How To Analyze The Real Cost Of Refinance

By the end of this article you will discover the one question to ask your lender during a refinance and why it could save thousands of dollars in mortgage payments.

Everyone is thinking about refinancing. You know what I mean, don't you? Mortgage rates are the lowest in a lifetime.

Every day mortgage brokers, loan officers, and mortgage bankers receive phone calls from frenzied borrowers wanting to refinance, especially in these times. Accordingly for many of us interest rates have never been this low and may never be lower again. It is a perfect time to take advantage of the current mortgage rate environment.

Undoubtedly most borrowers that intend to refinance ask one standard question. If I were refinancing, what would my interest rate be?

Here is the problem. When borrowers don't end up with the rate quoted over the phone, they often feel they have been mislead. But there is a reason. The public doesn't understand how to evaluate a refinance.

The truth is lenders know that interest rates vary based on a borrowers credit profile, income, and work history.

In addition the value of the property versus the loan amount, often referred to as loan-to-value (LTV), can influence your interest rate too or may require additional costs such as mortgage insurance.

So you can't hang your hat on interest rates quoted over the phone or viewed on the internet. That means at best these interest rates are merely ball park numbers.

Here is a little known secret. The most important question you need to ask your lender if you intend to refinance is what will it cost me?

You probably can understand that multiple charges are incurred during refinancing. Certainly, one of those costs is the interest rate you are going to be charged. It is the most important one but not the only one.

Consequently if you want to know the true cost of refinancing ask your mortgage lender to prepare you a Good Faith Estimate (GFE) upfront before you apply for a home loan.

Did you know a Good Faith Estimate is an itemized estimate of the costs to obtain a mortgage? You should ask for a GFE in the first conversation with a prospective lender whether you are buying a house or refinancing your existing home loan.

You can even ask for more than one if you want to compare different loan products although it means more work for your loan officer.

Either way when you refinance, there are costs incurred in connection to the loan such as loan origination fees, loan discount points, appraisal, credit report, processing fees, underwriting fees, tax service fees, and others.

Equally important there are also the costs related to title and escrow such as closing fees, preparation fees, notary and attorney fees, as well as title insurance.

Other fees included are related to government recording and transfer charges as well as any miscellaneous additional settlement charges that may be required.

All the above charges are one time costs sometimes referred to as non-recurring closing costs.

There are also costs that may be required by the lender called recurring costs such as interest to be paid in advance depending upon what day in the month you close. Lenders call this prorated or prepaid interest. Other prepaid costs may include reserves required by the lender for hazard insurance, mortgage insurance, property taxes, or flood insurance.

The third category addresses the need for the loan officer to be paid. The Good Faith Estimate should include the mortgage lenders compensation often referred to as a yield spread premium (YSP).

The YSP may not appear to affect the bottom line of your refinance because it is technically paid by the lending institution. But in fact the yield spread premium can affect the interest rate you receive which in turn affects the long term cost of your loan.

So be sure your lender discloses all the costs for obtaining a mortgage, including who is paying them and how much. Your mortgage company deserves to get paid as long as it is disclosed and within reason.

Move down to the end of the Good Faith Estimate form where you can view two sections containing the total estimated funds needed for closing the loan and the ongoing mortgage payment estimate. This is your true cost to refinance. If your broker provided Good Faith Estimates for more than one mortgage program, peruse them for differences in the funds to close and mortgage payment columns.

Plan for enough time when you go in to escrow or the attorney's office for signing documents to compare the good faith estimates to the final calculations.