How to Compare Refinance Rates and Closing Costs
Staff Writer
Closing Cost by Sections
Most people see “Closing Costs” as one big, confusing number, but it’s really a mix of different fees charged by different parties. Some of the costs come from the Mortgage Brokers, some come from the Lenders, and some are third-party fees like escrow, title, and recording that the Title Company charges. Understanding who is charging these fees make it much easier to compare two loan offers side by side. We’ll walk through each category of cost so you can read an Loan Estimate with confidence instead of guessing.
What do Mortgage Brokers Charge?
Mortgage Brokers may charge an application fee, an admin fee, a processing fee, and an underwriting fee, or some combination of these. Not every Broker uses the same labels, but they all fall under the general category of Broker fees for handling your loan.
There is also a third-party fee for the credit report. Your Broker orders the report on your behalf, but that charge is passed through to the credit reporting company, not kept by the Broker and will end up in the Services You Can Not Shop For category.
Beyond those items, the Broker earns a commission for originating the loan. In most cases, that commission falls in the 1% to 1.5% range, depending on how the Broker has set up their compensation. Most often than not, the Broker’s commission is paid by the Lender instead of appearing as a separate fee to you. When that happens, you won’t see an Origination fee on the Loan Estimate because you’re not paying for it directly. Instead, the cost of that commission is already included into the interest rate you’re being offered and you may see the Origination fee on an addendum or later on in the process on a Closing Disclosure. Other times, the Borrower chooses to pay the Broker directly through an Origination or Broker fee that appears as a line item on the Loan Estimate. In that case, the rate itself can be priced a bit lower because you’re not funding the commission through the rate.
All the fees that the Mortgage Broker charges will end up in the top left hand corner called the Origination Charges except for the credit report.
The important takeaway is that the Broker’s commission is always in the numbers somewhere. A higher commission structure usually translates into a slightly higher rate; a lower commission structure can allow for more competitive rates. Even if you don’t see an Origination fee printed on the Loan Estimate, the interest rate you’re looking at already includes the cost of paying the broker.
What do Lenders Charge?
Lender fees are the charges that come directly from the institution funding your loan. In a typical refinance, you’ll see discount points, an underwriting fee, Admin fee, an Appraisal fee, and a handful of smaller items such as Tax Service, Flood Determination or Certification, and MERS Registration. Different lenders may use slightly different names, and there may be a few additional line items, but the purpose is the same: cover the cost of pricing, documenting, and approving your loan.
The key Lender fees are Discount Points, Underwriting fee, and to a lesser degree, Admin fee. These appear in the Origination Charges section of the Loan Estimate and have the biggest impact on the real cost of your refinance. The other lender related fees are usually categorized as Services You Cannot Shop For, because they are third-party services the Lender or Broker are required to order. That includes the Appraisal and the various small Registration and Certification fees. By the time you are working with a chosen Broker and Lender, they already have established relationships with certain vendors. These vendors are already set up in the lender’s system, so the Flood Cert, MERS, and similar items are handled through standard relationships rather than shopped individually for each borrower. Any price difference would typically be minor, and these fees are considered part of the normal cost of completing a mortgage.
Discount Points are one of the few parts of the cost that you actively choose. By paying Points, you’re agreeing to spend more money up front in exchange for a lower interest rate over time called Buying-Down the rate. The points are always based on a percentage of your loan amount, so on a larger loan it can add up to a significant dollar figure. That’s why Discount Points show up in the Origination Charges section and they’re directly tied to how your rate is priced. Many borrowers choose not to pay Points at all, but for someone who expects to keep the loan for many years, buying down the rate can sometimes be worth running the numbers.
Finally, most Lenders charge an underwriting fee and sometimes an Admin fee as part of their standard structure. These fees cover the process of reviewing your application, verifying your documentation, assessing risk, and issuing an approval. When you put the underwriting fee, Admin fee together with any discount points, you are looking at the main portion of what the lender is charging you to put the loan in place.
Is it necessary to compare escrow fees?
The last major group of costs comes from the Title and Escrow company. Even on a refinance, someone still has to handle the title search, check for existing liens, prepare the legal documents, and move money safely between all parties. Because there is no home purchase involved, these charges are usually lower than what you’d see on a purchase transaction.
