One of the most common mortgage mistakes is obsessing over getting the lowest refinance rates at the expense of fees. If you choose a lender based on refinance rates alone you will overpay. Here are several tips before you refi for getting the best refinance rates without paying lender junk fees or discount points.
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that can save you thousands of dollars on your next home loan.
Lowest Refinance Rates Does Not Mean The Best Deal
Refinance rate shopping is difficult enough without trying to compare everything under the sun across different mortgage loan programs. Once you’ve decided what program is right for you, comparison shopping becomes ten times easier. No matter what your banker might tell you identical mortgage programs from different lenders share the same index. If your credit score is not a limiting factor choosing the best mortgage lender boils down to the fees you’re paying at closing.
Suppose you’re comparing two lenders and the first one quotes you a 30-year fixed home loan at 4.75 percent. The second knows this is higher than market and quotes you 4.875 but asks how long you’re planning on keeping your home. Intent on selling you a 5/1 ARM with higher closing costs including discount points at 3.0 percent.
If you fall for this sales tactic you’re overpaying because you made the mistake of fishing for refinance rates instead of hunting for the best deal. The first rule of refinancing is not to let mortgage companies talk you into switching programs once you’ve decided which one is best for you. It’s next to impossible to make an apples-to-apples comparison of refinance rates when your salesperson is trying to muddy the waters with more attractive but expensive choices. Pick a loan program and stick with it.
Another problem with refinance rate shopping is getting a trustworthy mortgage quote. Some bankers and brokers take the used car salesman approach to selling you refinance rates. Want four percent? Sure I’ve got you four percent, no problem! Then when closing rolls around you’re hit with discount points, a lofty origination fee, commitment fees, processing junk fees and underwriting fees.
The “secret” to getting the best refinance rates is to focus on shopping for the lowest interest rate AND fees with quotes on the same program across different lenders.
What Mortgage Fees Matter When Refinancing?
When you’re comparing refinance rates from different lenders with the same program what fees should you be looking at? Many of the third party charges like attorney fees and title insurance shouldn’t vary much across different lenders in your area and you won’t gain much splitting hairs over title insurance companies.
The fees that matter are found in section 800 of your Good Faith Estimate starting with the loan origination fee. This is paid to the person or company arranging your home loan and varies widely from one loan originator to the next. I’ve seen community based credit unions charge as little as a flat $400 for their loan origination fee. One percent is considered reasonable; however, the less you pay at closing the more benefit you’re getting from the lowest refinance rates.
What about junk fees? Rate lock fees, processing fees, application fees and administrative fees are all considered junk fees that can be negotiated for you to pay less or not at all. Remember, the test of how good of a deal you’re getting comes not from how low your interest rate is but how much that rate is costing you.
Let Your Break Even Point Be Your Guide
You can estimate how much benefit you’re getting from refinancing your mortgage by calculating your break-even point. Break-even points are an approximation at best depending on the program you choose but the calculation is still helpful to decide if mortgage refinancing with a particular offer is worth your while.
This only works if you’re choosing the same loan program as your existing mortgage. If you choose a home loan with a longer term length you’ll never break even recouping your closing costs thanks to the additional years you’re financing.
To approximate your break-even point add up all of the fees you’re paying out-of-pocket closing on your new home loan. Then divide this figure by the amount your mortgage payment is going down each month. This gives you (approximately) the number of months it’s going to take you to break even recouping closing costs from your lower payment.
If you sell or start serial refinancing like many of your neighbors it’s going to be impossible to break even meaning you’re losing money no matter how low your interest rate.
4 Steps to Getting the Lowest Refinance Rates
No one wants to overpay for anything let alone the most important purchase most homeowners make, your mortgage loan. Here’s your takeaway from today’s article in three easy steps for getting the best mortgage rates without paying too much.
- Go Hunting For Refinance Rates, Not Fishing
- Don’t Waste Effort Trying To Time The Market
- Don’t Rely On The Annual Percentage Rate
- Time Costs You Money
Decide up front before you do anything else which mortgage program is best for your next home loan and stick with it. Don’t let a fast-talking broker bamboozle you into a different program with a shiny annual percentage rate. That’s fishing for refinance rates and a sure ticket to overpaying at closing.
If a broker tells you they can time the market for refinance rates they’re full of beans. There are simply too many variables to try and time mortgage refinance rates. General rule of thumb is that bad economic news means lower refinance rates. Beyond that you’re better off investing your time comparing fees from different lenders across identical programs.
Annual Percentage Rate or APR is the most manipulated marketing tool in your lender’s arsenal. More often than not choosing the home loan with the lowest APR gets you a mortgage with the highest out-of-pocket costs thanks to discount points. Don’t be duped by that low, low APR. Pay attention to the fees listed in section 800 of your Good Faith Estimate and compare them to the fees of other lenders with identical programs.
Most lenders have a backlog of refinancing applications. Be prepared to wait as long as 60 days to close on your transaction. The problem is the longer you lock your refinance rates the more expensive it gets. Find out how long potential lenders are averaging to close and factor that in your decision when choosing an offer. Make sure you’re comparing refinance rates with the same lock period and that lock gives you ample time to close.
That’s the basics you’ll need to know to get the lowest refinance rates from today’s best lenders without paying junk fees. Sounds easy right?
Don’t let a pushy banker try and confuse the process with slick marketing tricks like comparing rates across different programs. Mortgage lenders use confusion to their advantage and have successfully made your neighbors overpay…don’t fall for the same trap.
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