When you consider that most homeowners don’t know too much about refinancing, we assume that people learn some of the key phrases that mortgage companies use to advertise their refinance programs. These phrases are things like “no cost”, “no points”, APR, streamline, closing costs, an many more terms that don’t do much more than get people in the door. Once you’re in the door, you will then need to determine whether or not you want to work with the loan officer you meet. Hopefully he or she is someone that was recommended to, but even if not, you can use the following tips to help you determine if the individual you’re working with is good.
The first tip that I have for you is to do your due diligence by shopping around. Don’t automatically go sign up with the first office you visit unless you’ve at least talked with a couple of other loan officers and know that the first one you visit is the best. Several mortgage companies now have a lot of valuable information on the internet and finding their websites can be relatively easy to do. This will help you do some priliminary research before you decide to go with one company over another. Getting several quotes will at least give you a better idea of what a good rate is. Be cautious of the traditional bait and switch where a company will get you in the door with a low rate only to have a lot of additional fees and “points”. Make sure you’re comparing apples to apples and get the entire cost, not just the APR.
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.
The third tip is to evaluate your monthly cash flow and how it can be affected by a refinance to reduce rates vs. to have a no-cost refinance. Most homebuyers will most likely not hold onto the same loan for the duration of the mortgage. What this means is that whether the borrower refinances within 6 months to 2 years down the road or sells the home, or otherwise changes lenders, the purchase “down” or buy down of the interest rate has cost more than you would have saved by buying down the rate. This isn’t to say that it is never worth buying down the rate, but with your loan officer, do the calculations so that you understand how long it would take in monthly savings to justify the cost of buying down the rate. Your loan officer should be able to help you make this calculation and help develop a loan product that will work for your specific scenario.
Also, if you don’t know how long you’re going to be in a home, whether there for a shorter amount of time, or have plans to “upgrade” to a new neighborhood within a few years, buying down the rate may not be the very best option. You may have more success financially if you focus on keeping your monthly cash outlay to a minimum and reduce the amount of capital required to close the loan. There are many good loan officers that will help you determine which program is the best for you. For instance, if you spend $3,000 to buy down the rate from a 5% to a 4.5%, you may save $30,000 over the life of the loan if, and only if, you keep that loan for the full 30 years (assuming a 30 year fixed mortgage). There is a break even where when you spend $3000, your break even may be 3 years or 4 years. A point in time when the buy down of the rate ends up being a better value to you than if you were to not buy down the rate at all. The same may be true for paying a higher rate to cover all of the closing costs through a no-cost refinance. Evaluate this with a good loan officer and you’ll have an idea about what would be the best thing to do with your loan officer.
The fourth tip is to reserve the credit check for the loan officer and broker you decide to go with. This shouldn’t matter too much as the credit bureaus made some changes with how multiple inquiries within the same period of time affects overall credit score. The answer is that the credit adjusts as if it were only one inquiry. Also, to keep an eye on your own credit, you have the option to get a free credit report from each agency once per year. What this means is that if you request your credit report every 4 months, you’ll have a good chance of seeing not only what is on it, but your score as well. The three agencies are Experian, TransUnion, and Equifax.
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.
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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