How to Refinance a Mortgage

If you are considering mortgage refinancing, there are several steps you can take to qualify for a better mortgage rate. Many people will tell you comparison shopping is the most important aspect of qualifying for a great rate; however, comparison shopping is only one aspect of the equation. Here are several tips to help you qualify for a better interest rate when mortgage refinancing.

I. Boost Your credit score

Mortgage lenders use your credit score to determine how much of a risk you are for a mortgage loan. Your credit score is derived from your credit reports maintained by the three credit reporting agencies: Equifax, Experian, and Trans Union. The first step in improving your credit score is to request copies of your credit reports and carefully check for any errors or negative information.

Your credit score relies heavily on your payment history; 35% is based solely on making on time payments to your existing creditors. If you have credit problems in your past be upfront with your lender and explain why the payments were late. Any documentation you can provide to support your explanation will help your cause.

II. Consider Buying Your Mortgage Rate Down By Paying Points

Most mortgage lenders will lower your mortgage rate in exchange for points. A “point” is one percent of your mortgage rate in the form of pre-paid interest due at closing. The more points you pay upfront, the more your interest rate goes down. When deciding if you will benefit from paying points determine how long it will take you to recoup the expense from the amount you are saving with a lower mortgage payment. This will tell you the “break even point” and if paying this fee makes sense for you.

III. Avoid Paying Yield Spread Premium

Mortgage companies mark up your mortgage rate because the wholesale lender pays them a bonus for overcharging you. For every quarter percent you agree to overpay the lender pays them one percent of your loan amount in addition to the origination points you already pay. How can you avoid paying this retail markup of your interest rate? Ask your mortgage company to see the mortgage rate guaranteed by the wholesale lender and tell them you will not pay any retail markup of the interest rate from the wholesale lender. If the mortgage company refuses to show you the rate sheet find another mortgage company that will.

You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for our free, six part video tutorial.

Are you considering mortgage refinancing with an Adjustable Rate Mortgage? If so, you will undoubtedly run across some very competitive mortgage rates. Are these low rates really a good deal? They could be a good deal, but maybe not. Here are several things to lookout for when mortgage refinancing with an Adjustable Rate Mortgage.

Teaser Rates Bait & Hook Gullible and Desperate Homeowners

Mortgage companies use teaser rates as a marketing trick to lure homeowners that don’t fully understand how Adjustable Rate Mortgage loans work. You know it’s a teaser rate when you see an advertisement for a 2.95% mortgage rate. Read the fine print and you’ll discover the mortgages comes with many strings attached.

Prepayment Penalties - These loans often include heavy penalties for early repayment. Pay off your mortgage early and you could pay as much as 3% penalty.

Negative Amortization - Adjustable Rate Mortgages are prone to experience “negative amortization” when the underlying index for your interest rate goes up during the teaser period. Any unpaid amounts from this increase are tacked on to your outstanding loan balance.

No Lifetime Caps – Over the life of your loan your mortgage interest rate could theoretically increase as much as 13%.

Mortgage lenders use teaser rates to prey on homeowners that lack understanding. If a mortgage company offers you mortgage rates or terms that sound too good to be true, be on the lookout for the strings attached. The problem with teaser rates on Adjustable Rate Mortgages is the homeowners frequently get hit with payment shock when their teaser rate runs out. The teaser rate is not the same as your contract interest rate which your payments are based on when the teaser expires.

It is possible to leverage a teaser rate to your advantage if you fully understand how the loan works. If you can negotiate for a mortgage with no prepayment penalty, you could use an Adjustable Rate Mortgage for a short term financial need and save yourself thousands of dollars in mortgage interest. You can learn more about your mortgage refinancing options with Adjustable Rate Mortgages by registering for our free six part tutorial.

Three days after receiving your mortgage application, the Mortgage Company or broker is legally required to provide you the Good Faith Estimate for the loan you are applying. This estimate is supposed to itemize the total fees and costs you will pay closing on your mortgage loan. The degree of accuracy of your Good Faith Estimate is limited by the level of honesty of your mortgage company. The mortgage company is only required to provide you the Good Faith Estimate, they are not held to any standards for its accuracy.

