The whole point of refinancing a home mortgage is to save money, so don't accidentally leave precious dollars on the table! A little bit of due diligence is all it takes to ensure that you get the best deal possible, even if it can seem overwhelming at times. Before you sign on the dotted line, follow a few easy steps recommended by the experts to help you save the most money possible on your refinance.
There are about a million lenders out there (banks, credit unions, online websites, etc.), so it can be dizzying to figure out who to talk to first. Consult with friends, co-workers and family who've refinanced already and had a positive experience to obtain solid recommendations. "It's really important for customers to talk to a lot of people and find out what is a good deal," says Tony Garcia, market manager for Wells Fargo Home Mortgage.
Once you've whittled down the lender pool to some serious contenders, it's time to visit them. Just keep the number to a manageable amount. "Personally, I wouldn't call 15 different lenders because that's a lot of information to process," Garcia says, suggesting that three quotes is a good starting point and should paint a good enough picture of what to expect, and what's fair.
Compare and Contrast
You'll want to make sure that the interest rate (IR) you're being offered is in keeping with current rates and is therefore competitive. A website like Bankrate or NerdWallet will let you know what the current mortgage rates are nationally. Bear in mind, though, that the interest rate you're actually offered may be higher than the standard rate, reflecting your personal credit score, how much debt you're carrying and other factors.
Although the IR is a good jumping-off point, it's only the first in a series of important numbers that should be considered. "Get a full picture of the overall fees, not just the interest rate," Garcia says. In particular, he says to compare the annual percentage rate (APR), which is a more accurate way to understand how much the refi will cost you. This is because APR is the interest rate depicted in yearly form, plus all the various fees and costs associated with the loan process. Examples of such fees include closing costs, broker fees, title fees and appraisal fees. Most lenders will post both the interest rate and the APR rate on their websites. For instance, Wells Fargo's website shows that a 30-year fixed rate mortgage has an interest rate of 3.625 percent and an APR of 3.75 percent.
Also, it's important to realize that refinancing may not necessarily be worth it, depending on how long you plan to stay in your current home. "To make refinancing worthwhile, consider how the closing costs and the breakeven point – the time it will take you to recover the money it costs to refinance – will affect your overall finances," explains Michelle McLellan, senior vice president and product management executive of home loans with Bank of America in an email. (For instance, closing costs of $3,000 and a monthly savings of $200 in a refinance means it will take 15 months to break even. You'd need to staying in your house for longer than that to make a refi worth your while.) Failure to do so could seriously affect your bottom line, leading a customer to feel shortchanged.
Pick Your Person
For some people, establishing a long-term relationship with a lender is just as important as saving money. "It's not always about the cheapest amount," Garcia says. "You are looking at a relationship for life."
Others don't really care about the relationship as long as they see the financial benefits. Garcia also points out that it's not unusual at all for companies to transfer the servicing of a mortgage immediately after closing. "Your loan can potentially be sold every 12 months," he says. "Some bigger, national companies do not do that as much. That's something to consider, as it may or may not be something that bothers you."
Before choosing a lender, decide on a few things. Do you care whether your loan is sold? Do you want the convenience of walking into a local bank to make a payment and/or talk to someone who really knows your loan? Or are you fine with online transfers, auto-withdrawal and talking to any old representative? There's no wrong answer; it all comes down to personal preference.
McClellan also recommends looking into whether or not rewards are offered by your existing bank before getting too far down the line. For instance, some banks offer thousands of credit card points, airline miles or other perks if you take out a loan with them. "Leverage the relationship you have with a lender where you already do your everyday banking and participate in rewards programs as lenders offer their customers special discounts and incentives on products and services," she says. However, since rewards change all the time, don't let them be your primary decision-maker for which lender to go with. Closing costs and the interest rate are more important.
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