Finance

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 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.

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 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 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.

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.