item costs. This is a national standard used throughout the United States and looks identical from state to state. This form is a good place to look for ways to save on the closing costs.
Typically, line items such as "Origination Fee" and "Lender Fee" are the most easily negotiated. This is the fee paid directly to the lender or loan officer for completing the transaction. Most are paid on commission and prefer a lower commission, as opposed to none at all. Other fees listed, such as "Points" and "Other Fees That You Can Shop For," can also be negotiated. The fees that you can shop for typically include appraisals and inspections.
Truth in Lending
The Truth in Lending Statement is a national document that lists the total cost of the mortgage over the life of the loan. This form is the same from state to state. This document not only lists the total interest expense over the full term of the debt; it also lists the APR. The APR is the annual percentage rate, which is the numerical representation of the total cost of the mortgage. This number not only includes the monthly interest rate, but the closing costs as well.
One of the biggest fees a borrower may see listed on the Good Faith Estimate is "points." "Points" is a term used to describe a fee paid to lower the interest rate of the mortgage and is essentially a form of prepaid interest. One point is typically the equivalent of 1 percent of the loan amount. Most borrowers do not purchase more than one or two points.
If the borrower is not going to be in the house long-term, but plans on keeping this particular mortgage long-term, points may be a good idea. However, when purchasing points to net a lower monthly interest rate, consider how long it takes you to break even on the cost. If paying for points requires several years worth of mortgage payments to net the savings, the points expense isn't needed.
Compare to Get the Best Deal
In order to get the best deal, seek out three different mortgage lenders and request Good Faith Estimates and Truth in Lending Statements from all three. Most lenders recommend seeking three options to see an average of what your local market has to offer, although the number is not set in stone. It's just a guideline to use to get the best deal. Seeking out more than three typically leads to nothing but more repetitive offers. There's no need to do a full application, as most will be able to give you a good estimate if they just know your credit score.
You can pull your own credit score or simply have one lender pull it for you. Don't allow all three lenders to pull your credit to avoid a negative impact on your score. Compare the APRs of all three offers. The one with the lowest APR is the cheapest overall mortgage. If you prefer one lender over another who has a lower APR, ask the preferred lender to match the lower APR to net the best overall deal.
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