Do current mortgage rates have you asking the question should I refinance my home? Demand for refinance rates is down significantly now that current mortgage rates are pulling away from record lows. Did you miss out on historically low rates or should you act now before current mortgage rates climb higher? Here are several tips before you refi to help you answer the question “Should I Refinance” before it’s too late.
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Should I Refinance My Home Loan?
While it’s true that the average refinance mortgage rates on a 30-year fixed-rate home loan have recently gone up by 1/5 a percentage point they’re still near all-time-lows.
The simplest way to answer the question “Should I Refinance” is to look at how long it’s going to take you to break even recouping the costs of taking out a new home loan. Every mortgage has settlement charges like the loan origination fee that have to be paid at closing, either by you or someone else.
The more you pay closing on your refi the longer it’s going to take you to break even before you start benefiting from current mortgage rates. One of the most common mistakes you can make is focusing only on getting the lowest current mortgage rates at the expense of fees. When you compare quotes from today’s best lenders it’s important to compare current mortgage rates AND fees. Here’s how to get the lowest refinance mortgage rates and fees using the new Good Faith Estimate.
Don’t Forget to Check Your Credit First
Once you’ve answered the question “should I refinance” you’re ready to start shopping from today’s best mortgage lenders… almost.
When’s the last time you checked your credit reports and score? If you aren’t saying on top of your credit reports you might find that mistakes are dragging down your credit score. Have you already started shopping for a lender and are finding the refinance mortgage rates you’re being offered are higher than what lenders are advertising? The likely culprit is your credit score.
Before you do anything else go to the government-mandated website AnnualCreditReport.com and review all three of your credit reports from TransUnion, Experian and Equifax. The government requires the three credit bureaus to give you access to your credit reports every year but doesn’t require they give you a credit score. If you’d rather not pay for your credit score you can get your TransUnion score for free at CreditKarma.com with no strings attached.
You’ll find that credit scores vary between the three bureaus and mortgage lenders rely on your middle score when quoting refinance mortgage rates. If your scores are 680, 700, and 710 at Equifax, Experian and TransUnion your middle score is 700. Not happy with your credit score? The fastest way to boost it is by paying down the balances of your credit cards below 30% of your limit. Don’t zero them out completely, it actually helps to carry a small balance.
How to Compare Current Mortgage Rates & Fees
Now that you’re ready to begin shopping from today’s best mortgage lenders you want to start requesting quotes. There is a right way to request mortgage refinance quotes that doesn’t waste your time and protects your credit score.
First, make sure the refinance mortgage quotes that you’re getting do not include discount points. Paying points with current mortgage rates makes no sense. You’ll find that lenders advertise interest rates that include points first because they’re lower and seem more attractive. If you’re curious as to how discount points affects your payments there is a table on page three of the Good Faith Estimate but as a starting point make sure your quotes do not include discount points.
Second, make sure you’re giving the loan officer your Social Security Number to get an accurate refinance quote. Some homeowners refuse to give their Social Security Number because they think they’re protecting their credit score from lender inquiries. While it’s true that lender inquires do lower your credit score it’s the only way to get an accurate quote.
If you don’t provide your Social Security number you’re relying on the loan officer’s best guess for your refinance mortgage rates. You need accurate quotes to answer the question “Should I Refinance” and giving your SSN is the only way to get them.
You can protect your credit score from excessive lender inquiries by limiting all of your refinancing quotes to a 14-day period. If you do this your credit score will only get dinged for one lender inquiry.
How to Use the Good Faith Estimate to Shop for the Best Mortgage Lenders
Keep in mind that the Good Faith Estimate is just an estimate but it’s the best way to compare offers from different lenders. Also, make sure you’re comparing refinancing offers from identical mortgage offers. It makes no sense to compare refinance mortgage rates from a 15-year fixed rate home loan to a 30-year adjustable rate mortgage. Your quotes need to be for identical mortgage programs. That’s the only way to make an apples-to-apples comparison of lender fees.
Next, use page two of your Good Faith Estimate to comparison shop mortgage origination fees. Most brokers will tell you that paying one percent of your home loan is standard for the loan origination fee. This is the fee paid to the person or company arranging your home loan and I’ve found community credit unions that charge as little as $400 for loan origination. Remember, the less you pay settling on your new home loan the quicker you break even and the faster you’ll benefit from today’s refinance mortgage rates.
Beware Mortgage Yield Spread Premium
Huh? Yield Spread what? This is a credit found on page two, box 2a of your Good Faith Estimate, and yes, Yield Spread Premium is still legal. The only thing that changed is that mortgage brokers are not allowed to take the credit as a commission.
What is Yield Spread Premium? Simply put, it’s a credit you get for accepting higher than market refinance rates. Think of Yield Spread Premium as discount points in reverse. For every .25% you allow the lender to mark up your interest rate you’ll get a credit of one percent of your loan amount. This credit is used to pay your origination fee and other settlement costs.
The higher your closing costs the more markup you’ll need to cover. This is how those “no fee” and “no cash out-of-pocket” mortgage refinancing offers work. The problem with accepting Yield Spread Premium is that you’re giving up the lowest current mortgage rates which means you’ll have a higher payment for the entire time you keep the loan. Instead of breaking even you’re going to reach a point where you’re losing money by having the lender cover your closing costs. If you can afford the fees it’s almost always better to pay closing costs yourself if you plan on keeping your home.
How to Calculate Your Break-Even Point
Are you still questioning should I refinance? One way to put your mind at ease about paying for a new home loan is to calculate how long it’s going to take to recoup your out-of-pocket expenses. You can use a simple mortgage calculator like this one to calculate the number of months it’s going to take you to reach your break-even point.
Simple Mortgage Calculator
Once you know how much your monthly payment is going down from current mortgage rates divide your total closing costs by your savings. (The difference between the old payment amount and the new) This will tell you approximately the number of months it’s going to take breaking even.
I say approximately because it doesn’t factor in taxes or changes in term-length. As long as you’re keeping the same term-length (term-length is the number of years) or going shorter, the approximation works. (If you’re going longer, say from a 15-year to a 30-year mortgage you’ll probably never break even.)
Once you know how long it’s going to take you to break-even recouping your mortgage settlement fees you can answer the question “Should I Refinance.” If you’re comfortable with the amount of time it’s going to take breaking even then mortgage refinancing probably makes sense. Remember, the better you shop for fees and the less you pay for things like loan origination the faster you’ll reach your break-even point.
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