There's a reason why refinances are popular: Homeowners can save hundreds of dollars a month when they refinance their existing mortgage loans to ones with lower interest rates. Homeowners who refinance a 30-year fixed-rate loan of $160,000 from one with an interest rate of 6 percent to one with a rate of 3.5 percent will lower their monthly mortgage payments by $241 a month or $2,892 a year. But mortgage refinancing isn't free, or cheap. The Federal Reserve Board says that homeowners should expect to pay 3 percent to 6 percent of their outstanding loan balance in closing costs.
Shop around by calling several mortgage lenders -- including the one to which you already send your monthly payments -- so that you can compare the rates and fees that they are offering. You are allowed to refinance with any lender licensed to do business in your state; the more calls you make to lenders, the better your chances of finding one willing to waive some of their traditional closing costs.
A $160,000 mortgage loan refinance, then, can generate from $4,800 to $9,600 in closing costs. Fortunately, consumers can negotiate the terms of their refinance to eliminate some of these costs. Ask lenders for a detailed list of their estimated refinance closing costs. Some of these fees will be non-negotiable. For instance, your lender can't do anything about the fees that your state or municipality charges. But several fees can be negotiated, especially those charged directly by your lender. These fees, usually labeled loan-origination or underwriting fees, can add $1,000 or more to your refinance costs. Basically, lenders are charging you for the work they do -- vetting your financial health, taking down your budget information, processing your loan application -- to prepare and close your loan. You might, though, be able to find lenders who are either willing to waive or reduce these fees to keep your business.
Ask lenders to waive some the document-preparation fee if they charge one. According to Bankrate's 2012 survey of closing costs, this fee can cost $100 or more, so it's a good one to target. Not all lenders will drop this fee, but those who want to keep your business might.
Study the credit-report fee that lenders charge you. This fee shouldn't be much: According to the 2012 survey of closing costs by Bankrate, lenders typically charge about $13 to order your credit report. If your lender is charging much more than, ask for an explanation.
Third-party companies handle much of the work of closing your refinance. An appraiser will determine the current market value of your home. A survey company will map out the exact location of your home and its property lines. Your lender will bill you for these outside services, but by shopping around for these services, you might be able to reduce the cost of your refinance. Your lender will probably require a title company to do a title search of your property to make sure that there are no outstanding liens on your property. For instance, if your home's previous owner fell behind in mortgage payments, that owner's bank might have an ownership claim against your property. Your lender will probably recommend a company to do this search. You can shop around with other title companies, though, to see if you can find one that will perform the title search at a lower cost. Just because your lender recommends a title firm -- or any other third-party provider -- doesn't mean you have to use it.
- If your negotiation efforts are yielding no results, don't be afraid to work with a different lender. You have plenty of choices when refinancing your mortgage loan. Keep calling until you find a lender willing to negotiate on closing fees.