If you’re looking for current mortgage rates on the web, it can be pretty confusing out there. How much benefit you’ll get from refinancing with today’s mortgage rates depends on how you go about shopping for your next home loan. Here are several tips to help you avoid common mistakes that steal the benefit you get from refinancing with the lowest current mortgage rates.
Current Mortgage Rates Can Be Deceiving
The rates you see published on the web and advertised on television can be deceptive because they’re not telling the whole story about the fees involved unless you can speed read the fine print. Lenders advertise teaser rates to suck homeowners into overpriced home loans.
“Wait…” you might be thinking, if current mortgage rates are so low how can the mortgage be overpriced? Mortgage lenders are in the business to make money and they don’t do it by just sitting back and collecting the interest on your home loan payments. If you want the best deal on your next home loan and the most benefit from current mortgage rates it helps to understand how lenders profit.
Mortgage Lender Fees Make or Break Your Deal
If you’re shopping for current mortgage rates to refinance you should also be focusing on the fees found on your Good Faith Estimate. The most common way that lenders manipulate current mortgage rates that results in overpaying is with discount points.
Did you pay a point or two when you first purchased your home? Depending on what was going on in the market at the time when you bought your home this could have been a waste of money. Should you pay discount points with today’s current mortgage rates? For most homeowners the answer is absolutely not.
You see, discount points are just a fee left over from the 1980s when homeowners were paying double-digit mortgage refinance rates. Back then it made sense to pay this fee to buy down your interest rate because the savings allowed you to recoup your out-of-pocket expenses in a fairly short amount of time.
The problem with current mortgage rates being at historically low levels is there’s nothing quick about the way you recoup the expense, if at all. Also, the benefit you’re getting by lowering your interest rate is proportionally lower, meaning you’re getting much less bang for your buck.
The problem is that paying discount points offers next to no benefit for anyone but mortgage lenders. This fee is pure profit for lenders which is why they quote current mortgage rates that include discount points first.
If you’re curious about how paying discount points affects your payment there is a chart on page 3 of the new Good Faith Estimate; however, as a starting point you should always request zero discount points when comparison shopping current mortgage rates.
How to Shop Smartly Using The Good Faith Estimate
Before you do anything else you can save yourself a lot of financial frustration by staying on top of your credit reports. If you haven’t already been to AnnualCreditReport.com for free credit reports you should go there before doing anything else. AnnualCreditReport.com is a government mandated website where the three credit bureaus (Equifax, Experian & Trans Union) are required to give you free access to your credit reports.
If you want to see your credit score there is a fee; however, CreditKarma.com seems to be an excellent alternative to those “free credit score” websites that charge you for credit monitoring services. (CreditKarma has clever TV commercials too)
Once you’re confident that your credit reports are accurate you can give your credit score a quick boost by paying down the balances on your cards below 30% of your limit. CreditKarma.com also offers free advice and community support on improving your credit profile.
Understanding The New Good Faith Estimate
The government recently overhauled the Good Faith Estimate (GFE) and the new version is vastly superior to the old GFE when it comes to shopping for current mortgage rates. Most of the fees you’ll want to pay attention to can be found on page two of your Good Faith Estimate starting with the loan origination fee.
Many mortgage brokers will tell you that one percent is the standard amount to pay the person or company arranging your home loan; however, I have reviewed community and military credit unions that charge as $400 flat for the mortgage origination fee. Remember, the less you pay obtaining your next home loan the more benefit you’ll get from current mortgage rates.
The next item on your Good Faith Estimate (item two in box A) is mortgage yield spread premium. Every now and then when I write about yield spread premium I get a snarky comment from someone saying that yield spread premium is illegal now and that I should do my homework. Fact of the matter is that yield spread premium is NOT illegal. The only thing that changed is that mortgage brokers cannot charge you a loan origination fee AND take yield spread premium from the lender. (The days of double-dipping mortgage broker commissions are gone for good.)
Yield spread premium is alive and well. Are your eyes glazing over as you think yield spread what?! It’s just a fancy name for a pretty simple concept. Mortgage lenders pay a premium for borrowers that accept interest rates higher than the current mortgage rates. This premium is a credit known as yield spread premium. You can use the premium to pay your loan origination fee and other closing costs. Just how much do you get for taking higher than current mortgage rates?
Yield spread premium works like discount points in reverse. For every .25 percent increase you agree to above current mortgage rates you get a credit of one percent of your loan amount towards your closing costs. This is the “credit or charge for the interest rate of x%. This REDUCES your settlement charges” that you see in box 2a of the new Good Faith Estimate. Again, yield spread premium is alive and well, just read your Good Faith Estimate.
Should You Agree to No Fee Refinancing?
Yield Spread Premium is how lenders like Bank of America offer no fee or no cash out of pocket mortgage refinancing. What are you giving up by agreeing to higher than current mortgage rates? Your payments will be higher for the entire time that you keep the home loan meaning you’ll eventually be overpaying significantly for having your closing costs paid by the lender. If you’re short on cash and having the lender pay your closing costs is your only option go for it; however, for most people it’s better to pay the loan origination fee and other settlement charges yourself.
How Long Before Breaking Even?
Some financial advisors like the Mortgage Professor claim it’s a mistake to look at how long it’s going to take you to break even when weighing your refinancing options; however, I disagree with their arguments. While it’s true that dividing your total mortgage fees by the amount you’ll be saving each month only approximates your break-even point because it doesn’t factor in things like term length and taxes, it’s still good enough an approximation for most people to make an educated decision.
You can figure this out for yourself by using a simple mortgage calculator to determine your new payment amount and then divide your out-of-pocket expenses by the amount your mortgage payment is going down.
Simple Mortgage Calculator
This tells you the number of months it’s going to take to break even recouping your closing costs and if you’re comfortable with this amount of time them refinancing with current mortgage rates on the offer you’re considering probably makes sense.
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You can learn more about getting the most benefit from today’s current mortgage rates by avoiding unnecessary lender fees by checking out my free Underground Mortgage Videos.
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