How To Lose Thousands When Refinancing

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.

Most lenders will have a prepayment penalty. This second tip is to make sure you know what the prepayment penalty is on your current loan before you spend the time shopping for a new lender. If you have a large prepayment, it may offset any benefit from the refinance. You may still end up with a lower rate, but knowing if you have a prepayment penalty and what it is should be a priority. Most lenders typically have a 120 to 180 day prepayment penalty. This insures that even if you refinance after only 120 days, they’ll still have had an opportunity to cover their costs and make some profit while they’ve held onto the loan. Some lenders do have a 90 day prepayment policy. This information is great to know also both from your existing provider as well as the lender you’re about to sign with so that you know when you can next refinance in the event that rates are good or there is another cause for refinancing.

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 is to work with a loan officer that isn’t going to “rip you off” when it comes to the backend payouts that the loan officer receives from the bank. This payout is called Yield Spread Premium (YSP). As an example, if the loan officer sells the rate for 1% higher than the par rate or the rate the lender is offering, then there may be a payout of a certain percentage of the loan amount paid to the loan officer broker. The loan officer or mortgage office will use this YSP to cover things like the loan origination fees, the appraisal, and any other misc. fees that are typically associated with a refinance. This is not a bad thing especially if you know about it. What happens too often is that the loan officer knows that you the borrower don’t know anything about this YSP and so will increase the rate by more than is really ethical or moral. Don’t be afraid to ask your loan officer what they are making on the loan. This is the same as asking what a loan origination fee should be. You may get a feel with this one question how honest and trustworthy your loan officer is. Also, the fact that present your awareness of the YSP to the loan officer will usually be an indication that you know enough about loans that you aren’t a customer to be taken advantage of. This often may be enough and alone this tip may save you thousands over the life of the loan.

The main points to take away from this article are that you can save a lot of money if you’re aware of the numbers involved and have a basic understanding of how mortgages work. If nothing else, you can use this information to help you identify a good mortgage broker or loan officer from a loan officer that does not have your best interests in mind. Refinancing doesn’t have to be difficult, but expect to put some work in to this as your home is typically your most expensive purchase and is worth a little caution when dealing with the financial side of home ownership.

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