I will admit. I am frustrated. I have been in the mortgage business for a long time. I have seen lenders come and go (they jump in when things are great but leave when things get tough). Well, the market is flourishing and there are new lenders popping up everywhere. But that’s not why I am upset.
I am frustrated because it seems like many lenders are hiring inexperienced Mortgage Loan Originators and training them on how to sell rather than on how to structure a loan for the benefit of the borrower.
For instance, here are some common sales tactics I see being used on borrowers interested in refinancing to a lower interest rate and three quick questions you should ask yourself in order to make sure you are doing what is best for you:
- Pop-up Ads. Don’t be blinded by flashy, low rates and monthly savings without finding out the total costs. The lender may spotlight how much you would save by locking into their low low rate. However, you need to weigh that savings against what you are paying in closing costs to get that rate. In some cases, the costs are so high, that it would take more than 10 years to recoup.
- Catchy Catch Phrases. If a lender offers “No closing costs”, it sounds great but what it usually means is you lock into a higher than market rate to offset the closing expense that the lender pays on your behalf. This is not necessarily a bad thing. The key is making sure you are choosing the “no closing cost” option because it makes the best financial sense for you to do so, not because you think you are getting something for free. If a lender tells you that you will have “Zero funds out of pocket”, this does not mean there are “No closing costs”. In most cases it means that you are rolling your closing costs into the loan.
- Where Are The Closing Costs? It is easy to not worry about the loan costs if you can just roll them into your loan AND still save money on your mortgage payment each month. However, rolling closing costs into the loan means you are adding the costs to the amount you owe. Sure, doing this usually has very little impact on our monthly payment. However, it depletes the equity you have in your home so it is important to determine whether you will recoup the cost before you plan on selling the home.
- The 30-Year Stretch. This is when the lender has you focus on the savings you will have over the life of the loan. They will say things like, “If you are saving $30,000 over the life of the loan, who cares if it takes you 10 years to recoup the costs?” Well, you care! Your plan is to move in 3–5 years. The refinance needs to make good financial sense for your specific needs.
If you are thinking of refinancing your current loan to a lower interest rate, ask yourself three important questions:
1. How long am I planning on staying in this home?
If you plan to move in two years, but it takes five years to recoup the costs of refinancing, you are actually losing money by refinancing.
2. How much am I saving each month?
Compare your current monthly Principal and Interest payment to the proposed monthly Principal and Interest payment. Or Click here to determine savings.
(Note: If you currently have mortgage insurance on your loan, you will want to factor that in as well. Your savings could be even higher. If you aren’t sure how to do, speak to a mortgage professional to determine the full savings.)
3. What is my total cost to refinance?
You want to look at the actual costs that you will incur for refinancing. Closing costs usually include lender fees, appraisal fees, title, and gov’t fees. Be sure to get a cost estimate from a mortgage professional that you trust.
Next, divide the total cost by the monthly savings to determine the number of months it will take you to recoup the costs, or just use our simple Should I Refinance? calculator to help you figure it out.
Once you have the answers to the above three questions, you are on the road to making a wise financial decision.
If you’re in Florida and are looking to refinance your mortgage, consider working with us!