By Doris Fitzgerald
Author of How To Keep More Of What You Make!
Ignorance is bliss, so we have been told. Not so when it comes to getting the best possible refinance. You can't just blindly blunder your way into refinancing your home with the first person who calls you on the phone. Who are they? Do you know them? How do you know they are telling you the truth? At the time of this writing home mortgage rates are lower than they have been at any time in the last 45 years. Every home owner in America receives an average of five calls from mortgage brokers a week. In the last decade it has become routine for a person to refinance every couple of years. If you don't know these simple strategies, you could wind up paying thousands more than you should, either in up-front fees, or in higher interest rates and higher monthly payments.
| 1 |
Use a Mortgage Broker.
You need someone you can trust. Someone local that you can meet with face to face, someone you can get to know on a first name basis. You need someone who knows the ins and outs of the industry leading your way. Someone who's not locked into working with any one lender. You need a professional mortgage broker. Brokers work for you, not one particular lender. A loan officer in a bank gets paid whether or not he gets you a loan. A mortgage broker only makes money when she succeeds in finding you a loan. Brokers generally have hundreds of loan programs available to them, while bank loan officers have only a handful. Banks often force you to open an account with them to get the best rate on your loan. |
| 2. |
Use an experienced mortgage broker.
Every time falling interest rates creates a refinance market the mortgage industry turns into a feeding frenzy of shark like inexperienced sales people jumping into the market to feed on easy pickings. Last week they were car salesmen, this week they are "loan officers." The very obvious problem is that they know nothing of the business, and can jeopardize your chances of approval unless your loan fits into the "easy-squeezy category. An experienced loan officer can find exactly the right loan for you, instead of trying to force you to fit into the only loan program he knows how to do. Unless you are trying to help "cousin Ernie" to break into the mortgage business, rely on someone with experience. |
| 3. |
Keep on eye on the fees.
A loan officer should be charging no more than one "point" for the loan origination fee. A point is one percentage point of the loan amount. If he is charging more than a point "on the front," ask if he is receiving a rebate from the lender "on the back." Most lenders will pay the broker a fee to sell you a slightly higher interest rate. This can allow a broker to keep his own rates down to one point. If his rates are higher, make sure he's getting you the very lowest rate offered by the bank, and not taking a rebate from the lender. |
| 4. |
Beware of 'no fee' loans.
Every lender has to charge some sort of loan fee to cover the costs involved in processing the loan. If they are not charging you a fee on the front, you are getting a higher interest rate than you would if you paid a fee. Possibly a much higher rate. No-fee loans aren't necessarily bad, just be aware that you don't get something for nothing. Ask your loan officer to compare the real costs between a no fee loan with a higher interest rate, and a low interest rate loan with a fee. Make sure you compare what you spend on fees with what you spend on monthly payments. Another tactic they may try is to wrap your fees up in the loan amount. If they tell you the loan will cost you nothing "out-of-pocket" it means they intend to have you borrow their fees and pay interest on them for the life of the loan! If this is the only way you can get a loan, then fine, but realize that you are paying a fee, and in this case, paying interest on that fee. Make sure you're getting a rock bottom rate. |
| 5. |
Better credit scores = lower rates.
Credit scores have become critical measures of the probability that you will repay a loan. The higher the scores, the higher the probability you will repay. When lenders feel less risk, they lower the interest rates. If they feel threatened, they raise their rates. Credit scores have become the standardized way of evaluating the risk a particular borrower presents. Lenders now use credit scores to quickly approve high score borrowers, quickly weed out low score borrowers, and help concentrate their approval time on the moderate scoring borrowers. This has led to greater efficiencies for the lender, but sometimes the borrower feels like they have no control over the scores they receive. Fortunately you can determine what your scores will be by your financial behavior. Keep your scores up by paying your bills on time, keeping your existing mortgage paid on time, and never letting a creditor report you late. Whether you are paying on a car, a boat or your house, never let your payments get behind. Any creditor who will report your payment history must be kept happy. This will keep your scores high, and make the lowest interest rates available to you. Keep the number of credit lines to at least two but not more than four. This shows the lender you can be trusted to pay your debts, but that you don't have too much debt. Remember that credit scores take into account the last twenty four months of your financial history, so, even if you have lower scores now, you can improve them over time. |
| 6. |
Keep your LTV Low.
The LTV or Loan to Value Ratio is the ratio between the value of your home, and amount of your loan. If you can keep your LTV below 80% you can avoid mortgage insurance and save hundreds per month on your payments. This may not be possible if you are also seeking to receive a large cash back amount. Consider taking less out, to keep your LTV low. |
| 7. |
Keep your debt payments low.
Your debt to income ratio is one of the most important factors a lender will look at. It could determine what interest rate they will give you, or whether or not your loan will be approved. Depending on which type of loan you are seeking, the ratios will vary. However, most lenders want to see your house payments less than 30% of your total income, with your total debt payments less than 41% percent. If you're thinking of buying a car or a boat, put it off until after the loan has gone through. |
Doris Fitzgerald is a loan officer for Financial Advantage in Everett, WA. She specializes in helping renters become owners. Her expertise is in finding zero down loans for just about anybody. She may be reached by calling 425-357-9643. You may purchase a copy of her book, How To Keep More Of What You Make! in our bookstore here. |
