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 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 in only a temporary situation or know that you will only be in your home for a shorter amount of time, instead of buying down the rate, your best option may be to lower your monthly costs as much as possible instead of coming up with more cash at closing. It may be that if the cost to buy down the rate is $2,000 which may save you $20,000 over the 30 years you’ll have this mortgage, of course it’s worth it. But you may also need to decide on the value of that same $2,000 if invested in another medium. For instance, how much would that same $2,000 be worth if invested in something like t-bonds or another sort of mutual fund, etc. Often, the interest rate on a mortgage is low enough that buying down the rate to get slightly lower may not be worth it. Run the numbers with a competent loan officer and you’ll have a good idea of what may best help you.
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.
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.