You probably know a braggart or two. You know the type…they love to brag about how great and smart they are. If you’ve ever heard someone talking about what a great mortgage rate they’ve got after refinancing you might wonder how much they paid to get that interest rate. Did you know the fees you pay at closing make or break the deal you’re getting? Here are several tips for paying less and truly getting the best deal on your next home loan.
Why Refinance Rate Shopping Doesn’t Work
For most people refinance rate shopping is letting a lender talk you into a home loan or program they’re promoting. That’s called mortgage fishing and not shopping around for the lowest refinance rates. Making an apples-to-apples comparisons of mortgage loans from different lenders is difficult, often downright impossible.
One problem with shopping for refinance rates is that different lenders all quote interest rates differently. Instead of advertising offers with the lowest refinance rates you’ll find lenders pushing home loans with the lowest APR.
Annual Percentage Rate is the most manipulated and abused marketing tool in your lender’s arsenal. More often than not, the home loan with the lowest mortgage rate has the highest out-of-pocket expenses due at closing. You might get the mortgage rate you were shopping for only to get fleeced with discount points, loan origination fee, commitment fees, administrative fees and underwriting charges.
One of the most common ways lenders manipulate APR is with discount points. Because points are a form of pre-paid interest, paying discount points lowers the Annual Percentage Rate. One discount point is one percent of your loan amount paid at closing and lenders use this to buy down your refinance rate by .25 percent.
How to Shop For The Lowest Refinance Rates & Fees
If you want a better way to shop your next mortgage try and get all of your quotes for the same timeframe, usually 30 days. Ask for quotes that do not include discount points with and without the origination fee. Ask for a detailed list of charges particularly from section 800 of the Good Faith Estimate. Section 800 is where you’ll find all of the fees that go into that APR calculation along with any junk fees like processing, administration, the loan origination fee or unnecessary discount points.
Section 800 is where you should focus your energies when shopping for refinance rates. Charges like attorney fees or title insurance paid to third parties aren’t important when rate shopping. Don’t rely on a total “estimate” of closing costs; just ask for a detailed explanation of section 800 fees.
Yield Spread Premium Still Exists
Every now and again I get a snotty comment from a broker or loan officer saying my information is outdated and Yield Spread Premium is no longer relevant thanks to changes in the laws governing compensation.
Yield Spread Premium didn’t go away. What changed is that your mortgage broker cannot accept lender paid compensation in the form of Yield Spread Premium AND charge you a loan origination fee. It has to be one or the other. You can take higher refinance rates in exchange for the lender paying your origination fee and/or closing costs. (That’s what Yield Spread Premium DOES.)
What you need to think about is how higher refinance rates affect your ability to break even recouping your closing costs. That’s what refinancing is all about. How much are lower refinance rates going to cost me and will I ever get that money back from a lower payment amount?
If you can satisfactorily answer that question and the timeframe for breaking even is acceptable to you then you’re doing a good job refinancing your mortgage. If you want the maximum benefit from today’s lowest refinance rates then you need to pay close attention to section 800 and negotiate to pay as little as possible for loan origination and lender fees.
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