For most people their homes are the single most important purchase made in a lifetime; however, many people put more effort into shopping for a plasma television. Common mortgage mistakes drive your payment up by hundreds of dollars for no reason. Here are several mortgage tips you need to know to avoid falling in the same trap costing your neighbors thousands of dollars.
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The most common mortgage mistake is overpaying the loan origination fee. Your loan originator is the person (loan officer or mortgage broker) arranging your purchase or mortgage refinance loan. Most loan originators work for a commission paid by you or your lender. Wait, you OR your lender? Why not just let the lender pay your loan originator’s fee and closing costs?
I’m sure you’ve seen those no fee refinance offers advertised on television. What’s happening with no fee mortgage refinancing is that your loan origination fee and often closing costs are paid by the lender in exchange for your accepting mortgage rates. Rather than paying a few thousand dollars up front you’ll have a higher monthly payment for as long as you keep the loan.
If you’re going to pay the origination fees yourself to avoid higher mortgage rates and payments how much should you be paying? A reasonable amount to pay for the mortgage origination fee is one percent of your home loan amount; however, I’ve reviewed several community based credit unions here that have loan origination fees as low as a flat $400.
Considering that the fees you pay when refinancing your mortgage make or break the deal you’re getting I often recommend that people start their mortgage shopping looking at hometown credit unions.
Why Origination Fees Are So Important
I mentioned the closing costs you pay make or break the deal you’re getting. The reason fees are so important is that you have to recoup your out-of-pocket expenses for loan origination and closing before you benefit from today’s insanely-low mortgage rates. If you never break even recouping out-of-pocket expenses you’re going to be losing money no matter how sweetheart the deal.
How do you break even from mortgage refinancing? Here’s an example to illustrate how recouping closing costs works. You should note that this example is only valid if you keep the same term-length (30 years for example) or go shorter. If you refinance with a longer term-length than you had before it’s going to be impossible to break even because of the money you’re losing for the extra financing.
Suppose for example you’re refinancing your home for $250,000 at 4 percent. It’s going to cost you $5,000 for the loan origination fee, appraisal, attorney and underwriting fees. Your old payment at 6 percent was $1,498. Mortgage refinancing at 4 percent gets you a payment of $1,193 which is a monthly savings of $305. You can approximate how long it’s going to take you to break even by dividing your closing costs by the amount you’re saving each month. In this case dividing $5,000 by your monthly savings of $305 gives us 17 months to break even. If you sell or refinance again during this period you’re walking away from cash on the lender’s table.
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Another common mortgage mistake is trying to get the lowest refinance rates at the expense of discount points. If you’re not already familiar with discount points this is a fee you pay to buy down your interest rates. A relic of the 80s when refinance rates were double digits, homeowners paid the fee to get a lower payment.
Lenders still use discount points to improve their bottom line at the homeowner’s expense. Should you pay discount points on your next home loan? Mortgage rates are at their lowest levels ever… In fact, 15 year mortgage rates recently slipped below 3 percent. Paying unnecessary discount points is just more cash out of your pocket that you could be using for other things increasing the amount of time needed to break even.
The problem is most lenders advertise purchase and refinance rates that include discount points so be sure and check the fine print. When comparing offers from the best mortgage companies be sure and compare the lender’s par rates AND the loan origination fee. Par rates do not include discount points or markup for Yield Spread Premium as seen with those no fee refinance offers.
Invest a few hours of your time doing your homework with these mortgage tips and you’ll save yourself thousands of dollars from unnecessary points and lender junk fees.
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You can get more mortgage tips for avoiding lender junk fees on your next home loan by checking out my free Underground Mortgage Videos.
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