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Should You Refinance If You Can Drop Your Rate By 1%?
I’ve seen articles where financial “experts” advise refinancing a California (CA) home mortgage only if you can drop your rate by 1.0% or more. This is WAY over-simplified in my opinion. In some situations it may make sense at 0.250% and in others it may not make sense at 1.500%. Consider these two scenario’s:
John is exploring refinancing. His current rate is 5.500% and he is considering a no-cost refinance at 5.250%. He can reduce his payment by $100 per month. Because his break-even time is zero (it will cost him zero dollars to do the refinance, and he will save $100 per month) the refinance may make sense to him.
Dave is also exploring the possibility of refinancing his CA home mortgage. His current rate is 6.500% and he is considering a refinance at 5.000%. The closing costs and points on the refinance are $9,000. If he goes ahead he can reduce his payment by $300 per month. His break-even time is 2-1/2 years (30 months) because $9,000 divided by $300 = 30. The refinance may not make sense to him because he may be moving house in 2 years time.
As mentioned: the “1% rule” is way over-simplified when you consider that:
Dave may be 1 year into his current 30 year mortgage and John may be 5 years into his.
Dave and John’s loan amounts may be different, and because of the way amortization works the viability (or not) of refinancing will be different for each of them.
In a nutshell: it is a huge oversimplification to say you should refinance your mortgage if you can drop your rate by 1.0% because there are many other factors to consider. Although I am not a licensed financial planner or CPA I am licensed to originate mortgage loans in California and therefore am happy to take your mortgage related questions.
Can A Lender ‘Guarantee’ You An Interest Rate For “x” Number of Days?
A client called me yesterday. She’d received a letter from a lender who ‘guaranteed’ her a rate of 4.750% for the next 30 days. If rates change several times per day – how is this possible? Well, that’s a simple one: if the market moves in the wrong direction before her rate is locked the lender would simply increase the points.
If you are a California home mortgage consumer you by now know that my goal is to arm you with as much information as possible so let’s get into this a bit more….
Brokers are paid either by you (the consumer) or the lender they send your loan application to. Sometimes it’s a combination of both. It all depends on the interest rate. For example, after entering your information (estimates of your credit score, loan-to-value ratio, debt-to-income ratio etc.) into their search engine a broker will come back with a range of interest rates and costs or ‘rebates’ from the best (lowest rate) lenders.
For example; with a set of specified parameters the search may produce the following result:
Option 1: 4.750% interest rate with 1% “cost”. This means that the broker would have to pay the lender 1% of the loan amount (1 point) for that interest rate. Therefore they would need to charge you 2 points (1 point = 1% of the loan amount) to get you that rate and make 1% profit for themselves.
Option 2: 5.000% interest rate – “PAR” – in which case the lender pays zero to the broker and therefore the broker will charge you 1 point to make a 1 point profit.
Option 3: 5.250% interest rate – 1% “rebate” – in which case the lender pays 1 point to the broker and therefore they can charge you zero points to make a 1 point profit.
Option 4: 5.500% interest rate – 2% “rebate” – in which case the lender pays 2 point to the broker and therefore the broker can process a “no points or fees” loan for you. In this scenario the broker would pay all your third party title fees (title, appraisal and lender fees etc.) and still have enough money left over from the lenders rebate to make a profit.
The interest rate at which each of these deals are available changes in real time throughout the day. So, as you can see, all a lender or broker has to do to guarantee you a specific rate is to NOT guarantee your closing costs and points.
The Best Mortgage Shopping Strategy In Existence
First, you have to decide if you are actually a mortgage shopper at all. If you’re well seasoned you may have already come to the conclusion that mortgage rates and closing costs (lender, title company, appraiser) are a commodity and you may be already using this strategy.
If you do describe yourself as a mortgage shopper then my recommendation is to learn as much as you can about the mechanics of the market. Specifically, how mortgage lenders work with brokers, why they don’t compete with their own brokers, and what drives mortgage rates. As you learn more about the last item you will come to the realization that it’s not “who has the best rates?” but who is best at understanding what drives mortgage rates and is the best at TIMING your rate lock. That is the key!
So, the best shopping technique is to establish a relationship with a seasoned mortgage professional and let him or her know you are using this strategy. Then go to various websites (their rates are closer to real time rates than say a newspaper) and find a site you perceive to have the best deal. Then, call your mortgage professional and tell him or her about the best deal you have seen on the web. Being the client-focused person they are will go that website and check it out. Almost always they can match that deal because that website is also a mortgage broker and therefore will be working with the same lenders and using the same search tools they do.
This strategy gives you the best of both worlds.
What Constitutes a No-Points-Or-Fees Mortgage?”
For as long as I have been originating mortgages there has been one lender who has had the lowest rates, day after day after day. At the time of writing they are number 3 nationwide in terms of volume. They are BIG!
In order to make sure I am offering my clients the best deal possible I am constantly researching their options, and so I went to this lenders site to see what they were offering. On that day I was able to offer a no points or fees conforming loan at a rate of 4.875%. When I went to their website I saw that they advertised the same deal,
This surprised me because lenders don’t normally compete with their brokers. They believe in the “don’t bite the hand that feeds you” philosophy. I clicked on the Good Faith Estimate and, sure enough there were no fees indicated. So I called them. The person I spoke to said “yes, there are no fees, although of course you will have the normal title insurance charges and third party fees like appraisal costs (totalling $1,800).
