Wednesday, May 6, 2009|
Minimizing closing costs on mortgage refinances
By Bill Baron
When interest rates drop, the decision as to whether it makes sense to refinance often hinges on a comparison between the costs involved in refinancing and the length of time it will take to recoup those savings vis-à-vis the lower interest rate. Simply put, the lower the closing costs, the less of a rate reduction required to justify proceeding with a refinance.
Therefore, it is in the best interest of both lenders and borrowers to keep closing costs as low as possible. The good news is that there are a number of cost saving strategies that can substantially reduce a borrower’s closing costs.
Mortgage Tax Savings
When refinancing a mortgage in New York State borrowers and lenders can avoid repaying mortgage recording tax on the outstanding principle balance of their existing loan by modifying their existing mortgage, rather than satisfying and replacing it with a new mortgage (pursuant to NYS RPL Section 255). If the outstanding principal balance is being increased, then a new "gap" mortgage is made and consolidated with the existing mortgage.
With mortgage tax rates ranging from 1.05% to 2.8%, depending on the property type and location, the cost savings can be substantial. For example, the mortgage tax savings on the refinance of a $600,000 mortgage in New York City with an outstanding principal balance of $592,000 would be $11,366. While there are certain additional fees associated with mortgage modifications, such as higher attorneys’ fees and document recording fees, these additional closing costs are usually a fraction of the mortgage recording tax savings.
Title Premium & Recording Cost Savings
When a borrower is refinancing his or her mortgage solely for a rate reduction and not to borrow additional money, then it benefits the borrower to refinance the existing mortgage for no more than the amount of the unpaid principal balance. Here’s why: If the principal is increased by even a penny, then there are additional costs to the borrower to record the "gap" mortgage. Furthermore, when the existing mortgage is being modified and there is no new money the borrower is entitled to an additional 20% discount off of the title insurance premium. For example, if the outstanding principal balance of a $600,000 mortgage is $592,000, the borrower would save $502 off the title premium (in addition to the $11,366 in mortgage tax savings) by modifying the mortgage for $592,000 rather than rounding up the amount being refinanced to the original mortgage amount of $600,000.
Discretionary Fee Savings
Most of the major costs payable in conjunction with title insurance at the refinance closing are regulated fees. The title premiums, endorsement costs, mortgage taxes, and the underlying cost of document recording are all set by some form of law or regulation and are not subject to negotiation or modification. However, there are other customary fees which are set at the discretion of the title company, and which can vary significantly from company to company. Examples of such fees include municipal searches, service fees in connection with recording mortgage documents, courier fees, etc. Attorneys and mortgage officers can save their clients hundreds of additional dollars by monitoring these discretionary fees and selecting a reputable title company whose fees are competitive and reasonable.
By utilizing some or all of the above cost saving strategies, lenders and borrowers can substantially reduce their clients’ closing costs.
Bill Baron is president of TitleVest Agency, Inc., a New York based title insurance company. Renowned for its industry best service and technology, TitleVest’s clients include many of the leading law firms and institutional lenders who enjoy outstanding service and free access to TitleVest’s arsenal of proprietary web-based tools such as ACRISasap™, Legal Form Generator™, Interactive Online Reports™, ACRIStracker™,and UCCtracker™. TitleVest’s Closing Cost Calculator™ can be used to calculate the exact closing costs and associated savings described above. For more information, visit www.TitleVest.com . To submit a question for "Ask the Title Expert" contact Bill Baron at firstname.lastname@example.org or 212-757-5800