You waited long enough – interest rates are right where you want them so you are ready to refinance. Before you jump in head first, you should ask your lender the following important questions.
What is the APR?
Don’t let yourself get so focused on the interest rate that you forget about the APR. The APR is the total cost of the loan, including the closing costs in percentage format. It gives you a better idea of what the loan actually costs you.
Sometimes loans with low-interest rates actually have high APRs because of the excessive fees charged. The APR can help to keep you in line and avoid you from refinancing when it’s really not worth it. It’s so easy to get caught up in the low-interest rate that you completely overlook what the loan will cost in the end.
Is There an Origination Fee?
If you are using a lender other than your current lender, you may pay an origination fee. Even if you use your current lender, don’t just assume they won’t charge it – ask them. Lenders charge an origination fee when they think an applicant has a risk of default. Unless you have exceptional credit and a super low debt ratio, you have some level of risk of default; it’s only natural.
Not all lenders charge the origination fee, but if they do, it can really make your closing costs get expensive. One point in an origination fee equals 1% of your loan amount. If you have a $200,000 loan, that’s $2,000 on top of all of the other closing costs.
Can You Pay a Discount Fee?
The discount fee is an optional fee. If you want to buy your interest rate down, you’ll pay the discount fee. Lenders usually discount the rate 0.25% for every point that you pay. Each lender has their own pricing structure, though.
Make sure you look at the big picture before you decide to pay the discount fee. First, will you stay in the home long enough to realize the savings? Remember, you have to pay off the closing costs before you truly start putting the savings in your pocket. Also, is the savings enough to make it worth it? If you’ll only save $25 a month, do you really want to pay thousands of dollars? It will take many years for it to make it worth it.
When Can You Lock the Rate?
Just like when you bought your home, you need to lock the interest rate. You’ll have a certain amount of time to close the loan before the rate lock expires too. Luckily, you can usually take a smaller lock period with a refinance because you don’t have to do any of the legal work that was necessary when selling the home.
Make sure you know the cost to lock the rate (if any) and the consequences of an expired lock. You don’t want to find out the hard way that you’ll have to pay to re-lock your interest rate because you locked it too early.
What’s the Turnaround Time?
If you are in a hurry, such as is the case with some cash-out refinance loans, you’ll need to know how long it will take the lender to process your loan. don’t be afraid to ask what the turnaround time is and what you should expect as far as a closing date.
If you are getting cash out of your home’s equity, you’ll want to know when you’ll receive it. Plus you need to schedule your life around the closing. For example, your closing date will affect when you have to make your first payment. If you have a month off, you can use that extra money that you’ll save to cover your closing costs. If you close at the beginning of the month, though, you won’t have that month off; your first payment will be due the next month.
Who Will Service Your Loan?
Finally, you should know who will service your loan before you close on it. If the lender doesn’t do their own servicing or they know they will sell your loan, you’ll need the details of where your loan will land. Just because you like the lender you are using now doesn’t mean that you’ll like the company that services your loan.
The loan servicer is actually the company that you’ll have the most communication with so you want to make sure that it’s a company that you like. If your lender can’t tell you exactly who will service your loan, they can at least tell you the possibilities of who will so that you can do your research and decide if it’s the right loan for you.
Take your time to ask your lender these important questions before you refinance. They will give the answers that you need to make the best decision about your refinance. Since you already own the home, you aren’t under any pressure to refinance like you were when you bought the home and needed financing. This time around, you’ll have more time and be able to make clear choices.Click to See the Latest Mortgage Rates»