Time to Refinance your Mortgage?

If you haven’t refinanced in the last year it’s probably worth looking into. Interest rates depend on many factors, which I’ll list shortly, but “headline rates” (i.e., those available to borrowers in the best circumstances) are under 4% for a 30-year fixed mortgage, 3.25% for 15-year fixed, and about 2.5% for 5- or 7-year ARMs.

Factors that affect the rate you can be offered

  • Loan amount. If you are trying to borrow more than the conforming loan limit (currently $417k in most parts of the country) then you are looking for a “jumbo” mortgage, which always carries a higher rate because it can’t be easily resold.
  • Loan-to-value (LTV): The ratio of your loan to your property’s assessed value. You’ll get the best rates with LTV < 60%. Anything above 80% carries extra premiums.
  • Your credit score. Scores above the mid-700s are considered “prime” and qualify you for the best rates.
  • Employment history and income: You need to show that you have stable income sufficient to cover the loan.
  • Cash reserves: You need savings sufficient to cover the loan during a period of unemployment.
  • Purpose of the loan: Best rates are for financing your primary residence.
  • Cash-out refinancing: This generally increases the cost of the loan.
  • What state the property is in.

How to shop for a mortgage

Bankrate.com gives the broadest view of lenders. The problem is that you may waste your time contacting some of those lenders because they have listed “teaser” rates and then tack on excessive fees.

I just refinanced my mortgage using Costco where quality control should be a little tighter and lenders listed agree to make their most competitive prices. If you go through Costco you should expect to pay the lender less than $600. I will cover other costs shortly.

In any case, while shopping for a mortgage do not give out your social security number or consent to a credit check until you have picked a lender you actually intend to use: Every lender that runs a credit check can reduce your credit score by 5 points.

When contacting prospective lenders just give them the information they would need to produce a good-faith estimate (GFE). Since a GFE is now a regulated and legally-binding item they won’t actually give you a “real” GFE until you start an application with them, but they can give you something like it if you give them enough information to price a mortgage. When I call lenders I simply ask something like, “Can you give me rates and fees for the following:

  • Refinancing a mortgage with a $200k balance on my $400k single-family primary residence in Pennsylvania.
  • Assume that my credit scores are prime (i.e., above 750), and that I will clear underwriting for debt, income, and assets.
  • Quote me rates without points.

The most important number I’m looking for is their interest rate, and in order to make it easy for me to compare across lenders I ask for rates with “no points.” (“Points” are up-front premiums for a lower rate, which may make sense to pay when you close the loan, but which only confuse things at the shopping stage.)

The second thing I’m looking for are their fees. This is where it can be tricky depending on which state you are in. There are a lot of fees involved with processing a loan, but when it comes down to it there should only be 3 parties collecting money during the transaction:

  1. The lender/broker. As I mentioned before, their fee should be under $600, and it covers their cost of underwriting and processing the loan.
  2. The appraiser. Independent appraisals are now effectively mandatory, and shouldn’t vary across lenders. Typically you are billed directly by the appraiser. For my recent refinance this was $375.
  3. The title/transfer company. This is the biggest variable by state, and is usually highly regulated. I just refinanced in Pennsylvania, so what follows is only necessarily true there: Bizarrely, title insurance rates are set so high that profit margins are above 70%. Lenders tell you that you can choose your own title company but that since rates are regulated you may as well use theirs. Not so fast: Call the company that last insured/processed your mortgage, tell them you’re refinancing and that if they can offer you any concessions you’ll choose them. They may not be allowed to offer you a discount on the title insurance premium, but mine waived almost every other charge they are legally entitled to levy, saving me $500 (and still keeping a handsome profit for themselves).

If you go ahead with an application be ready to sign absurd numbers of disclosures and authorizations, and to produce a lot of documentation. For my refinancing I had to provide the following:

  1. 2009 and 2010 Federal tax returns (all pages)
  2. 2009, 2010 and 2011 W-2s
  3. 3 recent pay stubs
  4. Recent mortgage statement
  5. Savings account statement covering last 60 days
  6. Copy of driver licenses
  7. Copy of social security cards

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