Are you looking for the best refinance rates for your next home loan? Want to avoid unnecessary markup and lender junk fees? Should you trust your bank or use a broker to get the best refinance rates? Here are several of my best tips before you refi in my Ultimate Guide to getting the best refinance rates.
What are the Best Refinance Rates Anyhow?
Would you recognize the best refinance rates if you found them? Is getting a good deal for your mortgage refi all about getting the best refinance rate or do fees play a part of the equation? The fees you pay for mortgage loan origination and closing costs pay a huge role in how good of a deal you’re getting because you have to recoup these expenses before you realize any savings from your lower payment amount.
What kind of fees am I talking about? The loan origination fee is one of the larger fees you’ll encounter and a pitfall for many homeowners that I’ll talk about in a moment. Other fees you need to know about are mortgage rate lock fees, broker courier fees, and loan processing fees. Many of these fees you’ll find buried in your HUD-1 Settlement Statement are pure garbage and can be negotiated away as a condition of getting your business.
Banks vs. Brokers – Which is Better?
No explanation of how to refinance a mortgage would be complete without addressing the question of Banks vs. Brokers when refinancing. While it’s true that banks can offer attractive rates, especially Wells Fargo and Bank of America right now, there are a number of reasons I don’t recommend banks for your mortgage refi. The biggest reason for avoiding banks for your refinance mortgage is what the Banking Lobby has done to the Real Estate Settlement Procedures Act. In the 90s the Banking Lobby spent millions of dollars lobbying Congress to be excluded from this important legislation and they succeeded. All banks are required to provide you is a Good Faith Estimate based on an Annual Percentage Rate that was created by the bank’s marketing department.
Thanks to this loophole in the Real Estate Settlement Procedures Act your bank isn’t required to disclose any of their markup or profit margin on your mortgage refi. If you don’t shop the wholesale rates offered by a broker you’ll never know if you’re getting a good deal or not. This isn’t to say that all banks or bad…I just avoid lenders that don’t have to play by the rules.
Mortgage Broker Compensation
2011 saw several important changes to the way mortgage brokers can be compensated for the work they do on your home loan. This is good news for homeowners looking for the best refinance rates that take advantage of the changes. Under the new rules the broker can only charge you a loan origination fee for their services or take compensation from the lender for marking up your mortgage rate. Why would you allow the broker to mark up your mortgage rate instead of paying the origination fee? Most people think they’re saving money at closing and just don’t know better.
Here’s an example to illustrate why lender paid broker compensation is a bad idea when you want the best refinance rates for your home loan.
Paid Outside of Closing Broker Compensation
Yield Spread Premium is the fee lenders pay for locking and closing your mortgage refi with higher than necessary interest rates. The broker receives one percent of your home loan amount for every .25% they markup your interest rate. Suppose for example you’re refinancing your home for $275,000 and the broker quotes you an interest rate of 5.5% including Yield Spread Premium. You have the choice of paying the mortgage origination fee (one percent is reasonable but many brokers will try and charge you more) or accepting the higher mortgage rate of 5.5% that includes this markup.
Once you find the right broker willing to work for a flat fee of one percent to get the best refinance rates in this example your interest rate will be 5.0%. On a 30-year, fixed-rate, home loan of $275,000 your monthly payment will be $1,476 per month. If you accept the higher interest rate at 5.5% your payment on the same loan goes up to $1,561. That’s a difference of $85 a month, or $1,020 every year that you’re throwing away in this example because you didn’t pay the broker fee up-front. In this example a reasonable amount to pay for loan origination is one percent, or $2,750, which you would recoup in just over two years. The bottom line on your mortgage refi always comes down to how long it will take to recoup your expenses, despite what some financial advisors tell you about the 2% rule of mortgage refinancing.
The Myth of the Two Percent Rule
Many financial advisors are still pushing the two percent rule of mortgage refinancing on their clients. This rule simply says you should not consider a mortgage refi unless the new interest rate is two percent lower than your old rate. As you’ve seen from my previous example it’s all about how long it will take to recoup your expenses from refinancing to determine if your best refinance rates are a good deal instead of relying on this particular nugget of bad financial advice.
You can learn more about getting the best refinance rates for your mortgage refi without unnecessary markup or lender junk fees in Part II of this Ultimate Guide by checking out my free Underground Mortgage Videos.
Here’s a quick sample to help get you started on the path to finding mortgage bliss for your next home.
Thank you for the article and video! My husband and I have been waiting for the rates to drop to their low before refinancing. We are with a bank when we bought our first house a few years ago and have the option to refinance with them. They sent us a rate of 5.0, with an APR at 5.408 a few weeks ago and a second estimate this past week with a rate of 4.75, APR of 5.466 and an increase in the mortgage insurance. I was disappointed to see our overall total monthly payment actually go up a little with the second estimate. I told my husband these refinance estimates remind me of dealing with a car salesperson. Any recommendations on getting the best deal, including a lower rate, APR and monthly payment? Thanks.