Have you been watching today’s best mortgage lenders advertising rock-bottom refinance rates? Did you refinance three years ago and wonder if it’s worth your while a second or even third time? Here are several tips to help you decide if refinancing with today’s best mortgage lenders is a smart move or a colossal mistake.
Beware the best mortgage lenders trick marketing
Mortgage lenders love to brag about their low, low APR home loans. What they’re not telling you is the reason that APR is so low is that they’ve loaded their offers up with discount points. Often the home loan with the lowest Annual Percentage Rate has the highest out-of-pocket expenses because you’re required to pay points at closing.
Are you leery about refinancing again because you’ve heard serial refinancing isn’t a good idea? It’s true…taking out a new mortgage before you’ve recouped your expenses from the last home loan is a recipe for losing money. Origination fees and other closing costs can quickly steal the benefit you’re getting from lower refinance rates.
The secret to getting the best deal isn’t about scoring great refinance rates from the best mortgage lenders but how much you’ll save from taking out a new home loan. If you can lower your interest rate by one percent or more while keeping your out of pocket costs low refinancing is probably a smart move.
If you’re only lowering your interest rate by a quarter percent you might still be able to justify refinancing depending on how long it’s going to take recouping your closing costs.
How getting a free Dr. Pepper can save you thousands
No one likes paying fees. I’m amazed at the lengths some of my friends go to avoid paying for things. My bank has a branch in a grocery store near my office. Walking out of the store the other day I saw one of the tellers ordering a large Dr. Pepper and was surprised to hear her ask if she could have it for free. The person behind the counter replied “No, but I’ll only charge you for a medium.”
This is the mentality you want to adopt when shopping for the best mortgage lenders. There are third party fees that don’t allow for wiggle room; however, you can save thousands on things like the loan origination fee just by asking for a free Dr. Pepper.
Closing costs will typically run you anywhere from 3 to 6 percent of your mortgage amount. The less you pay the more benefit you’ll get from lowering your interest rate. Some people choose to roll their closing costs into the home loan amount rather than pay out-of-pocket at closing. If you do this you’re much less likely to haggle over fees, meaning it’s going to take that much longer to break even.
What fees should you be questioning? Question everything found in section 800 of your Good Faith Estimate including the loan origination fee, administrative fees, rate lock fees and processing fees. Many of these are junk fees you can pay less for or not at all simply by asking.
The point is unless you ask you’ll never know what you can get out of paying.
How often should you refinance your home?
You can justify refinancing your mortgage if your savings outweigh the fees you’re paying. It’s going to take time to recoup the fees you’re paying from your savings but in the long run it should add up. You can approximate the amount of time it’s going to take you by calculating your break-even point.
Start by adding up all of your out-of-pocket fees including any discount points you’ve agreed to pay and divide by the amount your payment is going down each month. This will tell you the number of months it’s going to take you to break even before realizing any benefit from refinancing.
Note that this is only an approximation because it doesn’t factor in losses or gains from any investments you have or the income tax you pay. It’s also worth noting that the break-even calculation is only valid if you’re keeping the same term-length or going shorter.
If you choose a longer term length like going to a 30-year mortgage from a 15-year term you’ll basically never break even thanks to the additional financing.
Suppose refinancing is going to cost you $5,000 in fees but saves you $150 on your payments. It’s going to take you 33 months, just over 2.5 years to reach that break-even point where your benefit outweighs what it’s costing you to refinance.
The general rule of thumb is that you should only refinance as often as you can recoup your expenses in a reasonable amount of time. What’s reasonable? Five years or less will make lowering your payment worthwhile as long as you don’t engage in serial refinancing.
Any more than five years and you should consider if the savings are enough to make it worth your while. If you have to move unexpectedly, you’ve lost all the money you spent paying closing costs.
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