Are you in the market for refinancing your home mortgage? If so, you’ve probably been told by friends and family to shop around for the best refinance rates. The problem with refinance rate shopping is that most people do more harm than good. Here are five tips to help you get the lowest refinance rates while avoiding common mistakes with today’s best mortgage lenders.
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that can save you thousands of dollars on your next home loan.
There’s More to Refinancing Than Getting Low Mortgage Rates
One of the most common mortgage mistakes is only focusing on getting the lowest refinance rates. Smart shoppers compare refinance rates and lender fees. Before you can do either effectively it’s important to ensure your financial house is in order.
- Should I Even Refinance My Mortgage?
- Optimize Your Credit Score Before Shopping for Refinance Rates
- Pick a Mortgage Program & Stick With It
- Request Quotes From a Mix of Different Brokers & Lenders
- Shop Smartly Using The Good Faith Estimate
It makes sense to ask the question “Should I Refinance” before paying for a new home loan. Every mortgage has out-of-pocket expenses that you’ll pay one way or another. If you’re not able to break even recouping your closing costs then you’re going to be losing money no matter how great your refinance rates.
You can approximate the amount of time it’s going to take you to break even by adding up all of your closing costs and dividing by the amount your payment goes down each month. This is only an approximation because it doesn’t factor in things like term length or taxes and it’s worth noting that the calculation is only valid if you keep the same term length or go shorter.
If you lengthen your term length by going from a 15 to 30 year mortgage the calculation is not valid because you’ll never break even. Did you figure out how long it will take you to break even? Dividing your closing costs by the amount you’ll save monthly tells you the number of months to break even. If you’re OK with this amount of time then it probably makes sense to pay for a new mortgage.
If you’ve already started shopping for the best refinance rates and are finding the quotes you receive are higher than what lenders are advertising, the likely culprit is your credit score. Advertised refinance rates are usually based on having a score of 720, sometimes higher.
The government mandated website AnnualCreditReport.com allows you to review your credit reports for free. If you find mistakes in your credit reports each of the credit bureaus (Equifax, Experian, and TransUnion) has a process for disputing incorrect information online.
Once you’re certain that your credit reports are in order, protect your credit score by shopping smartly. When mortgage lenders run your credit, which you need them to do in order to get accurate quotes, your credit score takes a hit from the inquiry. The trick is to limit all of your rate quotes to a two week period. If you do this you’ll on get dinged once for a mortgage lender inquiry on your credit score.
The second most important decision you’ll make when refinancing your mortgage is which program you’re choosing. Do you need a thirty year fixed rate loan or do you need a government refinance program like an FHA streamline refinance?
Once you’ve decided which mortgage program is best for you don’t let a fast talking loan officer confuse you by quoting refinance rates across different programs. The only way to make an apples-to-apples comparison of refinance rates and fees across different lenders is to compare quotes from identical mortgage programs.
Refinance rates, fees and terms vary widely across lenders. Remember it’s important to focus on the big picture including lender fees and not just refinance rates. The loan origination fee for example is one of the largest out-of-pocket fees that you control.
Many loan officers and brokers will tell you one percent of your mortgage amount is standard; however, I’ve reviewed community based credit unions that charge as little as $400 for this fee.
Don’t assume your existing lender or bank will offer you the best deal. If you neglect to shop around you’re guaranteed to leave cash on the table.
The new Good Faith Estimate is vastly superior to the old disclosure document. When requesting refinance quotes remember to ask for them from the same mortgage program and request zero discount point quotes.
You’ll find that most lenders quote refinance rates that include discount points first. Paying discount points has little benefit for most homeowners; if you’d like to see how paying the fee affects your payments there is a table on page three of your Good Faith Estimate.
Page two of your Good Faith Estimate shows the loan origination fee, lender fees and any Yield Spread Premium associated with your refinance rates. Pay close attention to page two and you’ll find that often the mortgage with the lowest refinance rates comes with the highest fees.
Shopping smartly from today’s best mortgage lenders will help you avoid 90% of the mistakes made by your neighbors. Remember, focus on getting the best refinance rates with the lowest fees and you’ll be on the path to your best home loan ever.
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