Are you shopping for home refinance rates and have your heart set on a specific interest rate? Do you know that one of the most common mortgage mistakes is focusing on getting the lowest rate at the expense of fees? Carefully comparing home refinance offers and fees from a variety of lenders is the best way to ensure you’re not losing money when refinancing. Here’s how to comparison shop today’s best mortgage lenders and get a better deal than your neighbors for your next home loan.
Home Refinance Rate Shopping Tips
Here are five tips to help you get the lowest home refinance rates without overpaying lender fees at closing.
- Check Your Credit Reports First
- Request Home Refinance Quotes The Right Way
- Is Refinancing Worth It?
- Shop From a Variety of Lenders, Banks, & Credit Unions
- Use Your Good Faith Estimate to Compare Fees
Before you start filling out forms for home refinance quotes you should focus on your credit. If you don’t, you’ll often find the quotes you’re getting are higher than what lenders are advertising. If so, the likely culprit is your credit score, assuming you have the necessary loan-to-value ratio. Nothing drags down your credit score like inaccurate information in your credit file.
The government requires each of the three credit bureaus (Trans Union, Equifax, Experian) to provide you with access to your credit files once per year, at no charge, at AnnualCreditReport.com. You won’t get a credit score unless you pay for it; however, CreditKarma.com provides free access to your Trans Union credit score with no strings attached.
Are you happy with your credit score? If you’re not, the quickest way to boost it is to pay down the balances on your credit cards below 30% of your limit.
The new Good Faith Estimate is an excellent tool for comparing home refinance rates and fees if used correctly. There’s two things you’ll need to do to make sure you’re getting an apples-to-apples comparison of home refinance fees with your quotes.
First, make sure your quotes do not include discount points. There is a table on page three if you’d like to see if paying discount points is worthwhile; however, as a starting point make sure your home refinance quotes do not include points.
Next, make sure all of your quotes are for the same mortgage program. If you need a 30-year fixed rate mortgage don’t let some fast-talking loan officer quote interest rates for a 30-year ARM. Comparing fees across different programs is like comparing apples to oranges and results in overpaying.
Answering the question “Should I refinance?” before you do anything else can help you avoid an expensive mistake. You can figure out if a home refinance is worthwhile using a simple mortgage calculator like this one to approximate your break-even point.
Simple Mortgage Calculator
Once you have an idea of what home refinance rates you’ll qualify and your approximate closing costs you can calculate your break-even point. First, determine what your new payment will be based on the refinance rates found on your Good Faith Estimate. The difference between your old payment and the new is your monthly savings.
Divide your average closing costs by the amount you’ll be saving each month and this tells you the approximate number of months it’s going to take to recoup your out-of-pocket expenses. Assuming you break even and you’re comfortable with the amount of time, then a home refinance is probably worthwhile.
Note that this is only an approximation because it doesn’t factor in changes in term-length or things like taxes. As long as you’re keeping the same term-length or going shorter it’s still good enough to make an informed decision if refinancing is worthwhile.
Don’t automatically assume that your bank is going to offer you competitive refinance rates and fees. Some of the best deals I’ve found have come from small community
credit unions. Mortgage brokers can be an excellent resource for home refinance shopping if you don’t have the time to comparison shop.
Also, don’t let the fact that you’re not a credit union member discourage you from rate shopping credit unions. Many credit unions relax their membership requirements so they can market home loans beyond their local membership base. The more comparison shopping you do the better your chances of finding a great deal.
The only catch with home refinance rate shopping is that you need to take steps to protect your credit score from lender inquiries. When a mortgage lender runs your credit you’ll get a hard inquiry on your credit report which lowers your score. The trick is to limit all of your home refinance rate shopping to a 14-day period and you’ll only get dinged on your credit once. Make sure when you’re requesting quotes that you provide your Social Security number and that you limit quotes to that two week window.
The loan origination fee is one area where you can save or lose the most money on your home refinance. Many loan officers will tell you that one percent is standard for the mortgage origination fee; however, I’ve seen community credit unions charge as little as $400 for loan origination. You can find the loan origination fee on page two, item one of section A of the Good Faith Estimate.
The next thing you’ll want to consider on your Good Faith Estimate is the Yield Spread Premium found in item 2 of section A. This is a credit the lender is giving you for accepting home refinance rates that are higher than the going rate. The credit is used to pay your loan origination fee and other settlement costs.
The problem with accepting Yield Spread Premium on your home refinance is that while it reduces or even eliminates your out-of-pocket expenses, it drives up your monthly payment. If you plan on keeping the mortgage for any length of time (the average homeowner refinances every 4-5 years) you’ll break even for what the lender credited you and start losing money.
In most cases you’ll want to pay your own closing costs if you’re able. The exception is if you know you’re going to be selling within five years and can avoid a prepayment penalty.
Home refinance closing costs average two to three percent of your mortgage amount. The less you pay for loan origination and the lender fees found on page two of your Good Faith Estimate the more you’ll benefit from current mortgage rates.
Invest an hour or two using these tips and you can shave thousands of dollars from your out-of-pocket expenses on your home refinance.
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You can learn more about paying less refinancing with today’s best mortgage lenders by checking out my free Underground Mortgage Videos.
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