Yesterday I received a call from a referral who had been ‘offered’ a no-points-or-fees deal from his bank on their website, but when he called them they said the fees would be $2,600!
All I can deduce from this is that this must be legal (otherwise the third biggest lender in the nation wouldn’t do it).
From my viewpoint, if I ‘quote’ a client on a ‘no-points-or-fees’ deal then they will literally walk away from close of escrow paying ZERO non-recurring closing costs.
What Constitutes a Cash-Out Transaction And How This Can Affect Your Interest Rate
What constitutes a ‘cash-out’ transaction varies in the eyes of each lender but generally speaking, if you are going to walk away with more than $2,000 at the close of escrow it is a cash-out transaction and you will usually end up with a higher interest rate or points cost if that happens.
You should also be aware that if you are paying off a Home Equity Line of Credit (HELOC) then, generally speaking, that will trigger a cash-out ‘hit’ also.
An experienced loan professional can help you navigate through these issues and find the best way to structure a deal to help you get the lowest rate and lowest costs for your own personal situation.
Do You Want The Lowest Price Or The Lowest Overall Costs?
A friend of mine bought a house several years ago. To keep his costs low he hired an ex builder to do a pre-purchase inspection of the property instead of the more expensive property inspection companies.
To cut a long story short; this mistake cost him his house, his marriage, hundreds of thousands of dollars, and destroyed his credit. He avoided bankruptcy by a hair’s breadth.
In a misguided attempt to save money it had, in the end cost him a LOT more money than he saved. He had chosen to go with the lowest price versus the lowest overall cost. Rarely do the two go together.
If you are in the market for a mortgage you may want to ask yourself what is YOUR priority? Sure, you can find plenty of lenders or brokers who offer you very low pricing, but if the loan doesn’t close how much will that cost you in extra payments over the life of the loan?
There are many reasons why making the wrong choice could cause your transaction to be a non event. Therefore you must make sure that there is one person who the buck stops with on your mortgage transaction. You should also make sure that your loan agent has a track record of closing mortgage transactions – especially in low rate environment where lenders and brokers are overwhelmed with applications.
Remember: if your rate is locked the clock begins ticking from the day of the lock, and it needs a lot of competence, persistence, focus, organizational, and multitasking skills for an agent to close your loan.
If you find the right mortgage professional you CAN get the lowest price and the lowest overall costs.
Why Do The Numbers On The GFE From Your Broker Differ From Those On The Lenders?
If you apply for a mortgage and apply through a broker there is a good chance that the Good Faith Estimate (GFE) from your broker will contain different numbers to the one supplied by the lender.
This is because, at the early stages of the application, the lender doesn’t know (or care) what agreement you and the broker have made. If you’ve applied for a no-cost mortgage with a mortgage broker for example, all the lender knows is that they will be paying the broker for finding the applicant and for processing the application. They do not necessarily know that the broker will be crediting the borrower for their closing costs.
If you have any questions regarding CA home loans please do not hesitate to contact me.
Maximize Your Savings When Shopping For A Mortgage Online
Many sites give you the option to “Shop 4 Lenders” or similar. The theory is that if you contact 4 different lenders you can get a better deal. As you know; if you shop for a mortgage using the same techniques you use for other products you mayrun into trouble.
If you don’t have a recommendation of an experienced and trustworthy mortgage broker from a friend or relative, or you have never worked with a loan agent you’re happy with, then this may be your next best option. As always, the most effective way to get the best deal is to find someone you trust and form a relationship with that person.
Mortgage shopping sites which connect you with lenders who compete for your business are simply lead generation services for mortgage loan agents and brokers. It’s as simple as that. They gather your information and then sell it to 4 or more mortgage companies.
After hitting the ’submit’ button on these sites you should get 4 calls fairly quickly. Your goal should be to find someone you feel good about and then check out this person’s website, testimonials and background.
If you have any questions about California mortgages or refinances, give me a call or send me an email.
What Commitment Are You Making When You APPLY For A Mortgage?
Once you’ve found a mortgage professional ‘employed’ by a California mortgage broker you trust, then the next step is to fill out an application. The broker will then send you the loan application, numerous disclosure documents, and a Good Faith Estimate (GFE) for signing.
The first question is usually; “what does this commit me to?” and, although I am not an attorney, I think you’ll find, on closer examination, that the answer is nothing.
At the application stage, and until the interest rate is locked, there are too many unknown’s for any type of binding contract to be created, even if it was legal to do so.
For example; until the rate is locked the interest rate and points (if applicable) won’t be known. (in my clients interest I personally would never lock a rate without their permission, but that is a subject for another post).
Regarding the disclosures, that is all they are: documents which disclose to you items of note. For example: you’ll sign a broker’s privacy policy and a form authorizing the mortgage broker to pull your credit and contact your employer etc. Another form states that you won’t be discriminated against in any way. So, on most forms, all that you are signing is that you are aware of what is being disclosed in them or that you agree to certain actions by the broker or direct lender.
Finally: the Good Faith Estimate can ONLY be an estimate at the application stage (see other posts on this subject).
In summary: none of the above COMMIT you to closing the loan with the broker or lender who supplies you those forms. You only reach the point where you cannot back out at the very end of the process when you sign the binding loan documents at the title company and even then you have a 3 day cooling off period on a refinance in California.
There’s a huge difference between application documents and closing documents and hopefully this clarifies the issue.
If you have questions regarding CA home mortgages please feel free to contact me.