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If you’re looking to cut down on mortgage fees and snag the best rate, you’re in the right place. I’ve been in the mortgage game since 2003, and I’ve learned a thing or two about getting the most bang for your buck.
Mortgage fees are a necessary evil. After all, people need to make money, right? I’m cool with paying for services, but some fees are hidden, don’t make sense, or are just plain excessive.
So, how do you cut down on these fees? Let’s start by understanding what they are. I’ll also explain the point system and how incentive-based pricing works.
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To cut down on mortgage fees, you need to understand what they’re made of. They’re mostly fixed, regardless of your mortgage size. So, the smaller your mortgage, the pricier it is to proceed.
You can see that the bank has the flexibility to waive the Application Fee ($100) and Commitment Fee ($915), saving you $1,015. That’s 28% of the mortgage fees you could potentially cut right there.
Vendor Fees and Title and Escrow Fees are a bit trickier to reduce because they’re outsourced to independent third parties. Banks used to use in-house appraisers to push through loans, but after the financial crisis, that’s no longer allowed.
Understanding the mortgage fees line by line helps you know what you’re up against when negotiating with the bank. My refinance fee will cost roughly $3,136 after all is said and done because I’m getting a $500 credit off the $3,636.50 fees.
Now that you’ve got an idea of what the common mortgage fees are, you need to understand the point system banks use to assess additional fees. Points are another form of fees a potential borrower pays in addition to standard mortgage financing fees.
Let’s say the mortgage I’m looking to refinance is $1,000,000. Let’s look at the cost to refinance the mortgage based on various points.
If I elect the higher interest rate of 2.5%, I will get a $3,750 CREDIT. So, if I go with the 2.5% 5/1 ARM, instead of spending my own money to refinance, the bank will pay me $113.50 + give me a $500 credit for opening up an IRA.
Choosing the right refinance terms depends on where you think mortgage rates are going, how long you plan to own the property, how long you plan to have a mortgage, and your cash flow.
I generally don’t pay points. It’s like paying taxes up front with a Roth IRA. The banks and government are guaranteed a win, and you’re left hoping that time and good luck will allow you to win in the end! If you do pay points, at least the cost is deductible.
I prefer no-cost refinances to ensure that I benefit from the first month. Just know that you will pay a higher mortgage rate to not have to pay fees. The bank needs to make money somehow.
Now that you understand the point system and basic mortgage fees, take a look at the difference in points based on deposits of less than $1,000,000 and deposits of $1,000,000 or more at Citibank.
Based on this example, Citibank will give me a 0.25% point credit if my total deposits are over $1,000,000. Currently, I have about $750,000 in brokerage and savings with Citibank. How do I magically come up with $250,000 within the next couple of months before the close of refinancing?
The solution is to move money over from another financial institution. Money has no loyalty. I have about $350,000 in a Rollover IRA with Fidelity that I’ll transfer over in-kind to Citibank.
Citibank has not only offered a -0.25% point incentive for transferring over more assets, they’ve also offered a $500 cash incentive that will be deposited in my Rollover IRA once transferred for a total incentive of $3,000 based off a $1,000,000 mortgage.
One downside with this transfer is that Citibank charges $20/trade instead of $7.95/trade at Fidelity. Further, Citibank doesn’t have commission-free trades with 60 different ETFs. As of 2021, Citibank no longer charges a trading commission.
Another downside to the transfer is concentration risk with one institution. Citibank better not go belly up! But if large financial institutions didn’t fail in 2008-2010, then with the new tier 1 capital requirements in place, I don’t think they ever will.
Always ask your banker whether they have any incentive-based pricing systems to reduce your fees or lower your mortgage interest rate.
Incentive-based pricing can sometimes be called relationship-based pricing. There are other downsides to relationship-based pricing as well.
Finally, a banker’s dream client is one who opens multiple accounts, never welches, and stays for a very long time. In the banking business, they call this “cross-selling.” The more banks can cross-sell, the stickier their clients will be and the more reoccurring profits they will potentially earn.
If you like the service your bank provides, you might as well open up as many accounts as needed. There will be a correlation with even better service and better terms the more accounts you have.
Just remember that the FDIC insures only up to $250,000 per account per individual and $500,000 per account per married couple.
Here’s a quick rundown of how to reduce mortgage fees:
- Get as many competitive quotes as possible.
- Understand each mortgage fee.
- Do a cost-benefit analysis on paying points.
- Ask about incentive-based pricing.
- Open multiple accounts where needed and be a loyal client.
Now that you know how to reduce mortgage fees, you should focus your attention on investing in real estate. Real estate should be a strong investment going forward due to negative real mortgage rates and work-from-home trends.
If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise. It’s my favorite private real estate investment platform.
Real estate is a key component of a diversified portfolio. Investing in real estate beyond where you live helps stabilize your real estate investments and take advantage of big demographic trends.
Check the latest mortgage rates online. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you’re getting the lowest rate for your situation.