You’ll usually see a lender’s title policy, since your new Lender wants protection that their lien is valid and in the right position. There will also be an escrow fee for managing the transaction and keeping everyone on track, a notary fee for witnessing your signatures on the lender’s final documents, and a handful of smaller, company-specific charges. On the Loan Estimate, these items fall under Services You Can Shop For. In theory, that means you can choose a different title or escrow provider if you want to.
In reality, very few borrowers actually shop title and escrow fees on a refinance. Most people simply use the company selected by their Mortgage Broker or Lender and focus their energy on comparing rates and main Lender/Broker fees. That’s usually where the bigger dollars are, in the Origination Charges section. Title and Escrow costs do matter and they need to be disclosed, but for most refinances they are not the deciding factor in whether a loan makes sense.
Summarizing Closing Costs
The Loan Estimate is designed to organize Closing Costs into three separate categories: Origination Charges, Services You Cannot Shop For, and Services You Can Shop For. Origination Charges are the most critical for you as a borrower, because this is where the Mortgage Broker’s compensation and the main Lender fees appear, along with any Discount Points that directly affect the interest rate you receive. The Services You Cannot Shop For category holds the third-party items that come with almost every loan, such as the credit report, certain lender-related services, and other small fixed charges the Lender orders on your behalf. Services You Can Shop For is where you’ll see title and escrow fees, which you are allowed to shop, even though most people simply use the provider arranged by their Broker or Lender. When you’re trying to make sense of the Loan Estimate, remember that all three categories matter, but the Origination Charges section is where you’ll really see how your refinance is being priced.
Using APR to Compare Rates and Fees
APR, or Annual Percentage Rate, is meant to give you one number that reflects the overall cost of a loan, not just the interest rate printed on the Loan Estimate. Your interest rate tells you what you pay in interest each year based on the unpaid balance. APR goes a step further. It takes the interest rate and adds in certain required Lender and Broker charges, then spreads those costs out over the life of the loan and expresses everything as a single yearly rate. The idea is that you shouldn’t have to decode every fee on a Loan Estimate just to figure out which offer is actually more expensive.
When you get a Loan Estimate for a refinance, you’ll see both the interest rate and the APR on the first page. The interest rate is the starting point for your monthly payment calculation. The APR is the “all-in” rate that reflects not only the interest you’ll pay over time, but also the price of getting that loan set up in the first place. In other words, the APR tries to answer the question: “If I take this interest rate and these required charges and stretch them out over the term of the loan, what does that really cost me on a yearly basis?”
To get to the APR, the lender’s system first builds what’s called the finance charge. This is the total cost of the credit in dollar terms, not just the stated interest rate. On a refinance, that finance charge always includes the interest you pay over time, any Discount Points, Origination charges, Underwriting and Processing fees, and Prepaid Interest. Legally, many Title and Escrow fees do not have to be included in the APR calculation, even though you still pay them at closing. However, some lenders choose to go beyond the minimum rules and fold certain items such as escrow fees and the lender’s title insurance into their APR. When that happens, the APR you see is reflecting an even larger share of your real closing costs.
At the same time, APR does not include everything you see on the Loan Estimate. Certain third-party and property-related costs are treated differently under the rules. Fees like the Appraisal, Tax Service, Flood Certification, Flood Determination, Notary charges, Recording charges, and Credit Report fees are still part of your cash to close, but they are generally not included in the APR calculation for a mortgage as long as they are bona fide and reasonable. The thinking behind this is that those items relate to verifying and transferring the property or handling the closing, not to the time value of money itself. Ongoing costs of owning the property, such as taxes, Homeowner’s Insurance, HOA dues, and Escrow deposits, are also kept out of APR. They matter for your budget, but they are not considered part of the price of borrowing.
Because of this split, you can think of APR as a tool for comparing the interest rate plus Lender/Broker side of the pricing, rather than every dollar that changes hands at closing. Two refinance offers might show the same interest rate, but if one has higher origination charges, more points, or richer broker compensation built into the pricing, its APR will be higher. When you are deciding between Lenders or between two quotes through the same Broker, that APR number helps you see which offer is charging you more for the same basic Rate and Term.
