Everyone wants the lowest mortgage refinance rates for their home loan. The problem is that chasing the lowest rates often results in overpaying thousands of dollars because the loan with the lowest refinance rates isn’t necessarily the best deal. If your goal for mortgage refinancing is to save money it’s important to balance getting the lowest rates with keeping your out-of-pocket expenses low. Here are several tips to help you get the lowest possible mortgage refinance rates without wasting your hard-earned cash at closing.
Lowest Mortgage Refinance Rates, Highest Fees
Why would the home loan with the lowest mortgage refinance rates and APR be the most expensive mortgage? If you base your mortgage refinance rate shopping on the Annual Percentage Rate (APR) you could very well end up with the most expensive mortgage out-of-pocket thanks to discount points.
Most lenders quote mortgage refinance rates that include discount points. If you find a lender with rates that just blow their competitors out of the water, check the fine print and you’re sure to find points. Paying discount points at closing to buy down your refinance rates can add up to thousands of dollars, doubling even tripling your closing costs compared to what another lender would charge you.
Mortgage Refinancing Is All About Fees
You might think that getting the best deal on your next home loan is all about getting the lowest mortgage refinance rates but it’s actually all about the fees you pay to get that rate. It’s true that getting the lowest mortgage refinance rates means you’ll be paying down the principle balance on your home loan more quickly; however, if you’re not able to recoup your out-of-pocket expenses that you paid to get that rate you’re going to be losing money no matter how low it is.
Every discount point you agree to pay the lender is equal to one percent of your mortgage amount. On a $25,000 home loan one discount point cost $2,500 and only lowers your rate .25%. Like the cold war and big hair, mortgage discount points are a relic of the 1980s. When mortgage interest rates were double digits in the 80s homeowners would pay lenders discount points to buy down their rates. It made sense then; however, with today’s rates less than 4 percent paying discount points is a waste of money.
Lenders don’t want you to know that of course, the more you agree to pay at closing the better their bottom line will be despite record shrinking profits. If you agree to pay points it can take you 10 years or longer to recoup your closing costs. Considering most homeowners refinance every 4-5 years paying points is a losing proposition for most homeowners.
Beware Annual Percentage Rate When Shopping
One of the most common mortgage mistakes is basing your decision on the lender’s Annual Percentage Rate. APR is a flawed calculation that was intended to tell you how much the mortgage costs over time factoring in fees; however, the way lenders calculate APR the home loan with the highest discount points often has a lower APR meaning you’re getting the most expensive home loan.
The best way to shop for your next home loan is to compare mortgage refinance rates AND fees, paying close attention to the loan origination fee. Never pay more than one percent of your loan amount for the origination fee. Avoiding unnecessary discount points will also help keep your out-of-pocket expenses down allowing you to benefit from your new home loan more quickly.
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You can learn more about getting the best deal for your next home loan while avoiding lender junk fees by checking out my free Underground Mortgage Videos.
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My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
