Refinancing with the best mortgage lenders is a confusing and frustrating process for many homeowners. Lenders use confusion as a marketing tool to sell overpriced home loans. Doing your homework before comparing offers from the best mortgage lenders will help you avoid common mistakes that steal the benefit you get from refinancing. Here are several tips before you refi that will save you thousands of dollars from unnecessary discount points and lender junk fees.
Best Mortgage Lenders: Who are they?
Mortgage lenders change their programs, offers and fees on a daily basis. What makes one the best mortgage lender for your neighbor might make them rubbish for you. How do you shop for the lowest refinance rates and fees from the best mortgage lenders?
Start by choosing a program and stick with it. Don’t let a fast talking mortgage banker confuse you by quoting refinance rates from different programs.
Do you know what I mean by loan program? It depends on what your goals and needs are for refinancing. Do you need the lowest predictable payment? Do you want to build equity as fast as your budget allows? The answers to these questions will help you zero in on a program.
If you want a long-term low, predictable payment then 30-year fixed refinance rates are the way to go. If you’re not planning on keeping your home for very long consider a 5/1 or 7/1 Adjustable Rate Mortgage to get the lowest possible refinance rates. If equity building is your goal then consider a 10 or 15-year mortgage keeping in mind how much higher your payments will be.
Common mortgage mistakes
Letting a broker talk you into a program that isn’t in line with your financial goals is just one common mortgage mistake. Pick your program and stick with it. Another costly mistake made by nearly all of your neighbors is focusing on getting the lowest possible refinance rates at the expense of fees.
If your choices for the best mortgage lenders includes unnecessary discount points, overpaying the loan origination fee and lender junk fees you might find it impossible to break even recouping these expenses. If you’re not able to break even recouping closing costs from refinancing you’re losing money no matter how great your refinance rates.
How to calculate your break even point
Many financial advisors will tell you at best you can only approximate your break-even point. This calculation is still helpful in deciding if refinancing makes sense.
You can approximate your break-even point on any offer from the best mortgage lenders by adding up all of your closing costs and diving by the amount your payment is going down. This will tell you approximately the number of months it’s going to take you to break even recouping your closing costs.
Sell or start serial refinancing before you break even and you’re losing money no matter how great your refinance rates.
How to shop for the best mortgage lenders
The best way to shop for your next home loan is to compare offers from the best mortgage companies on identical programs. Remember to pick your program before shopping and stick with it. Next compare fees found in section 800 of your Good Faith Estimate. Section 800 contains fees that you can negotiate like your loan origination fee and lender junk fees.
Which fees are considered junk? Look for anything that resembles processing fees, administration fees, or rate lock fees. Lenders like to cook up different names for their fees to confuse you so don’t be afraid to question everything.
What about that loan origination fee? How much is reasonable to pay the broker or mortgage company arranging your refi? I’ve reviewed community based credit unions with origination fees as low as $400. The industry standard is around one percent; however, the less you pay the more benefit you’ll get from that low interest rate.
What about no fee refinancing?
You might be wondering about no fee refinancing offers promoted by some of the best mortgage lenders. Why pay all those closing costs when your lender is willing to pay them for you? There are no free lunches when it comes to your home loan. In the case of no fee mortgage offers you’re trading higher refinance rates for having the lender pay your closing costs. Is the trade-off worthwhile? It depends how much your interest rate is going down after the markup.
A good mortgage broker can tell you if you’re better off in the long term paying closing costs yourself or if opting for no fee mortgage refinancing makes sense in your situation.
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