Shopping for a mortgage can be about as much fun as going to the dentist. And after going through it once, the thought of doing it all over again with a mortgage refinance might feel more akin, in fact, to getting a root canal. A long, complicated root canal.
We know it's not the kind of thing anybody wants to do. But refinancing can be lucrative; we're talking major cash -- right in your pocket. In fact, American homeowners are missing out on at least $13 billion a year by not refinancing their mortgages. And, just like when you did it the first time, it pays to shop around. Sure, your current lender might be the best bet. But if you don't look at other options, you could be leaving money on the table.
Here are some things to consider when shopping for a mortgage refinance -- and some tips to make it as painless as possible. (You're on your own with the root canals, however.)
1. Do you really need a mortgage refinance?
Of course this is the first question to answer. And it's likely you do, since mortgage rates are currently hovering around all-time lows.
We've got a handy calculator that can show how much money you can save if you lower your rate by even as little as half a percentage point. Say, for example, you've got a $300,000 mortgage. With a 3.5% rate, you'd be paying roughly $1,450 each month. Lower that rate by a mere half percentage point, to 3.0%, and your payment dips to $1,387. Of course, you would gladly accept an extra $100 a month, plus you'd pay about $22,000 less in interest over the life of the loan.
2. Should you stay with your current lender?
You already have a mortgage, and it seems so easy to just stick with that provider. And that can be a great option, says Bob Melone, loan officer at Radius Financial Group in Boston, provided you're happy with their service.
"Often I find that people think about refinancing because they get a letter in the mail or hear a radio ad, and their ears perk up at the amazing rates that are quoted," Melone says. "But what borrowers fail to realize is that getting those quoted rates might require something crazy like 50% equity in the home and a near-perfect credit score. By starting the conversation with your existing lender, you can sort through conflicting information with someone who is giving it to you straight."
3. Should you find someone new?
Maybe you feel that your current lender isn't doing enough to woo you. And perhaps there's someone else out there who could give you what you want -- which is, in most cases, a lower rate.
This is especially true if you're currently working with a big bank.
"A consumer would be smart to consider a direct lender who services their own loans," says Luis Hernandez, branch manager and loan originator for New American Funding in Chicago.
That means that whoever is processing your refinance is also going to work with you through the life of your loan. In addition, he adds, direct lenders might be able to offer a zero-closing cost refinance, since they're interested in developing long-term relationships with clients.
Worried about the deluge of paperwork that a new lender might require? The stack of paperwork is likely to be similar even if you stay with your existing lender.
4. How do you find the right lender for a refinance?
With so many lender options available, how do you know where to begin? Melone recommends talking to a local real estate agent whom you trust.
"They not only know whose rates may be the most competitive, but also who the better mortgage loan officers are -- those who will take the time to talk you through the details of the loan you are considering," he says.
And although we're advising you to shop around, beware of casting too wide a net. Limit your search to two to three lenders to avoid becoming overwhelmed.
"If you get a good feeling from them, I would stop there, because they are giving you enough of an overview of what's out there without completely confusing you," he says.
5. What should you look for in a mortgage refinance?
"Most lenders will provide you with a detailed report so you can see what the fees are and can compare apples to apples," Hernandez says. Here's what you should pay attention to:
- Rates: Since rates fluctuate daily, you should ideally make your queries to various lenders on the same day.
- Closing costs: Compare the fees with what you'll save, to make sure you're at least breaking even. For example, if closing costs are $3,000, and you're saving $100 a month, it will take 30 months to break even.
- Closing time: You want to make sure that your rate is "locked" (meaning that it can't go up) for a sufficient amount of time between application and closing -- probably around 45 days. "Your rate lock is even more important on a refinance than a purchase," Melone notes. When you purchase a home, you're liable to buy it even if rates tick up, but with a refinance, a higher rate could mean that it no longer makes sense.
- APR: Everyone talks about interest rates, but fewer people talk about APR, or annual percentage rate. But this can be a more accurate way to compare the total cost of loans. APR combines the interest rate with the closing costs to create the total cost of a loan, expressed as a percentage. While not every closing cost is captured in this number -- the credit report, appraisal, title insurance and inspection fees might be extra -- it will include such biggies as origination fees and mortgage insurance.
- Terms: Make sure the lender outlines the terms and what will happen if it sells your loan. "Terms are unlikely to change even if they sell it, but it's wise to ask," Melone says.
Like what you see? Ask for a "loan estimate," the official document that binds a lender to the terms for 10 days.
And with that, your shopping is done. All that's left is to decide is how you'll spend that "raise" you've earned.