Mortgage refinancing: understanding pricing variances
If you spend any amount of time searching for the best mortgage rate, the first thing you'll notice is that it's harder than it looks. Rates vary by geography: mortgage rates in Texas are different from mortgage rates in California. Rates vary according to your desirability as a borrower, and rates vary depending on the program you choose and the amount that you are willing to pay. You can't control all of these variables, but why not take care of the ones you can?
You can't always get what you want....
But it helps if you know what it is. Understand your limitations (small down payment? little equity? credit problems?) and your objectives (pay less interest? get the lowest payment? cash out?).
Pick your product
Don't choose a 30-year fixed-rate loan by firing from the hip. Pay attention to the length of time you plan to keep your home. Did you know that you can save about 1 percent on your interest rate by choosing a loan fixed for 5 years? If you don't plan to keep your home forever, that's a legitimate choice in home loans.
Ditto adjustable rate mortgages -- yes, that may be the quickest way to the "best mortgage rate" in the short term, but it could increase what you pay over the life of the loan. When comparing products, throw FHA loans into the mix if equity is a challenge.
Paying for what you get
You'll probably notice that the better the mortgage refinance rate, the more it costs. So these costs (disclosed on a Good Faith Estimate) need to be accounted for when you compare mortgage rates. When does it make sense to pay more for a lower interest rate? When ALL of the following are true:
- The APR of the more expensive loan is lower.
- You plan to stay with the mortgage and keep the property for the entire term of the loan
It gets more complicated if you know that you will keep your home for a few years but not forever. When deciding if you should pay more to "buy your rate down," compare the difference in costs with the difference in payments. For example, if you'd have to spend an extra $2,000 to save $25 a month on your payment, by dividing $2,000 by $25, you'd see that it would take over six years to make the more expensive loan pay off.
Refinancers who shop for their mortgages with several lenders avoid paying more than necessary. The more deals you look at, the more likely you are to recognize a good one.
Make yourself a better borrower
Finally, one rule of thumb is that for every 20 points that you increase your credit score, you get an average 0.12 percent off your refinance mortgage rate.