If you are in the process of refinancing your home mortgage you might have discovered that everyone and their cousin Jim has advice for you on finding the best deal. While most of the individuals offering advice have good intentions, there is a lot of bad advice and misinformation available, especially online that could cost you thousands of dollars. Here are several tips to help you avoid bad mortgage refinancing advice and find the perfect mortgage when refinancing.
Some of the worst mortgage refinancing advice is freely available on the internet. Everything from “Never refinance unless the new mortgage rate is 2% lower than your existing rate” to “Choose the mortgage with the lowest Annual Percentage Rate” to “Refinance with your Bank or Credit Union” is not only bad advice but could result in overpaying thousands of dollars for your new mortgage.
The Two Percent Refinancing Rule
The “Two Percent Mortgage Refinancing Rule” states that you should never refinance your mortgage unless your new interest rate is two percent lower. While there are plenty of good reasons for refinancing your loan with a higher interest rate; if you qualify for a lower mortgage rate it makes sense to evaluate the new loan on a costs/savings basis rather than just “two percent lower”
You can calculate cost/savings by dividing your total cost from refinancing the mortgage by the amount you save each month with the lower payment. Divide this figure by twelve and you’ll have the number of months it will take you to break even and realize any savings with your new loan. If you can live with this break even point it makes sense to refinance your mortgage.
Use the Annual Percentage Rate When Refinancing
The Annual Percentage Rate or APR was intended to allow borrowers to determine the overall cost of borrowing expressed as an yearly percentage of the loan amount. Lenders are required by law to disclose the APR; however, there is no standard for calculating this APR. Many lenders include and omit fees that give them the most favorable numbers; this makes the Annual Percentage rate completely worthless for choosing the best mortgage when refinancing.
How can you comparison shop for the best loan. Rather then make an apple to oranges comparison using the Annual Percentage Rate the best way to compare loan offers is to use the Good Faith Estimate and HUD-1 statement. Many people argue that the Good Faith Estimate is just an estimate and is as worthless as the APR; however, by reconciling your Good Faith Estimate against the HUD-1 statement you can ensure you’re getting the mortgage deal promised to you.
Refinancing With Your Bank is The Way to Go
This is probably the worst mortgage advice in the history of bad mortgage advice. The problem with banks and credit unions is that thanks to Banking Lobby they are exempt from the Real Estate Settlement Procedures Act. This legislation, also known as RESPA, protects homeowners in the United States by requiring mortgage lenders to disclose their profit margin and markup of your loan. Banks exploit this loophole in the RESPA laws by charging homeowners the markup known as Service Release Premium.
This markup exists only to boost the bank’s profit when selling your loan to investors on the secondary market. Because the bank is exempt from RESPA laws they are not required to disclose the markup and will never tell you the mortgage rate you could have had if you refinanced your mortgage somewhere else.
You can learn more about refinancing your mortgage without overpaying by checking out my free mortgage video toolkit. Register today and you’ll get instant online access to my Underground Mortgage Videos without downloading anything to your computer’s hard drive.
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.