Bad Faith Estimates technically violate the Real Estate Settlement Procedures Act; however, HUD does little to enforce the law. Despite its limitations, using the Good Faith Estimate is the best way to compare loan offers when mortgage refinancing. Closely review the Good Faith Estimate and you’ll find garbage fees, lender charges, and markups. Compare the Good Faith Estimate to your final settlement statement and you’ll find many mortgage companies slip in junk fees hoping you won’t notice.

Your best bet for mortgage refinancing without overpaying is to carefully shop form a variety of mortgage companies and request a copy of the Good Faith Estimate before submitting your application. Avoid using the Annual Percentage Rate to compare mortgage offers because it does not provide enough information to choose which loan is best. Mortgage representatives often try and distract you with the government approved Annual Percentage Rate while diverting attention away from the Good Faith Estimate filled with excessive fees and closing costs and charging you a non-refundable application fee.

Never pay a non-refundable application fee unless you are 99% sure that you have an accurate picture of all the closing costs, lender fees, and markup of that loan. You can learn more about mortgage refinancing while avoiding expensive homeowner mistakes by registering for our free six part video tutorial.

If you are in the process of refinancing your mortgage, one of the fees you need to pay close attention to is the loan origination fee. The Loan Origination Fee is paid to your Mortgage Company or broker for their part in setting up your mortgage loan. The origination fee is more than adequate compensation for the work they do; however, mortgage companies and brokers have a way of lining their pockets at your expense.

How much is a Reasonable Loan Origination Fee?

When refinancing your mortgage you can reasonably expect to pay 1-1.5 points to the Mortgage Company or broker for the loan origination fees of a home you plan to occupy. If this is an investment property the loan origination fees will be higher, typically 2.-2.5 points. A “point” is one percent of your loan amount; if the origination fee on your Good Faith Estimate is higher than this, question your loan representative as to why the fee is higher.

Mortgage Processing Fees

The next fee you should check on your Good Faith Estimate is the loan processing fee. This amount is often paid to a third party processing company; whoever receives this fee will be listed on the Good Faith Estimate. The mortgage processing fee should not be more than $400. Another way your mortgage company or broker overcharges you is by marking up your mortgage rate from the wholesale lender.

Mortgage companies do this because of an incentive from the wholesale lender for overcharging you. For every quarter point the mortgage company overcharges you they receive a bonus of one point from the wholesale lender. This markup of your interest rate by the wholesale lender is called Yield Spread Premium and results in overpaying thousands of dollars in unnecessary mortgage interest every year.

Mortgage refinancing can save you a lot of money if you do it correctly. Doing your homework and researching mortgage offers will help you avoid many of the mistakes homeowners make when refinancing their mortgage loans. Here are several tips to help get you started refinancing your mortgage loan.

How to Refinancing Mortgage - Check Your Credit First

One of the most important aspects of your new mortgage is your credit score. Your credit score is also called your FICO score, and is based on the contents of your credit reports. If you have errors or negative information such as judgments, write-offs, or bad debt in your credit reports your credit score will suffer. Before refinancing your mortgage request copies of your credit reports from each of the three credit reporting agencies and carefully review your records for mistakes. If you find mistakes you will need to dispute the errors with each credit agency and allow enough time for them to correct your credit report.

How to Refinance Mortgage - Comparison Shop

Careful comparison shopping means comparing mortgage offers from a variety of mortgage companies and brokers. When you compare mortgage offers it is important to use the Good Faith Estimate and not rely on the Annual Percentage rate to choose a lender. The Good Faith Estimate outlines all of the charges associated with your mortgage and who the fee is paid to. Mortgage lenders are legally obligated to provide you a copy of the Good Faith Estimate after receiving your application; however, most mortgage companies will provide you a copy simply by asking.

How to Refinance Mortgage – Beware Hidden Fees

Mortgage companies and brokers have clever ways of disguising their fees and markup of your mortgage rate. Doing your homework before mortgage refinancing will help you avoid paying unnecessary fees including the retail markup of your mortgage rate. You can find more tips on how to refinance your mortgage while avoiding costly mistakes by registering for our free mortgage tutorial: “How to Refinance Mortgage“.