Here's what you should know about closing costs when refinancing a loan.
Recently, a regular listener/watcher of ours, Michael Duree, asked if you pay closing fees each time you refinance your home, and today we're answering that question in full. The answer is yes, there are closing costs every time you get a loan, so the fees that will always be there are escrow, title insurance, and recording fees.
We do many of our loans at no cost, so people assume it's a 'free loan.' However, it's not necessarily free; you'll take a slightly higher interest rate and get a credit from the lender to cover those fees. The reason we do a majority of our refinances that way is that we've been in a 40-year bull market for interest rates since 1982. Rates have decreased over and over since then.
Rates are trending downward, and we haven't broken that trend in 40 years.
So essentially, we're saying you should do a 'free' loan today so you have no sunk costs that you won't get back. That way, in a few years, if rates go even lower, we can refinance you again at no cost and you protect your ability to keep reducing your rate. You may be leaving ⅛% on the table, but over time it'll save you quite a bit.
We also often have people asking about discount points. The above is exactly the reason you shouldn't buy down points. Since rates are trending downward and we haven't broken that trend in 40 years, chances are that they'll fall even more. If you're in a position where you can refinance and get a lower rate without having to pay fees upfront, you should do that instead of paying the premium to buy down points so that it truly makes a difference. Buying down points doesn't make sense if rates continue to decline.
Lenders are very smart; you think in terms of the one loan you're getting and what you think you know about your future, but lenders are making hundreds of thousands of loans. They know as a collection that a certain group of loans will run for 4.5 years on average, and they need a certain interest yield to make money over that time. When you pay down rates, all you’re doing is paying that interest in advance.
If you have any questions about this or a question you'd like us to answer in a future blog post, feel free to reach out to us. We would love to help you.