by Tom Murphy
NMLS # 662141
Home Services Lending
Shopping for a mortgage always involves plenty of shopping around and homework, whether it is a first mortgage or a refinance. As you are looking for that loan, there are a number of things that you should do and verify to ensure that you are making a good decision. Keep reading to learn more.
#1 Verify Potential New Payments with a Mortgage Calculator
Starting your research about mortgage refinancing with a good online mortgage calculator is always a smart move. Before you even think about refinancing, you should run several potential mortgage rate and term scenarios to see how much you might save in the short, medium and long term.
For example, you might run three refinance scenarios such as these:
- 4% interest rate for 30 years
- 4% interest rate for 15 years
- 3.75% interest rate for 5 years, and 4% for 25 years
Your new payment could be many different things depending upon the final, locked in interest rate and whether you choose a 15 year or 30 year loan, among many other variables. It is important to verify early on what you may save in the short-to-long-term on a refinance, so you know if it is really worth it in the end. Whether it is or not will depend upon many factors, and not just the rate and monthly payment.
For instance, if you plan to move in three years, the $200 per month you are saving in a lower payment could be eaten up by your closing costs to refinance. So, verifying potential refinance scenarios with an online mortgage calculator will tell you if it is even worth to refinance at all.
#2 Check What Your New Loan Term Will Be
There are valid reasons to get a 30 year mortgage and a 15 year mortgage. It depends upon your other financial goals and your general financial situation. If you have $25,000 in credit card debt and have no money saved up for college for your child, you could want to get a 30 year loan. This will keep your payments lower.
However, if you want to get your loan paid off faster so that you are free and clear on your home for retirement, getting a 15 year mortgage might be the way to go. It is very important to verify which loan term is best for your personal financial situation.
#3 Make Sure You Are Talking To 3+ Lenders
Mortgage rates and terms vary widely among lenders. It is smart to talk to one of each of these:
- Credit union
- Your community bank
- Direct lender
- Mortgage broker
Some lenders may have portfolio loans available that they keep rather than resell. These may offer more flexible terms.
Experts also advise finding a lender who you know and trust, and does not just offer the lowest rate. More than a few people go with the lowest rate they can find, and discover that there are many problems during the underwriting process because the loan officer makes mistakes or does not communicate well. The Federal Trade Commission posted various tips for consumers when they are shopping mortgage lenders online.
#4 Verify Loan Types Available
There are hundreds of mortgage refinance products out there to consider, including government-backed options, such as FHA (which you can consider if you are already in an FHA mortgage).
You should use a lender who has access to many types of loan products so that he or she can give you the best possible terms for your situation.
#5 Verify If There Is a Pre-Payment Penalty
There are some loans out there that will charge you a penalty if you pay off the loan early and/or refinance it. This guarantees a certain profit for the investor but is a raw deal for the home owner usually. Make sure that you new loan does not have a prepayment penalty.
#6 Verify All Rates and Fees
Your lender might entice you with that super low advertised ‘teaser’ rate. But it might be based upon you paying ‘points’ on your mortgage, which means you are paying a 1% of the loan being offered for the ability to get a lower rate.
For example, if you are taking out a new $200,000 loan, the lender might charge you one point for an interest rate ¼ of a point lower. This would amount to $2000. Whether this is worth it or not bears careful analysis, but you just need to be sure that you are verifying all of the fees and costs in your mortgage. Be sure that refinancing is financially worth it.
Experts say that it is critical to verify the following to be sure what your loan will cost:
- Interest rate
- Points paid
- Loan origination fee
You also should independently check the interest rate yourself that your mortgage lender quotes you on the day you are locking in your rate. Those rates bounce around a good deal from day to day and you want to be sure you are getting what was promised.
#7 Know Your Closing Costs
Exactly how much you will pay to refinance will vary. Experts tell us that you will pay from 3-6% of your loan principal to refinance. For a $200,000 loan, this comes out to $6000 to $12,000. If you are saving $200 per month in payments on the new loan, that is $2400 per year. Now you need to ask yourself how long you intend to stay in the home.
If your mortgage refinance closing costs are $6000 and you are moving out most likely in two years, you probably are going to lose money if you refinance. But if you plan to stay in your home for 10 years, you can usually justify paying closing costs for a refinance, if you are saving at least $75 to $100 per month.
Refinancing is often a great idea as you will save money in many cases. But review all the lending disclosures, consider costs and verify all of the above to make sure you really are getting a great deal.