10 Steps to Lower Refinance Rates

Getting the lowest refinance rates for your next home loan is important. Overpaying at closing can quickly turn even the best refinance rates into an expensive mistake. Mortgage rate shopping isn’t an apples-to-apples comparison, especially when you’re considering closing costs like the origination fee. Here are ten tips to make sure you’re getting today’s lowest refinance rates without paying unnecessary discount points or junk fees.

1. Beware Unnecessary Discount Points

Lenders usually advertise refinance rates that include discount points. That means if you want the interest rate being advertised you’ll have to come up with the cash at closing. One discount point is one percent of your loan amount which typically lowers your refinance rates by .25 percent.

It doesn’t matter if you’re seeing refinance rates quoted online, on the television or the radio, take a look at the fine print and nine times out of ten the offer requires discount points. Suppose you find refinance rates quoted at 3.25% with one discount point. On a $300,000 mortgage you’d be required to pay $3,000 at closing to qualify for the offer being advertised. Discount points are paid on top of any other lender fees and closing costs you’re required to pay for mortgage refinancing.

Should you pay mortgage discount points? Refinance rates are at their lowest levels in history. One common mortgage mistake made by many homeowners is trying to get the lowest possible interest rate at the expense of fees. Remember when refinancing you won’t benefit from today’s lowest refinance rates until you break even recouping your out-of-pocket expenses. Paying unnecessary discount points means it’s going to take that much longer to break even before you’ll benefit from your new home loan.

2. Lowest Refinance Rates Could Be The Worst Deal

As I mentioned, the loan with the lowest refinance rates could have the highest closing costs even if the Annual Percentage Rate (APR) is lower. The most expensive home loan often has the lowest APR because of the way lenders factor discount points as prepaid interest into their calculations. This is one of the many reasons Annual Percentage Rate is a flawed calculation and should never be used for mortgage rate shopping.

3. Compare Closing Costs On Every Mortgage Offer

When shopping for the lowest refinance rates make sure you’re comparing loan offers using the lender’s par rate. Par mortgage rates do not include discount points or markup for Yield Spread Premium (YSP). YSP is cash paid by the lender when you accept higher than necessary refinance rates. If you eliminate discount points and Yield Spread Premium from your quotes you can focus on comparing the loan origination fee for each offer. Loan origination and discount points are the most commonly overpaid mortgage fees. If you’re short on cash for closing Yield Spread Premium could cover your closing costs and origination fee at the expense of a higher refinance rates.

4. Consider Shorter Loan Term Lengths

When shopping for a new home loan consider 15 year refinance rates. 15 year mortgage rates recently dipped below three percent which could save you a significant amount of cash over the duration of your home loan, especially if you’re still paying six percent or more.

While it’s true that your payment on a 15 year mortgage will be higher than if you had a 30 year term length the amount you’re saving by eliminating that extra 15 years can be staggering.

5. Beware Bad Financial Advice

If your bank or broker is pushing a loan program on you that could overextend your budget don’t be afraid tell them no. Pushy brokers often recommend programs that don’t have your best interests at heart so it’s best to do your homework comparing refinance rates AND fees before accepting a loan officers recommendation.

Many loan officers pitch riskier adjustable rate mortgage rates when you’re shopping for fixed refinance rates because the lower payment seems more attractive. Always check the fine print for discount points and pay close attention to your broker’s loan origination fee.

6. Don’t Overlook Community Based Credit Unions

Just because Wells Fargo is the largest nationwide lender doesn’t mean they’re the best. I’ve reviewed dozens of mortgage lenders on this site and the best deals I’ve found when it comes to fees were from small community based credit unions. If you don’t have the time to shop for the lowest refinance mortgage rates an honest broker can find you a good deal while helping you avoid unnecessary fees and points.

Don’t stop with just one or two mortgage refinancing quotes. You could be missing out on thousands of dollars in savings if you go about refinance rate shopping the wrong way. If your neighbors put as much effort into mortgage rate shopping as they did shopping for a new plasma television they wouldn’t be overpaying thousands of dollars on their current home loan.

7. Research The Best Mortgage Lenders

When shopping for the lowest refinance rates take a close look at the top mortgage companies. Look for lender reviews like the ones I’ve published here and find out who services the loan. Many lenders sell your home loan as soon as you’ve closed on it meaning you’re dealing with a servicing company for your payments and when problems arises.

This is another selling point for small community based credit unions. Most credit unions service their own home loans and you’ll always have a real person to deal with in person if you hit a snag.

8. Check Your Credit Reports First

The mortgage refinance rates you’re quoted depend primarily on your credit score and loan-to-value ratio. If your quotes are coming in higher than what lenders are advertising the likely culprit is your credit score. Check your credit reports for errors at AnnualCreditReport.com and avoid opening new credit accounts until after closing on your new home loan.

If you find mistakes in your credit reports be sure to dispute the errors as any negative information found in your credit reports drags down your credit score.

9. Should You Float or Lock Refinance Rates?

Knowing when to lock or float your refinance rates could mean the difference between getting the lowest refinance rates and just missing the best deal. Once you lock a great refinance rate it’s yours forever. (Almost) The duration of your rate lock needs to allow you enough time to close and get your mortgage funded. Lock for too long and you’ll get higher refinance rates. Lock too short and you could find your lock expires if you hit a snag during underwriting.

If refinance rates continue to fall as they have been consider floating your rate. Also, watch out for rate lock fees. This is a common junk fee that raises your closing costs unnecessarily. Some lenders require a rate lock deposit which is applied to your closing costs. This is still cash out of your pocket that you could be using for other things.

10. Don’t Rush To Get Mortgage Refinancing Done

Mortgage Refinancing isn’t something you should take lightly. According to the HUD Secretary most homeowners are overpaying because they neglected to do their homework. If you find a pushy broker or loan officer don’t feel obligated to continue working with them.

Take your time and pay close attention to the mortgage origination fee as this is one of the most commonly overpaid closing costs. The time you spend comparing loan offers AND fees will be well worth your while and can save you thousands of dollars.