What should a refinance loan cost?

Question

My credit union wants to charge me $5,654 in closing costs to refinance my house for $200k. The house is worth more. I'm shocked! What are all these fees--origination, underwriting, processing, administration, preparation and "loan discount" and should I pay them? Why do they want prepaid interest when it is in the payments? Why reserve 2 mos insurance? The "estimated settlement charges" are $8,365--is that excessive?? Thanks anyone for any help. If I carry it myself and my son makes payments to me (he lives in the house but can't get his own loan yet) can I get a home equity loan any cheaper?

Answer 1

Actually, for a $200k loan that sounds well below market. What I'd expect from a credit union.

The loan origination fee is typically 1% of the amount of the loan and is standard practice industry wide.

Underwriting, processing, administration, and preparation are common "junk fees" that you'll just have to live with for the most part. You can negotiate them in theory but most lenders are "take it or leave it."

Closing fee is mandatory, the closing agent has to get paid!

Titlle insurance is mandatory, at least the lender's coverage, and the borrower has to pay the premium. If you have a current title policy within the past 5 or so years they may accept that, however.

The loan discount fee is the points on the mortgage. It buys down the interest rate. You can negotiate this but if they are reduced or eliminated your interest rate will rise. A VERY rough rule of thumb is 1/2% discount fee reduces the interest rate by 1/8% - 1/4%. Once your rate lock expires the loan will float to market rates up or down.

Prepaid interest covers the interest on the loan from the closing date through the end of the month. This is because mortgage payments are paid in arrears, unlike rent which is paid in advance.

The 2 month reserve for insurance is deposited into your impound account with the lender. Part of your payment is advance payments on future insurance and property tax bills. Lenders are allowed a 2 month cusion over and above estimated expenses to cover for bills that are sometimes higher than estimated. Having an impound account is pretty standard but is not legally required. If you have very strong credit it's possible to get a loan without impounds -- my loan is like that, I manage my own property insurance and property taxes. If you self-manage the lender may require copies of the paid bills from time to time. If your lender agrees to drop the impound (if your credit is strong, by all means ask!) the estimated settlement charges will be lower as will the monthly payments.

A home equity loan is almost always more expensive than a conventional mortgage, at least as far as the interest rates go. Locally where I am, first mortgages are about 6.4% right now but a home equity loan is 7.5%. Home equity loans are very rarely fixed rate so the rate is subject to periodic adjustment, often as frequently as every month. The closing costs MIGHT be lower, you'll have to ask for a Good Faith Estimate to get some idea on that.

Answer 2

All of the fees that you listed in your question are going directly to your Credit Union. Should you pay them? It depends on what you are buying from them. Consider the interest rate that you are offered, and what kind of product, 30 year fixed, or adjustable.

Insurance? They are setting up an escrow account for you, so that your payment will include insurance (probably taxes as well). You can ask them if you can still get the same deal if you don't include taxes and insurance in your payment, or you can ask for only taxes to be included.

The final settlement charges of $8,365 may or may not be a bad deal, depending on what kind of interest your are getting and what type of product.

You can definitely get a home equity loan cheaper as far as closing costs are concerned, but rate will probably be higher, so you need to take in to consideration how long your are planning to keep that equity loan. If you think that you are going to keep it for a long time, the higher interest rate may become more expensive than the cost of refinancing.

Answer 3

Even though it's YOUR Credit Union, you are not obligated to refinance through them. You should check other options and only go through with this deal if it is the best you can get. Most lenders don't charge discount points and yes, these closing costs seem excessive. I am sure though that there are details you are missing or simply don't understand. For example: Property tax escrow. Your credit union has to collect from you at the time of the closing several months of taxes but the same amount is already in escrow with your present lender and given back to you by them. That's a wash. Same with insurance, e.t.c. That can reduce your closing costs substantially. Also, a huge factor in all this is, WHAT INTEREST RATE you are getting for all this. Are you paying discount points for a lower rate? Is it worth to do so? It's more complex than you make it sound. Ask them more specific questions before you go for it. Good luck!

Answer 4

WIth it being a credit union I highly doubt they are trying to screw you.

All of those fees (execpt loan discount, I'll get to that later) are to pay various people involved in the loan process.

The loan discount is a fee you are paying upfront to lower your interest rate. Depending on how long you plan on keeping this house, this may or may not be a good deal.

Answer 5

Yes; I know several loan officers who could beat this. I recommend Smart Choice Mortgage. They do business in most states and are your best opportunity for someone to say yes. ADDITIONALLY, IF YOUR CREDIT IS SUSPECT, THEY SOMETIMES FRONT THE MONEY TO GET YOU INTO A CREDIT RESTORATION PROGRAM SO THAT YOU CAN QUALIFY FOR A LOAN. Check out the free evaluation form at the source website and a Smart Choice loan officer will contact you within 24 hours. Good luck.