Refinancing your mortgage is a relatively straightforward process depending on who you are working with. The concept is at least simple. Your objective is to reduce your rate, lower your monthly payment, change the terms of your loan, switch to a new lender, consolidate debt, take cash out of the equity of your home, or a combination of some or all of these. Most of the time you can do a refinance without any money out of pocket depending on what type of refinance you are trying to do. The following are a few tips that can save you thousands when doing a refinance.
The first tip I have is to shop around for multiple lenders and include in this search both a traditional bank as well as a few mortgage brokers and even a credit union. The reason for doing this is simply so that you’ll have a better idea about what the going rates for mortgages are. Rates do fluctuate on a daily basis and the likelihood of capturing the lowest possible rate in history is small. So watch for the attempts to get you committed earlier than you are ready by sales savvy loan officers who use the threat of increased rates to hook you. Do your due diligence before you commit to anything and give the opportunity for more than one person to quote you rates.
The second tip is make sure that you are not subject to an early termination fee with your existing mortgage. This penalty may be more expensive that it’s worth to refinance. This is a great tip for getting a new mortgage as well to find out when you can next refinance. It isn’t that you’re going to refinance no matter what in that time, but knowing when you will be out from under any possible “prepay” penalty is a good information to know. If you refinance with a new lender, you’ll most likely have a 120 day period before you can refinance again. This means that no matter the rates, you’ll probably be able to refinance no more than 3 times per year. Most people don’t do this and this type of strategy has it’s place, but typically not with the traditional homeowner.
This third tip may be the one that saves you the most money in the long run. The base rate that a lender charges is called the par rate. The rate that you pay is based on this rate. If you are paying upfront costs including loan origination fees and other fees such as appraisals, etc, then you should be able to get very close to this par rate. If your lender is doing a no-cost refi, this usually means he or she is making money of selling the loan at a higher rate which will typically cost you much more in the long run. If you are in a home where you plan to live for the remainder of the time left on the loan, such as a 15 year or 30 year mortgage, your most cost effective solution is to get that rate as low as possible which may also include “buying down” the rate. Keep in mind that this strategy works the best if you are refinancing because the rate is very low. If you’re refinancing becaue of a cash out or some other reason and the rate is only so-so, you may decide to not focus as much on the rate because you’ll most likely refinance again in the future.
Also, if you are refinancing the loan and are in a starter home or a temporary situation, instead of trying to buy down the rate, your best option is to lower your monthly costs as much as possible and have little or no initial cash outlay. The reason I say this is because let’s say it costs you $5000 to buy down the rate which would save you $25,000 over the course of the loan (say a 30 year mortgage). This is great if you’re going to be in the house for 30 years. However, if you are only in the home for 3-5 years, that $5000 is an extra $1000 to $1800 per year that you’re “losing” or have “lost” and is usually much more than the slight increase in the monthly mortgage payments based on a higher rate. Have your loan officer run some scenarios with you that will help you make the best possible decision related to your situation.
The fourth tip I have for you is to only run the credit check when you’ve selected with loan officer and brokerage you decide to go with. This may happen sooner than later after you’ve done some of your initial homework. It used to be that every inquiry, no matter what, would lower your FICO score or credit score. Because when shopping for a loan, you may have several inquiries from multiple agencies if you are trying to get pre-approved. The credit agencies changed this just for this reason that multiple inquiries in a given period of time (I believe something like 30 days) would not count against you as multiple inquiries, but as one inquiry. Still, there usually isn’t a reason to have your credit “pulled” multiple times. Usually, you’ll know based on an interview with some loan officers which one you’d like work with. You can then have them do the credit check because that credit report will stay with your file. So even if the loan officer has relationships with multiple lenders, you won’t have multiple inquiries because the loan officer representing you already has the credit that can be supplied to the lenders.
The fifth tip I have for you is based on knowing about and understanding the yield spread premium or YSP for short. The YSP is a payout the lenders make to the brokerages for selling the loan at a rate above the “par” rate. The lenders have a rate sheet that they provide to loan officers and mortgage brokers. This rate sheet has a par rate which is the rate at which the bank doesn’t require a buy down nor does it pay out anything to the loan officers at this par rate. The thing that is tricky about this YSP is that it doesn’t show up on any of the loan documents. What this means is that if you are not a savvy borrower and don’t know about this rate, the loan officer may tell you that the no-cost refinance is higher because they can receive compensation from the lender. What they don’t tell you is how much they are receiving which is also fine. The problem comes when they charge more than would be considered a fair payout for work done within the industry. Keep in mind that most of the time, your loan officer is doing a lot of work together with a loan processor and they truly do earn their money, but it should be a reasonable payment and not anything exorbitant.
These tips will save you money when you use them to refinance. The more basic education you have related to mortgages, the more informed you’ll be and the better you will be at spotting “red flags” when it comes to refinancing your mortgage. You may also ask around for friends, neighbors and coworkers who have recently purchased a home or possibly refinanced and find out about their experience. Often a recommendation from a friend for a trusted loan officer can make the difference between a good and bad experience at refinancing.
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