Are you considering taking advantage of current home refinance rates? Whether or not you’re getting a good deal for your next mortgage loan depends on the fees you’ll pay, not just on how low the refinance rates. Here are several tips before you refi to help you get the lowest home refinance rates without overpaying the lender at closing.
Home Refinance Settlement Fees
Every home loan has settlement fees that have to be paid one way or another at closing. Even those no-fee refinance offers have closing costs; the fees are being paid by the lender in exchange for you agreeing to higher home refinance rates.
The reason lender fees are so important on your home refinance is that you have to recoup your out-of-pocket expenses before you’ll benefit from having a lower interest rate. The more you pay at closing for things like the loan origination fee the longer it’s going to take you to break even.
Part of answering the question “Should I Refinance my home” is figuring out how long it’s going to take you to break even recouping your closing costs.
How to Calculate Your Home Refinance Break-Even Point
It’s not difficult to approximate your home refinance break-even point. You can use a simple mortgage calculator like the one below to figure out how much your monthly payment will be going down after your home refinance. Simply plug in the refinance rates you’re being quoted and your desired term-length and click the calculate button.
Simple Mortgage Calculator
Once you know the amount that your payment is going down each month after your home refinance, divide the total closing costs found on your Good Faith Estimate by your savings. This will tell you the approximate number of months it’s going to take to break even recouping lender fees on your home refinance.
This is only an approximation because it doesn’t take into consideration factors like income taxes and changes in your mortgage term length; however, as long as you’re not lengthening your term-length the approximation is good enough to make an informed decision.
Are you okay with the amount of time it’s going to take recovering your closing costs from your home refinance savings? If so, then paying for mortgage refinancing probably makes sense in your situation.
What About Those No Fee Refinance Offers?
You’ll see lenders like Bank of America advertising no fee home refinance loans from time-to-time. If you don’t have the cash to pay your settlement fees at closing these offers might seem like your only option. There is an alternative to accepting higher refinance rates, which means your payments will also be higher than necessary.
Many lenders will let you roll your closing costs into your loan balance meaning you’ll get to take advantage of current home refinance rates without markup.
You’ll find the credit you get for taking higher home refinance rates on page two of your Good Faith Estimate. Look at section A item 2. “Your credit or charge (point) for the specific interest rate chosen. The first box reads “The credit or charge for the interest rate of % is included in “Our origination charge.” (See item 1 above.)”
This credit is known as Yield Spread Premium and works like a discount point in reverse. For every .25% markup on your home refinance rates that you agree to the lender credits one percent of your mortgage amount towards your settlement fees.
Is agreeing to Yield Spread Premium on your home refinance a good idea? You can run the numbers using a simple mortgage calculator to figure out how the markup affects your monthly payments; however, the longer you keep this home loan the more you’ll wind up overpaying the lender down the road.
Should You Pay Discount Points?
Discount points are a fee leftover from the 1980s when homeowners were paying double-digit interest rates. You could pay one percent of your mortgage loan amount at closing and the lender would lower your rate by .25%.
Today home refinance rates are still near historic lows making the benefit of paying discount points extremely small. If you’re curious how paying discount points will affect your payments there is a table on page three of your Good Faith Estimate but most homeowners do not benefit from paying this fee. Make sure the home refinance quotes you get as a starting point are zero point quotes.
How to Shop For the Lowest Mortgage Rates & Fees
The first step to getting the best deal on your home refinance is to choose a mortgage program. Do you need a 30-year fixed rate home loan? How about an FHA streamline refinance? Once you know which mortgage program that you need don’t let loan officers quote interest rates from programs you’re not interested in.
The only way to get an apples-to-apples comparison of mortgage lender fees is to compare quotes from identical programs.
Next, look at the loan origination fee. This is paid to the mortgage company or broker arranging your home refinance. Many loan officers will tell you that one percent is standard for the mortgage origination fee; however, I’ve reviewed several community credit unions that charge as little as $400 for their loan origination fee.
Remember, the less you pay at closing the more benefit you’ll get from your home refinance.
Finally, look at the fees found on page two of your Faith Estimate in section B. Comparing these fees from a variety of banks and credit unions will give you a good idea of what’s reasonable and what is outlandish. Mortgage fees tend to vary significantly from one lender to the next so don’t assume giants like Wells Fargo Mortgage are going to offer the best deals.
The most common mortgage mistake is focusing on getting the lowest home refinance rates at the expense of lender fees. If you’re shopping for the lowest interest rates and lender fees using the Good Faith Estimate you’re on track to get a better deal than 90% of your neighbors.
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