Easy Way to Happiness

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.

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.

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.