What should you do if a lender quotes high closing costs for a cash out refinance?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

The short answer to your question is to find another lender. The long answer to your question is to determine what fees are included in the closing costs and compare the costs and mortgage rate to quotes from other lenders.

As long as you have sufficient financial resources, paying high closing costs is not always bad if it means you pay a lower mortgage rate. Paying a lower mortgage rate may save you more money in the long run, depending on how long you keep the loan.

For example, if you save $20 on your monthly payment, that adds up to $7,200 in total savings for a 30 year mortgage ($20 per month x 360 monthly payments = $7,200). In this case, even if your closing costs are thousands of dollars higher, you may come out ahead financially because your mortgage rate and payment are lower, as long as you plan to stay in the home for a while.

If you plan to pay off or refinance the mortgage relatively soon, then paying higher closing costs does not make much sense because you have less time to recover the costs. For example, if you only plan to own the home for another three years after refinancing, you only save $720 ($20 per month x 36 monthly payments = $720). If your closing costs are more than $720, then refinancing may cost you money instead of saving you money.

Use ourCASH OUT REFINANCE CALCULATORto understand how much you can save and how long it takes to break even based on different rates and closing costs

Returning to your original question, one potential reason your closing costs could be higher is because the lender is charging you discount points to lower your mortgage rate. A discount point is an optional fee that you elect to pay that equals 1% of your loan amount.

For example, if your mortgage amount is $400,000 and you decide to pay one discount point, the extra cost is $4,000. One discount point usually reduces your interest rate by .250% so you need to compare your monthly payment and closing costs both with and without points to determine what is right for you.

If the lender assumes you are paying discount points, the closing costs they quote would be higher. Lenders should not do this -- because paying points is 100% your decision -- but this is something to look into.

If the refinance quote does in fact include discount points then ask for another quote without the points. The mortgage rate may be higher but your closing costs should be lower and the quote may better meet your financing objectives.

If the quote does not include discount points then you should request a breakdown of the closing costs to learn what items are included. You can ask for a lender fees worksheet that provides a detailed breakdown of mortgage closing costs.

In some cases the lender may be charging a higher origination fee or passing along higher costs from third party service providers such as the appraiser, closing agent or title insurance company. In other cases, you may determine that the closing costs are reasonable after you understand the various fees that are included.

The table below shows refinance rates and fees for leading lenders. We recommend that you shop multiple lenders to find the best refinance terms.

The only way to truly determine if closing costs are reasonable is to compare the quote to other lenders. We recommend that you compare refinance quotes from at least five lenders to find the best mortgage terms.

Comparing proposals from multiple lenders enables you to find the right combination of mortgage rate and fees. In an ideal scenario you find a lender that offers the lowest rate and closing costs.

You can also use the quotes as leverage to negotiate better refinance terms. For example, if you find a lender that offers a lower rate but higher costs, see if that lender is willing to match the lower costs offered by another lender.

In short, shopping refinance lenders gives you leverage. Ultimately you select the lender and loan terms, including the rate and fees you pay, and not the other way around.

You can use our free personalized mortgage quote form to compare quotes from top-rated refinance lenders. Our quote form is easy-to-use, no obligation and does not affect your credit.

Sources

“What costs will I have to pay as part of taking out a mortgage loan?”  CFPB.  Consumer Financial Protection Bureau, February 24 2017.  Web.