Refinancing your mortgage can be one of the best financial decisions you make depending on how frequently you do this, the purpose of your refinance and the refinance product you decide to go with. You’ll need to put your trust in another individual (usually your loan officer that works with a brokerage or a loan specialist with a bank) that will help you with the process of getting refinanced. Because you’ll need to trust someone that will act in your best interest, the following are a few tips so that you’ll be a little educated on the basic refinance process and a few “gotchas” about the mortgage industry.
The first tip is to get pre-approved with multiple lenders. What this will do is allow the price comparison to be more vast and give you more options. If nothing else, this will give you the opportunity to have multiple rates and products to compare. Working with a good loan officer will also enable you to access multiple lenders as most loan officers or mortgage brokerages have relationships with multiple lenders.
The second tip is to check to make sure your existing mortgage does not have a pre-payment penalty which will penalize you if you refinance. Most lenders have a 120 day prepayment penalty which means that you wouldn’t be able to refinance within that 120 days without paying the pre-payment penalty. This also means that you wouldn’t be refinancing more than 3 times per year usually. Some lenders do have a 90 day prepayment penalty, but most are 120 days. You can usually find this out in the original documentation on your loan or by contacting the lender or group that services your loan.
This third tip can save you significant money, especially in the long run. There are two types of homeowners, at least two types I’ll categorize here. The first is the temporary homeowner. Whether this is a first time homebuyer that may only be in the home for a year or two, or someone who will most likely move or relocate well before the mortgage is paid off. The other is the “lifer”. This is the homeowner that is in their home for the long haul and isn’t going anywhere. Both of these types of homeowners can refinance and most do based on lowering rates, cash out refinances, and other reasons. The goal of the “lifer” apart from taking cash out of their home in an cash-out refinance to get at the equity of the home, is usually to get their rates as low as possible. The lower the rate, the less they’ll pay in the long run. This may mean that if they “buy down” their rate where they pay cash up front in exchange for a lower rate may be a good idea as the savings over the life of the loan will be significant. The temporary homeowner instead of trying to buy down the rate may consider it a better option to pay as little as possible up front to affect less their overall cash flow or access to cash. The best thing to do is find a good loan officer who can take your individual scenario and give you several options including the monthly costs and one time fees of each option.
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 is to reserve the actual running of the credit for when you’re ready to get approved. If you’re doing some shopping with multiple lenders, don’t provide your social security number or allow a credit check until you’re ready to sign with only one loan officer / brokerage or lender. The reason for this is that each inquiry against your credit will reduce your score slightly. There are some exceptions built into the credit bureaus that allow for multiple inquiries not counting against you that occur within a certain period of time (such as in the case of car shopping or even home shopping). However, if you know your credit score, you can usually get a loan officer to help you with some pretty accurate estimates based on the score. If you don’t know your score, you are entitled to a free credit report from each of the credit agencies at least one time per year. If you stagger this throughout the year, you can get a copy of your credit report every 4 months. Once from Equifax, Experian, and TransUnion. This will help you keep tabs on your credit as well as know your score.
Loan officers and mortgage brokers get paid one of two ways, either up front by charging you directly (like in the case of loan origination fees) or in the case of a “back-end” payout from the lender also known as yield spread premium. This is a compensation from the lender to the loan officer for selling the loan at a higher rate than the “par” rate. This isn’t necessarily a bad thing as it does allow for a no-cost refinance. What makes it bad is the fact that it is usually unknown to the borrowers. If they don’t ask about it or know about it, there is a possibility that the loan officer is offering a rate above what the industry would consider fair compensation for the work that is done. Asking your loan officer what the par rate is and how they are being compensated is a fair question. Although you won’t necessarily know the actual par rate, expect that a refinance may earn the loan officer somewhere around $800 to $2000 depending on the loan amount. For this industry, those may be just fine. If your loan officer won’t answer that question directly, you may look for a second opinion.
In conclusion, knowing about these few simple tips may save you thousands of dollars both on the overall cost of your home as it relates to the overall amount of interest you’ll pay or even to help you determine whether or not you should try to get a no-cost refinance and pay a higher rate or whether you should try to pay down the interest rate. The real key is to find a good loan officer you can trust. Use some of these tips to get a good feeling that who you are working with is reiiable and trustworthy. Failure to know about these easy tips could cost you thousands of dollars when you refinance.
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