Family Finance Help

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 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 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.

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.