5 cash-saving tips for mortgage refi's
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
I want to share with you the most common questions I receive from Orange County homeowners considering refinancing, along with my answers.
1) I’ve already paid for three years on my 30-year home loan. How can I take advantage of lower rates without restarting the clock?
Answer: Most lenders have the flexibility to write your new note and deed of trust for an uncommon number of years – like 27 years.
If not, you can make additional principal payments each month to accelerate your payoff date. To do that, ask your loan officer to provide you with an amortization table for your desired number of years in addition to the contract rate amortization table.
Let’s say the difference is $100 per month. Simply add that amount as additional principal (and notate on the check the addition is for principal reduction) on each monthly check you send to your loan servicer. Or, set-up an automatic ACH monthly withdrawal for that exact amount from your checking account.
2) How much should I pay in closing costs?
Answer: Ever since the Great Recession, the government is bent on a mortgage pricing bias that supports minimum or no closing costs. They want you spending your hard-earned money on equity preservation or down payment money in the case of a purchase.
I know 2.5 percent sounds better than 2.875 percent when it comes to a 15-year fixed rate. On a $417,000 loan, the 2.5 percent rate has a monthly payment of $2,781, while the 2.875 percent rate has a payment of $2,855. The monthly payment difference is $74.
But the 2.5 percent rate costs approximately $7,000 in points and fees while the 2.875 rate provides you with a no-cost loan and $2,200 of additional rebate money to use toward escrow impounds, prepaid interest and principal reduction. That is a savings of $9,200.
Take the $74 monthly payment savings and divide that into the $9,200 spread. It takes you better than 10 years to recoup your costs for buying down the rate. Take the higher rate and no-cost.
3) Do I lock or float the interest rate?
Answer: If you are happy with the rate, just lock. Don’t get greedy. Rates can get worse just as easily as they can get better.
4) Who offers the best deals?
Answer: Programs, rates and fees are in a constant flux. Start with recommendations from your family, friends and co-workers. Shop one depository institution like your bank or credit union, a mortgage banker and a mortgage broker.
Study after study proves shopping will improve your chances of finding a better deal. Make sure that they all run your credit within 15 days as that gives you the best chance of counting as one inquiry in terms of points off of your credit scores. Inquiries can run anywhere from 2 to 5 points off your score.
5) What if a lender says you don’t qualify and declines you?
Answer: Make sure you apply elsewhere, getting the same general answer from at least 3 separate sources. It’s common that one creditor may have stricter rules than another. And, ask them for a game plan to solve your problem if you cannot get funded.
Jeff Lazerson - Mortgage Columnist since 2011