The way to use APR in a practical way is to compare similar loans on the same terms. For example, you might have two 30-year fixed refinance offers with the same loan amount and lock period. If you line those Loan Estimates up side by side, the lower APR generally indicates the lower overall cost of credit once points and key Lender/Broker fees are taken into account. You don’t have to memorize the formulas or worry about the internal math; the point for you as a borrower is that APR gives you a standardized way to compare “rate plus key fees” across different offers without getting lost in different fee names and layouts.
For borrowers who are just trying to make sense of a stack of paperwork, APR is a way to cut through the noise. The interest rate tells you what your payment is based on; the APR tells you how expensive that rate really is when you add in the price of getting the loan. Used correctly, the same type of loan, same terms, and on the same day, it can help you quickly narrow down which offers are worth a closer look before you dig into the rest of the details.
The Problem with APR Comparisons
APR looks like a single, definitive number, but there are a couple of reasons why it doesn’t always tell the whole story.
One problem with APR is that it doesn’t always give a clean, apples-to-apples comparison between lenders. By design, APR is built from the interest rate plus what the rules call the “finance charge”, mainly discount points, origination, underwriting, processing, and prepaid interest, not every single fee you see on the Loan Estimate. On top of that, lenders don’t always treat the same charges the same way. Some go beyond the minimum rules and include certain title or escrow fees into their APR calculation, while others leave those same fees out even though the overall quotes are almost identical. Two lenders can show the same interest rate and very similar fee structures, yet one APR looks higher simply because more items were counted in the formula. If you rely on APR alone to choose a loan, you can easily assume one offer is “worse” when, in reality, the actual pricing between the two is nearly the same.
APR also doesn’t work well when you compare very different types of loans. It was created to compare similar products on similar terms, for example, two 30-year fixed refinances taken out on the same day. When you line up a 15-year fixed and a 30-year fixed, the 15-year will almost always show a lower APR because the starting interest rate is lower, even if the upfront cost is much higher. For example, a 30-year fixed is 5.990% with 0 points, with an APR of 5.996%, and about $3,529.85 in total costs, helped by a $1,710 lender credit. Compared against a 15-year fixed at an interest rate of 4.875% but requires 1.15% in points, has an APR of 5.113%, and costs about $9,279.85 with no lender credit. On paper, the 15-year “wins” on APR because 5.113% is lower than 5.996%, but the borrower has to bring almost $6,000 more to closing to get that lower rate. APR doesn’t spell that out—it blends the lower rate and higher points into one number, so a 15-year loan can look better on APR even though the cash cost of getting into that loan is much higher.
For these reasons, APR is best used in combination with the other numbers, not by itself. It can help you weed out obviously overpriced quotes and compare similar loans on the same terms, but the real decision should be based on the full picture: the interest rate, the key lender and broker fees, and your total cash to close. APR is most helpful when you read it alongside those items, not as the final word on which loan is better.
Getting Mortgage Rate Quotes
The best way to compare mortgage quotes is to get them on the same day. Rates change daily, sometimes more than once a day. If you get one quote on Monday and another on Wednesday, the market move alone can make one lender or broker look more expensive than the other, even if their pricing is actually very similar. To keep it fair, pick a day, give each company the same basic information, and ask them to quote off the same market.
You also want to make sure you’re comparing the same type of loan. That means the same program (for example, 30-year fixed vs 30-year fixed), the same loan amount, property value, occupancy (primary home vs rental), and rate structure (no points vs paying points). The lock period should match as well, comparing a 15-day lock from one lender to a 60-day lock from another isn’t a true comparison. Once you have apples-to-apples quotes, you can look at the interest rate, the key lender and broker fees, and the APR together and get a much clearer picture of who is really offering the better deal.
The ZenLoanz Fee Structure
We at ZenLoanz, we strive to consistently provide competitive mortgage rates. In doing so, our compensation from any Lender is .75%. We don’t have any Administration, Processing or Underwriting fees. This will enable the borrower to have the confidence in knowing their rate is indeed competitive.