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Updated on Thursday, June 27, 2019
If interest rates are dropping, you’re almost certain to be inundated with flyers and emails urging you to take advantage of refinancing to lower your monthly mortgage payment. Your current lender may be quick to offer you a refinance, sometimes with little paperwork and low closing costs.
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It might be tempting to just work with the company that you’re already making payments for and save some money, but you should definitely shop around to make sure you’re getting your best deal before you refinance with your current lender.
How do I know it’s time to refinance my mortgage?
Before you go looking for a refinance lender, you want to make sure the timing is right. Determining if it’s time to refinance often starts with determining what your financial goal is with the refinance.
If you’re primarily concerned with lowering your monthly payment, the first thing you want to look at is how much you can save. There are also a number of other reasons to refinance, including to take cash out to pay off other debt or to make improvements to your home.
Once you’ve established the reason for your refinance, you’ll want to determine the most cost-effective way to complete the refinance. You obviously start by looking at the interest rate, because that will have the most impact on your monthly payment. However, you also want to look at what it costs you to get that rate.
Looking at the annual percentage rate, or APR, is always a good benchmark to determine the costs associated with a mortgage transaction. Unlike your note rate, the APR reflects the costs of your rate over the life of your loan.
You should always back up your APR comparisons by calculating the breakeven point on each refinance offer you receive. You simply divide your closing costs (not including property taxes and insurance costs) by the amount you’re saving.
The resulting number represents how long it will take you to recoup the costs you spend to complete your refinance. The lower the number of months to recover your costs, the sooner you’ll realize the savings on your refinance, and the better the deal is for your bottom line.
Pros and cons of refinancing a mortgage with your current lender
How to shop for a refinance loan
Not all lenders will be as competitive with a refinance loan, preferring to focus their efforts on people who need mortgages to buy new homes. That’s why it’s important to shop around several different lenders so you know you’re getting your best rate and lowest costs to maximize the benefit of your refinance.
Step 1: Gather basic information you’ll need to start getting quotes
To make sure you get accurate loan estimates, you want to provide the same data to each lender. Here’s a quick overview of what you should have handy:
- Current mortgage statement: Your current mortgage statement has information about your total current payment, interest rate and even mortgage insurance premiums, property taxes and insurance. This information will allow the lender to provide more accurate cost estimates based on the terms of your current mortgage versus the new one.
- Date you took out current mortgage: This date is important to determine if you might be eligible for streamline loan programs offered by lenders that require very little documentation, and may not require an appraisal. Government loan programs by the FHA (Federal Housing Administration) and VA (Veterans Affairs) in particular offer streamline refinance programs, and if you’ve had your loan at least seven months, you may be eligible.
- Estimated FICO Score: If you don’t fill out an online application, you’ll need to make an educated guess about what your credit score is. It’s better to actually have the lenders run your credit to confirm your score — inquiries made on the same day by several lenders only count against your credit as one credit pull, so you don’t have to worry about a sudden drop in your scores.
- How much your house is worth: One of the best methods for getting a good ballpark on your home’s value is to have the agent who helped you buy your home do a comparative market analysis (CMA). They will look at nearby similar homes that have sold recently (usually within the last 90 days) to determine how much your home might be worth currently. Keep in mind if your home appraisal comes in low, your rate and costs could go up.
Step 2: Compare rates from multiple lenders
Once you have your information together, the best thing to do may be to see what kind of quotes you can get elsewhere. One way to immediately get feedback from several different lenders at once is to use a site like LendingTree, which is MagnifyMoney’s parent company and one of the biggest online marketplaces for different types of loans.
You just answer some questions via an online form, and you’ll be matched with potential lenders who participate in the marketplace. You’ll get quotes by email or phone, giving you a baseline for comparing offers from lenders besides your current one.
You can also call local lenders in your area, or ask for a referral from a friend or family member who recently refinanced.
Step 3: Get all the quotes on the same day
Interest rates fluctuate much like the price of stocks — daily. That’s why it’s important to get all of your quotes on the same day. With an online marketplace, the process is relatively easy, because all of the lenders will usually contact you the same day you make your online inquiry.
If you call around to local lenders, you may or may not get calls back that day. If that’s the case, use the rate quotes you received on the same day for comparison purposes. If you call another lender on a different day, the market may have shifted and you won’t be comparing apples-to-apples price quotes anymore.
Step 4: Take your best quotes to your current lender to see if they’ll negotiate
Once you’ve got your price quotes in hand, take your best of the best to your current lender and see if they’ll compete. Be sure to consider extra flexibilities your current lender gives you, like waiving an appraisal inspection, or allowing you to roll over the balance of your escrow account.
If your current payment includes a portion for your property taxes and insurance, then you have an escrow account. An escrow account is simply a savings account the lender creates to pay your property taxes and insurance when they come due, and is required on loans if you have less than 20% equity in your home.
If you refinance with a lender besides your current lender, you’ll have to set up a new escrow account, and that means extra money out of your pocket at closing. However, you do end up getting a refund of whatever is in your current lender’s escrow account so you often get most if not all of the funds you spend on the new account back.
What if I find a better deal and they won’t match it?
If your current lender won’t match or at least cut some costs to match the rates you’ve provided, then you will likely want to choose the outside lender. Be sure to request a rate lock, and get it in writing before you completely give up on your current lender.
The rate lock period holds the price of your rate for a specified time period, usually 30-60 days, and you’ll need to complete it within that time period for the lender to honor the price.
The decision to refinance your loan with your current lender may come down to one of convenience rather than economics. If you are at least getting the benefit of some monthly payment savings, and your current lender is offering you a streamlined documentation refinance without an appraisal, it may be worth your time to take the offer, even if the rate is slightly higher than the other lenders you shopped.
If, on the other hand, you want to maximize your savings and don’t mind jumping through the paperwork hoops to prove your creditworthiness to a new lender, then choosing a new lender for your refinance may be your best bet.