How do I choose the best mortgage refinance lender?

December 5, 2011 8:13 PM

I'm 4 years into a 30 year fixed mortgage with Wells Fargo, at a 6.75% interest rate. With rates around 4% now, I ran the numbers and decided to refinance.

This is my current breakdown:

Monthly Principal & Interest: $1,807.07
Total of 360 payments: $673,225.37
Total interest paid: $384,900.37
Payoff Date: 9/2037

And the breakdown with a 4% refinance I calculated online:

Monthly Principal & Interest: $1,308.3
Total of 360 payments: $470,987.24
Total interest paid: $196.949.54
Payoff Date: 11/2041

I did a basic search online and found lot's of refinance options, many from lenders I'm not familiar with. They all had around 3.8%-4.0% rates with varying amounts of APR's. Some of the APR's were even $0.

I want to just pick the one with a $0 APR and the lowest rate, but I'm not totally sure what I'm dealing with. How should I go about figuring this out?

I figured I would just do a little research on the lender and then talk to them to see what other costs there would be associated with their offered rate.

Also, I've also seen FHA loans at 2.0%. What's the opinion on those? They seem way too good to be true.

posted by blunt_eastwood to Work & Money (13 answers total)

You'll see lots of great numbers out there but until the lender does an appraisal, I don't think you'll *know* exactly what you're going to get.

For example, we bought at the height of the market (in the last affordable neighborhood in our city). Well, it's even more affordable now thanks to the economy, etc. So, one bank could offer us one rate, if we qualified. Well, we didn't. We went back to our lender and looked at refinancing under HARP and did an appraisal. If we qualified for that our rate was around 5%. Not the best rate but better than what we had. So, I think you're seeing best-case-scenario rates.

I also think you could go through a mortgage broker for your refinance and see what they might be able to get for you.

And if you're underwater on your house, know that after the first of the year, there are supposed to be some new rules to help such people. Take that with a grain of salt but do know that if you can't get a regular refinance due to a low appraisal, you may qualify for HARP but likely only your original lender will give it to you.

On the FHA loans, contact them and ask. Can't hurt.

This is all anecdotal based on my recent experience. I am not an expert.
posted by amanda at 8:36 PM on December 5, 2011

Hmm, in your calculations above, both scenarios have 360 payments, but there is a 4 year difference between the payoff dates ie wouldn't the 2nd option would require an additional 50 payments. ??
posted by lulu68 at 8:52 PM on December 5, 2011

lulu, the difference is because he's comparing his current costs vs. what's available, and is already 4 years into his current mortgage.


Also, be aware that a lot of lenders have different rates for purchasing vs. refinancing. I just (Friday) closed at 3.875%, refinancing on a 30-yr fixed, but I had to jump through a lot of hoops to get there. Also, the appraisal was a big shocker. County is taxing me at $309,000 and the appraiser came out, shook the magic 8-ball, and said $227,000. Which would have left me paying PMI, but because that put the LTV over 80%, I qualified for HARP and wound up paying no PMI (because I wasn't before, at ~65% LTV).

Pays to shop around and see what your options are.

But yeah, went from 5.875% to 3.875%, for a very nice reduction in monthly mortgage payment.
posted by xedrik at 9:11 PM on December 5, 2011

Thanks, xedrik - I figured I was missing something big in the calculations.
posted by lulu68 at 9:19 PM on December 5, 2011

You need to talk to a mortgage broker. The numbers you're giving us are just estimates. No one is going to be able to give you an accurate picture of what you're going to be able to get except a person who is actually offering you terms on a refinance.

Note that many refinancing agreements come with charges like origination fees, which can easily be several thousand dollar, so you need to take that into account as you're running your numbers. Again, no one but a person offering you terms is going to be able to tell you what those fees are going to be.
posted by valkyryn at 4:38 AM on December 6, 2011 [1 favorite]

You need to talk to a mortgage broker

And at least one credit union, who often have more humane rules, fees, and operating practices.

Also make sure to phone Wells Fargo and ask them about refinancing options. I used to have a mortgage with them and they were miserable to deal with in every way -- except that they offered me a no-fee, no-appraisal refinance that took all of about 15 minutes to complete. You are already in their system, and they may be able to beat other banks on at least convenience and possibly price as well.

