Refinancing: Save Money Five Ways
If your current mortgage rate is above 6%, you can probably save by refinancing to a lower interest rate. To maximize your refinance savings, look into these five ways to get discounts on your mortgage lender fees, title and escrow charges and interest rate.
1. Refinance with Your Current Lender
Your current lender might be able to save you some money on a refinance, if it is willing to offer you a competitive deal and if it is in a position to waive some processes and fees. If the lender that funded your mortgage still owns and services it, you have your best chance for achieving some savings -- perhaps in the form of waived origination, appraisal, processing, credit or closing fees. However, your lender may not be all that anxious to replace your 6.5% mortgage rate with a 4.75% rate. If your current lender comes to you with a refinance offer, be sure to get a Good Faith Estimate (GFE) showing exactly what interest rate it's offering and what fees will be charged. Typically, mortgage lenders offer their current customers low-cost refinance deals to keep them from going elsewhere, but the rate could be higher than what you can currently get on the market. Yet many homeowners accept it because it's easier than going elsewhere.
To get your best deal with your current lender, shop with other mortgage refinance lenders first. Get some GFEs to compare the costs involved. Then, contact your lender to get your mortgage payoff amount. Most mortgage finance companies have retention programs that are triggered by a "request for payoff;" odds are that you'll be promptly contacted by your current lender with an offer to refinance. Let whomever contacts you know that you have been offered a competitive interest rate to see if they can do better.
2. Try to Refinance Through the Home Affordable Refinance Program (HARP)
If you last refinanced a couple of years ago and have a "conforming" mortgage (one eligible to be sold to Fannie Mae or Freddie Mac), you may be surprised at the risk-based pricing adjustments that mortgage lenders add on these days. This is especially true if your loan-to-value ratio is high, your credit score is less than 740, you want to draw cash out, you own a condominium or manufactured home, the loan is for an investment property or second home, you need a loan with interest-only payments, certain ARMs or 40-year terms. The cost or combination of these costs may shock you. In the past, a credit score of 680 was easily high enough to get you approved for a prime mortgage rate. Today, it could get you approved, but you could end up paying several thousand dollars in pricing adjustments. With a HARP refi, however, you can still refinance to a lower rate, even if your home value and credit score have slipped a bit. As a bonus, the additional fees are limited to 2% of your loan's value. However, your loan needs to be owned by Fannie or Freddie in order to qualify, but luckily, millions of loans are.
3. Ask About a Fannie Mae Streamline Mortgage
Fannie Mae is expected to offer some form of streamlined refinance for borrowers with Fannie Mae loans by April 2010. To be eligible, you need to be approved through the same Desktop Underwriter (DU) software that it uses to underwrite HARP refinances, however, you'll need 20% equity in your home to take full advantage of discounts through the program. Ask your lender about Fannie Mae's DU Refi Plus when you're shopping for your mortgage refinance. If your current mortgage is guaranteed by Fannie Mae, you may qualify for a cheaper refinance.
4. Get a Short-Term Rate from Your Title Company
Title insurance companies offer various discounts for title insurance and escrow services, such as for first-time buyers, senior citizens, people in certain professions, a "short-term rate" for a property that has been resold or refinanced within the last five years, or a subdivision bulk rate for homes purchased in a new subdivision. Title companies may also offer a discount when both a lender's policy and an owner's policy are purchased at the same time. Discounts generally range from 5% to 30%, but you have to ask for them. Again, shop with a few title companies before checking with the one covering your current mortgage to see if its short-term rate is an improvement over other companies' rates.
5. Try a Shorter Mortgage Term
If you are willing to take on a 15-year mortgage, you can get an interest rate about half a percent lower than the 30-year rate. If you have already been paying down your mortgage for a number of years, your mortgage payment may not even increase by that much. For example, if you took out a $400,000, 6.5% mortgage eight years ago, your principal and interest payment is $2,528 per month. By refinancing your $354,627 balance at 5% on a 30-year loan, you'd get a new payment of $1,904 -- but it will take eight years longer to retire your mortgage. By refinancing to a 15-year mortgage at 4.5%, your payment would be $2,713. While your monthly payment would be $185 more, you'll pay off your mortgage in just 15 more years -- or seven years less than your original 30-year term. Another way to take advantage of a shorter term and lower rate is to refinance to a 5/1 ARM (a loan that comes with a fixed rate for the first five years then converts to an adjustable rate each year after that). Rates on 5/1 ARMs are typically 1% lower than for 30-year fixed-rate mortgages. The payment on that $354,627 at 4% is $1,693, or $211 a month less than the 5%, 30-year loan, for a savings of $12,660 over five years. However, you may be exposed to higher interest rates and payments when the five-year period ends.
It's not enough to get a lower interest rate if you want to maximize your savings with a mortgage refinance. Getting the best rate with the lowest fees involves comparison shopping, asking the right questions, selecting the most appropriate mortgage term and perhaps even a little gamesmanship with your current lender.
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