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An unexpected Costco member perk: Mortgages with 'low rates' and 'very low closing costs'

"There is definitely value a Costco member would get over shopping for a mortgage outside this program."

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It's a great time to refinance your mortgage: Interest rates continue to be at or near historic lows, and many homeowners have built a lot of equity during the pandemic as housing prices have skyrocketed — equity that they can use as collateral to the most favorable terms from lenders.

That logic is exactly what Seth Mullikin was thinking when he and his family refinanced their mortgage earlier this year. What he wasn't expecting was where he found the best deal on that transaction: Costco.

"This isn't an endorsement from me, but I will say Costco, actually, does a really good job of getting low rates with very low closing costs," Mullikin, a certified financial planner and founder of Lattice Financial in Charlotte, North Carolina, told Grow recently. "We were really impressed."

How the Costco mortgage service works

In addition to the discounts it gives shoppers for buying in bulk, Costco offers its members an array of services, from travel planning to insurance quotes to kitchen remodeling. For many of those programs, Costco itself isn't actually completing the service for the customer. It's merely connecting its members to third-party vendors.

That's the case for their mortgages and refinancing services, too. Costco serves as the platform where outside lenders can bid for customers; the store itself is not underwriting or lending, says Keith Gumbinger, vice president at HSH.com.

"A visitor can enter some basic data, see a selection of lenders interested in making a loan to them, and select those they wish to pursue," Gumbinger says, similar to other platforms like LendingTree. "There are seven-to-10 lenders that participate, and a user can select up to four from those that are returned from their query."

Costco lenders don't 'nickel and dime you' on fees

Interest rates from the lenders will likely be competitive, experts say, but the real value are the low fees that Costco dictates: a maximum of $250 for executive members and a maximum of $550 for non-executive members, according to Costco's website. While anyone can find a mortgage lender through Costco's marketplace, you need to be a member to get the lower fees.

Closing costs are typically 2-5% of the loan and often add up to thousands of dollars, so the savings Costco offers by capping those costs are significant says Guy Cecala, CEO of Inside Mortgage Finance, a trade publication that covers the residential mortgage business.

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"When you get a mortgage, whether it's to refi or to buy a home, most of the closing costs are not determined by the lender," Cecala says. "They're county and transfer taxes, recording fees, things like that."

So when Costco knocks those down to just a few hundred dollars, it forces lenders to eat those perfunctory taxes and fees. Lenders working through Costco "agree not to nickel and dime you," he says.

Instead, enders recoup that money over the course of the loan in what they charge customers in interest, Cecala says. But waiving the majority of closing costs can be very enticing to those seeking loans who might otherwise take their business to another lender.

"There is definitely value a Costco member would get [here] over shopping for a mortgage outside this program," Cecala says.

How to decide if refinancing is right for you

Refinancing a mortgage isn't the right decision for everyone, but it can make sense for a lot of homeowners whose mortgages predate 2019, says Greg McBride, chief financial analyst at Bankrate. Even cutting your interest rate by just a few tenths of a percent can lead to big annual savings.

"The rule of thumb is 0.5%," McBride says. If the interest rate you're paying is half-a-percent more than the interest rates banks are currently offering, "you might benefit from a refi."

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For example, if you have a $200,000 balance on your 30-year mortgage at a 3.5% interest rate, your monthly payment would be about $898, according to Grow's mortgage calculator. But if you drop the interest rate to 3%, your monthly payment falls to $843, saving you $660 over the course of a year.

People who are nearing the end of their loans or those who have smaller balances, like $50,000, won't benefit much from refinancing, McBride says, while homeowners who still have a long time left on their loans, or those who want to transition their loans from 30 years to 15 years, will benefit the most.

Get the best rate on a mortgage by shopping around

Even though Costco's mortgage service will show you multiple lenders offering competitive rates, it's still important you do your research, experts say, starting with an old-fashioned internet search.

Costco's "marketplace may provide opportunities to work with lenders with no physical presence in a member's area, so that might broaden search horizons a bit, if at the expense of any sit-down, face-to-face interaction with a loan officer," Gumbinger says, but "this opportunity would likely be best as part of a more comprehensive search of both local lenders and national brands."

Cecala agrees with that idea. While going with Costco provides members a sense of security that the retailer has already vetted the lenders in its program, its still important you do your due diligence before picking a lender. That way, you can be sure you're scoring the best interest rate.

Shopping around will give you "a better idea of the value of of a Costco-facilitated mortgage, since you can compare it to what you can get from Rocket Mortgage or Wells Fargo or somebody else," Cecala says. "In most cases, it's one of the biggest transactions you're going to do. Why wouldn't you shop around?"

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