It's really helpful to make a chart or list of the various options, because you end up comparing things that aren't quite the same, in order to figure out which is cheaper in the long run. Is it worth paying more interest in order to have a no-fee refinance? Or should you do the opposite? Comparing both monthly and total costs is the only way to figure this out. And make sure to check the small print, to make sure you aren't signing up for something with unpleasant surprises like adjustable interest, balloon payments, or early repayment penalties.
posted by Forktine at 5:12 AM on December 6, 2011 [1 favorite]

Aside: APR rates look tempting, but it is basically impossible for the interest rates to go much lower, but very, very possible for them to go much higher over the next 30 years. You get an APR when interest rates are high and likely to drop, and you get a fixed when interest rates are low and can't drop further. If you can get a 4% fixed rate, the chances of you getting much lower than that are extremely low (and will probably involve major economic crisis.)

Secondly -- one of the reasons your payment is dropping is your making payments for 34 years (4 under the original loan, 30 under the current.) If you can afford the payments, in the long run, you'd be far better off trying to shorten the term of the refinance.

It looks like you are talking $274K loaned on this refi. If you drop the term to 20 years, then you are looking at $398,492 total payment and a $1660 monthly -- thus, paying only $124K in interest. This saves you $140 a month from your current payment, roughly $70K in interest payments over a 30 year refi, and $260K in total interest over the current loan -- or, if you will, by refinancing into a 20 year loan, you pay less per month, you own the house in 24 years, not 30, and you save basically *the cost of the house* in interest payments.
posted by eriko at 6:47 AM on December 6, 2011 [2 favorites]

I have a 5-year mortgage with ING, and the rate is 2.99%. After 5 years, I can refinance a the then-current rate. The monthly (actually, bimonthly) payments are so low that I've been paying double, with all the extra going to the principal. My goal is to pay it off before the 5 years are up. The refinancing costs were moderate, and IIRC, they did not require a home inspection.

I've been happy with this mortgage, but I have no idea whether Capital One's buying ING has screwed up any of the deal.
posted by Kirth Gerson at 6:55 AM on December 6, 2011

+1 to looping in at least one credit union. (And, if you qualify for USAA, they should be on the top of your list)
posted by schmod at 6:56 AM on December 6, 2011

Are you planning on staying in that house for a while? If not, make sure to consider the closing costs in your calculation. There is a break-even point for refinances, where before that date, you are losing money because you need to pay down the closing costs.

Simple example: Closing costs are $2400 and you save $200 a month in your payment. You'll break even after one year.

With interest rates so low right now, the spread between the rate on a 30 year versus a 20 or 15 year mortgage is pretty low. In my opinion, you are better off maintaining the flexibility of having a lower required monthly payment and then paying extra as you can, then being forced to have a higher payment. If you take a 30 year and pay it off as if it was a 20 year, it works out almost the same. It *does* work out the same if there is no difference in the rate between a 30 versus a 20.

(Another thing you can do is refinance, but then pay the same payment you are paying now. You will have the mortgage paid off 10 years sooner.)

Using $275k as a starting point on a 30 year @ 4.5%, if you pay an extra $50 a month, you knock 10 payments off the end of the loan and save ~$8000 in interest over the life of the loan. Or, if you just pay an extra $1000 on your first payment and then do nothing, you knock two months off the end of the loan and save ~$3000 in interest.
posted by gjc at 7:46 AM on December 6, 2011

Response by poster: I will go talk to a mortgage broker. Any tips on finding one or a good one?

Also, I still want to be able to understand as much about this as I can, so I have a few more questions for you guys.

I tried to refinance with Wells Fargo a few months ago but was not approved because I didn't meet one of the conditions of my loan, which I found out is a HARP loan.

I asked about it and found out that since the value of my home had dropped the only loan I could get was under the HARP program.

There is an estimate value on my house of 265,000 down from an original value of about 300,000 something.

Is there any benefit to getting a nother apraisal? Would the cost of doing it not make it worth it? Or since I'm positive that the value will be lower now, should I just stick with refinancing through HARP since that seems to be all I will qualify for?
posted by blunt_eastwood at 5:17 PM on December 6, 2011

Penfed.org is good or they have been for my cars.

Why not try to go to 15 years?

Also, Suze Orman said last week that interest rates might continue to go down. She thinks the economy is going to be in for a rough go next year.
posted by getawaysticks at 6:21 AM on December 7, 2011

I will go talk to a mortgage broker. Any tips on finding one or a good one?

Talk to your realtor. They'll be able to hook you up. If you don't have one or don't like yours, call any realtor and they'll be happy to provide a recommendation.
posted by valkyryn at 10:21 AM on December 7, 2011