Tip #1 - You don't have to wait until mortgage interest rates drop by 2 percent before you consider refinancing your mortgage.
The decision to refinance your home is dependent on many things, including how long you plan to be in the house, how much lower the interest rate will be on your new loan, the closing costs for the new loan, your equity position in the home, and whether you plan to do a cash-out refinancing.
With a plain-vanilla refinancing, you're trying to take advantage of lower interest rates to lower your monthly payments. If you have enough equity in your home, you may even have a side benefit of being able to stop paying Private Mortgage Insurance (PMI).
To take advantage of a lower rate you'll have to close on a new loan and pay the closing costs associated with that loan. That's true even if you opt for a no-cash or low-cash closing. With a no-cash or low-cash closing, the costs still are there, they just are paid for either with a higher interest rate or are included in the principal balance of the loan. (There's truly no such thing as a free lunch.)
If you don't plan on being in the house very long, then the lower payments associated with the refinancing won't cover these closing costs. Our refinance calculator will help you estimate your new mortgage payment, closing costs, and the months that it will take you to recoup those closing costs.
Don't worry about the points you paid at closing on your current loan when you're considering a refinancing. They aren't relevant to the analysis because they're sunk costs.
Look instead at what you can save going forward. Compare APRs when deciding between loans. You may be able to refinance with your current lender and pay less in closing costs, but you need to be sure that its rate is competitive.
You'd rather refinance once and lower your interest rate by a point or more than do multiple refinancings for smaller interest rate savings.
Tip #2 - It may not be chaper to refinance with the same mortgage company
It just seems logical that it would be easier and less expensive for your existing lender to refinance your home. After all, they know your payment history, and they know the property.
The lender may not need a new property appraisal, a title search or other items that would normally be required on a new loan. They should also be willing to offer a better price because it's easier to keep a good customer than it is to find a new one.
The holy grail of refinancing is when the lender just reduces your interest rate and doesn't require you to close on a new loan. This can only happen if you are just rolling your existing balance and aren't looking for a cash-out refinancing.
So, why doesn't it happen more often? The problem is that the mortgage market is divided into three lines of business: mortgage origination, mortgage servicing and mortgage lending.
If the firm that originated your existing mortgage didn't retain the servicing, then you aren't a current customer. If the firm servicing the mortgage doesn't do originations in your market, then they may not be interested in your business.
Finally, mortgage investors are looking for packaged or securitized mortgages that are part of a pool of mortgages, so they aren't interested in your stand-alone business.
Ask your current servicing provider what cost savings they offer to current customers who refinance with them. You also need to find out what terms competing lenders offer.
Saving a few hundred dollars in closing costs doesn't mean much if you can get a lower interest rate from another lender. Compare many lenders for low rates before talking to your current servicing provider, so you will be able to recognize a good deal and use our refinance calculator to determine your refinancing savings.
If you are going to apply at several lenders, you should do it within a 30-day period. Your credit score won't be hurt by comparison shopping for a mortgage if you concentrate your applications within this time frame. That's because Fair Isaac & Co. Inc. (the company that works with the credit reporting agencies to provide your credit score to lenders) considers these multiple mortgage inquiries as one inquiry when calculating your credit score.
Tip #3 - There is an important difference between the rate and the APR.
The annual percentage rate adjusts the mortgage interest rate to reflect estimated closing costs, including points paid at closing and mortgage insurance.
The Truth-in-Lending Act requires lenders to provide the APR when advertising a mortgage loan and provide prospective borrowers with the loan's APR upon request. APRs aren't perfect, since closing costs are estimated and the lender can round off by up to a quarter percent.
In general, neither the lender nor anyone else may charge you a fee until you have received this information.
With so much refinancing taking place, you need to have confidence that your lender will be able to complete your loan origination in a timely and efficient manner. Ask the lender for references, and check them out with the Better Business Bureau.