For many homeowners answering the question “Should I refinance my mortgage” is easy; however, the question “How to refinance” can be perilous. According to Secretary of Housing and Urban Development, not doing their homework is the single reason most Americans are overpaying for their home mortgage loans. Here are several tips to help you refinance at the right time with the best mortgage lenders without leaving money on the table at closing.
The When & How of Mortgage Refinancing
The “when” of refinancing your home is fairly easy question to answer. Mortgage rates are at their lowest levels in 60 years. If you’re currently paying six percent or more now is the time to refinance you home. Getting the lowest refinance rates is easy if you’ve got decent credit. If you’re finding the rate quotes you’re getting are much higher than what lenders are advertising, the likely culprit is your credit score. Spend some time cleaning up your credit reports and paying down the balances on your credit cards and you should see those quotes come in line with what lenders are advertising.
The “how” of refinancing your mortgage gets tricky. You see, the test of how good of a deal you’re getting comes not from how low is the interest rate you’re getting but how much you’re paying to close on the new home loan. Sure you could go for one of those no-fee refinance offers; however, you’re always trading a higher mortgage rate for having the lender pay your closing costs.
If you want the most benefit from today’s low refinance rates, you’ll need to pay as little as possible for fees like loan origination, discount points, and other closing costs. The less you pay at closing the faster you’ll be able to recoup your out-of-pocket expenses from the lower payment amount.
Beware Mortgage Lender Tricks
A quick word about mortgage discount points; if you’re fuzzy on what this fee is, one point is one percent of your loan amount paid at closing. Points are a way of buying down your mortgage interest rate. Mortgage lenders often use sleazy advertising tactics involving points to make their loan offers seem more attractive. If you find a lender offering rates much lower than everyone else, check the fine print for points. If you agree to pay this up-front fee it’s going to make it more difficult, even impossible to break even recouping your out-of-pocket expenses.
Don’t Fall For Junk Fees
Like discount points, junk fees raise your out-of-pocket expenses for no good reason. Some examples of junk fees you’ll want to keep a sharp eye out for include rate lock fees, application fees, broker courier fees, and third party processing fees. Don’t be afraid to question everything on your Good Faith Estimate and negotiate not to pay anything resembling these junk fees.
When Will You Break Even?
Breaking even on your closing costs is the most important aspect of refinancing your home. If you sell or refinance before recouping your closing costs you’ll be losing money no matter how low the new interest rate. You can calculate your break-even point by adding up your total out-of-pocket expenses and diving by the amount you’re saving each month.
Suppose for example it’s going to cost you $5,000 to refinance and your new payment will go down by $150. Divining $5,000 by $150 reveals it will take 33 months, just over 2.5 years to break even recouping fees. Some mortgage “gurus” will tell you this is an oversimplification of the break-even point because it doesn’t take into consideration changes in your mortgage term length (15 vs. 30 years). If you’re participating in an academic discussion of the break-even point you need term length; however, in the real world calculating a simple break-even point is more than sufficient for most homeowners.
Remember the best rule of thumb when it comes to your home loan is to question everything, be that pesky customer and do your homework first and you’ll avoid the common mortgage mistakes your neighbors are currently paying for.