Refinancing your mortgage can be a smart way to reduce your monthly payments and cut down on the amount of interest you’ll pay over the life of your loan. But it’s important that you choose the right lender to make the best financial decision for your home and budget.First things first: What exactly is refinancing? Simply put, refinancing is the process of replacing your current mortgage with a new one with different terms. There are several reasons you might decide to refinance. Maybe you want to take advantage of lower interest rates to secure a lower monthly payment or to shorten, or even lengthen, your total loan term. You also might want to change the kind of mortgage you have, such as switching from a fixed rate to an adjustable rate.
You might be able to secure a lower interest rate because the market shifted, or perhaps your credit score has improved since you first took out the mortgage, making you eligible for better terms. Currently, interest rates are hovering around 4.375% for a 30-year fixed loan for someone with good credit. Rates have been creeping upward over the last year, but you may still benefit from refinancing if you took out your mortgage back when rates were higher.
There are two main types of refinancing: traditional and cash-out. With traditional refinancing, you take out a new loan with a new rate and term. In cash-out, on the other hand, you take out a loan bigger than your remaining mortgage and get cash for the difference, which can then be used for remodeling, debt consolidation or another big expense. You’ll want to decide which approach to take before you get too far into the process.
What makes one mortgage refinance company better than another?
There are many types of mortgage refinance lenders to choose from: banks, credit unions, mortgage companies. In addition, you can take out a loan through a mortgage broker. Regardless of what type of lender you choose, it’s very important to do some comparison-shopping.
The cost of a refinance will vary from lender to lender based on their interest rates, the fees they charge and other terms of the loan. That’s because each institution is different and their costs and regulations vary based on their location, operating expenses, profit margins, risk assessment and more. Credit unions, for example, often have lower interest rates because they are nonprofit and member-owned. And if you use a mortgage broker, you’ll have to pay a fee for his or her services.
If you’re happy with your current mortgage lender, that’s a probably a good starting point in your search. Because you’re already a customer, they have your information (although they’ll still require updated documents). They also may be willing to waive certain fees and costs to keep you around. For example, if you have a prepayment penalty on your current mortgage — a fee charged for paying off a mortgage early — your current lender might agree to waive the fee to keep your business.
Otherwise, you should look for lenders whose rates and fees are in line with other comparable lenders and who are responsive to questions you have. All lenders and brokers should be able to give you an estimate of their fees.
And just as you look at Yelp! reviews before choosing a restaurant, you should read reviews on mortgage refinance lenders, too. Two good places to start are the Better Business Bureau website and the Consumer Financial Protection Bureau’s (CFPB) Consumer Complaint Database. Also, take a look at market research firm J.D. Power’s U.S. Primary Mortgage Servicer Satisfaction Study, which measures customer satisfaction in seven areas.
How to find the best mortgage refi company for you
The best mortgage refinance company is the one that most closely meets your needs. Maybe you’re new to refinancing and need a lot of handholding, maybe you need to close quickly or maybe you just want someone to do the legwork for you and get you rates and terms to compare. And of course, it’s important to work with a reputable company as well. Use your goals to guide your choice.
For many people, cost is king and they want the lowest refinancing rates available. Just keep in mind that the interest rate itself doesn’t tell you the whole story. You need to also consider points if they’re added on to your refinance deal. Points are fees you pay, typically at closing, in order to lower your interest rate. In general, the more money you pay upfront in points, the lower the interest rate. Ask any lender for the loan’s APR (annual percentage rate), not just the interest rate, because that takes into account points, broker fees and other charges you might have to pay. If you’re looking at an adjustable rate, ask whether the loan payment would go down if interest rates drop.
Many borrowers place a high priority on customer service, particularly if they’re not familiar with the refinancing process. If you’re feeling wary of the paperwork, working with a company known for its responsive service may be especially important. You can do some “gut-check” research by seeing how user-friendly the company’s website is, and how responsive they are to your questions.
If you’re in a time crunch to close on your refinance, you’ll want to ask potential lenders the average time it takes them to close.
Compare quotes and pick the best option for your situation
When you shop around, you’ll find that rates vary from lender to lender. You can start by reviewing advertised rates listed on the company’s website or in an advertisement, but the actual rate you get could be quite different. That’s because the advertised rate will require borrowers to meet a host of specific criteria, such as their credit rating and their loan-to-value ratio (LTV). The better your credit score, the better your interest rate is likely to be. The same is generally true for your LTV, the relationship between the amount borrowed and the home’s value. The more you have paid off on your home loan, the lower your LTV.
The terms you’re seeking in the refinancing also affect your rate and may result in a different offer for you than the advertised rate. Given all these factors, you need to contact different lenders directly to get quotes personalized to your situation. Advertised rates can give you a ballpark idea of different rates, but they won’t tell you exactly what you can expect.
Apply for a loan from several lenders to see what terms they can offer. Each lender is required to provide you with a Loan Estimate document within three business days of getting your application. This detailed breakdown of costs and fees will show you the interest rate, monthly payment, closing costs and more, and will give you a preliminary picture of your true costs.
Be sure to compare “apples to apples” — that is, scrutinize the same loan terms across different lenders. If you’re considering a conventional 15-year loan from one lender, for example, request the same from the others as well. Once you have several offers, negotiate with the different lenders. Let them know you’re comparing their terms to those of their competitors. By encouraging lenders to compete against each other, you can help yourself secure the best deal.
By carefully comparing your options and negotiating, you can save thousands of dollars on the cost of your refinancing. To do this, put in care and effort throughout the process, and you will end up with a refinancing deal that helps you meet your financial goals.