If you’re looking to lower your interest rate, monthly payment, or number of years it’s going to take to pay off your home mortgage loan, perhaps you’re looking into refinancing. Even lowering your interest half a percentage point can save you tens of thousands of dollars; according to the Fair Isaac Corporation, a $450,000 home loan with an interest rate of 3.954 percent produces a monthly payment that is $144 lower than a loan with a 4.567 percent rate, saving $51,706 in interest over the life of the loan.
With this in mind, it makes sense for many not only to refinance, but to truly shop around for the best refinancing package they can find. Shockingly, the Consumer Financial Protection Bureau (CFPB) finds that a whopping 77 percent of consumers stop the shopping process after their first application. The same report found that shopping around can find you better deals by more than half a percentage point than by going with the first lender you see. So how do you select the best mortgage refinance lender?
Before you begin actually shopping around, you’re going to want to get a few details together. This includes:
Having all of this information on hand will not only provide you with a more accurate estimate, but should help to expedite the whole process.
Additionally, pull your credit reports from each of the three major credit bureaus (TransUnion, Equifax, and Experian) to show that your credit score hasn’t gone down and to make sure that there are no mistakes before you present your application. Recognize that your credit score is going to help to determine your refinancing options, and a credit score of 740 or higher is generally going to get you the best deal on most loan programs. Many lenders require a minimum of between 620 and 640 before they’ll issue loans. Something else to look it is your debt-to-income ratio (DTI) because even if you have a high credit score, you may be subject to higher interest rates and even denied refinance altogether based on high DTI. Many lenders suggest you make sure your DTI doesn’t reach over 36%, and the lower your DTI gets the better refinancing options you’ll be met with.
Before getting on to the shopping process, it’s also worth it to contact your original lender to see if you can renegotiate your mortgage. It’s possible that they may waive certain fees associated with refinancing so that they can keep your business. Write down your lender’s offer, and begin shopping around--but remember, your loan officer and every other officer, broker, and entity offering loans is looking to make a sale. This doesn’t mean anything negative, just that due diligence is required on your part to secure what’s in your own best interest.
According to Fannie Mae the most common source of home-loan advice is delivered by mortgage lenders themselves, despite the fact that they may not be the most objective parties. However, banks aren’t the only place one might consider loan-shopping. Credit unions, which are basically the same as banks, except that they are member-owned nonprofits, are some of the best places to start searching for mortgage rates. Nevertheless, plenty of alternatives exist to the credit union and bank, including consumer finance companies, alternative mortgage lenders, mortgage marketplaces and even mortgage brokers.
Mortgage brokers are great sources of information because their job is to literally compare lenders services and find you the best rate. Of course, the borrower has to pay them a fee for their work, and they are usually paid a fee by the lender for making a sale--but the costs associated with a broker may be greatly offset by the potential thousands saved by a better interest rate. For those with the know-how wanting to aggregate information themselves, online tools are a great way to avoid broker fees while maintaining an overview of options.
The biggest things that you want to look at when selecting a mortgage refinancing lender are going to be costs and service. A good faith estimate is a legally required document that provides transparency on any costs associated with seeking a loan, including fees for closing, points, processing, filing, and other legal fees. These good faith estimates are important because one loan provider might be charging more for legal fees while the other is able to offer a lower interest rate. When you factor that in with understanding the terms of your loan, such as the amount you’ll be required to pay monthly, the number of years you’ll be paying the loan off, the interest rate, the penalty fees including penalties for paying off the loan early, and any other associated fees, you’ll have a comprehensive view of the cost.
When it comes to service, you want to make sure that you’re working with a lender who answers your questions in a timely and accurate manner, and that you’re working with somebody you trust. "People get too wrapped up in the rate rather than finding someone who will communicate with them," says Russ Anderson, senior vice president and a centralized sales executive with Bank of America in Los Angeles. "You need to find someone you trust, who will be engaged in your family's financial situation."
Anderson’s advice is pertinent, because not only are you going to be reviewing multiple packages to select what works best for you, you’ll be providing an abundant amount of personal information. On top of that, a lender that isn’t punctual may not have your loan ready in time for closing. It’s not uncommon for final documentation to become available days or even hours before closing, so finding a lender who will coordinate and keep track of everything will provide you with peace of mind.
When looking at different loan options, there are certain things to keep in mind:
The average closing cost of a loan is usually about 2 percent of the loan amount. These costs can be paid for in cash, though there are multiple ways that you can handle paying for them.
The fees associated with a refinance such as closing costs, lender fees, etc., can be paid in a multitude of ways. As the name implies, closing costs are often paid at closing, but can also be packaged in as part of your loan balance or diverted for a “no-cost” refinance, where the lender pays the fees and the borrower pays more on their interest, generally at a rate of between .125 percent and .25 percent.
Shopping by APR can get a little confusing, as two loans with the same APR may have completely different interests rates and fees, and vice/versa. To clear the confusion, it’s usually best to shop for lenders by focusing on interest rate and fees because they’re usually to two biggest factors.
Portfolio loans are offered by lenders as “in-house” options that aren’t available to a secondary market. These loans are usually incentivized to attract business to the particular lender and can end up being more flexible and packaged with special promotions.
After you’ve decided on your loan and your lender, you should determine when to lock in your rate. Oftentimes lenders will offer a rate lock of between 30 and 45 days, so consulting with them on the appropriate time to lock in, as the cost of extending the lock or of re-locking in the loan will usually end up costing more money.
Selecting a lender might be tough, but the amount of money you can save by selecting the correct one offering interest rates just a half percent lower than their competitors can literally save you thousands of dollars. Shop around and select the lender that’s right for you. You deserve it.