Refinance Rates

When researching refinance rates, looking in your local newspaper or searching online is not the best place to find what you're looking for.

How Do You Find The Best Home Loan Refinance Rate?

The best refinance rate is one that you receive via a specific quote from a reputable lender or loan provider.

Obtaining a good faith estimate will allow you to compare refinance rates on comparable mortgage products such as the higher cost jumbo loans or on a no point mortgage.

[as of September 2007 the jumbo loan is anything above $417,000]

One of your first steps when searching for loan rates is to STOP believing a lender can get you any lower of a rate compared to anyone else. Wholesale loan rates are pretty uniform from lender to lender. So, going from broker to broker or lender to lender only causes you to lose money as home loan interest rates rise and you continue to shop.

Almost 99% of the time, the best interest rate between lenders are very similar -- to make a real decision you have to look at much more than interest rate alone.

Of course, factors that can affect the rate you are approved for as opposed to what's available are damaged credit or more importantly your credit report number. But there are other factors such as loan type. A balloon loan can have a lower rate however when your mortgage becomes due in full after 5 years you may lose your home because of poor planning.

Since your credit rating is one of three aspects used to determine your final interest rate, believing the low advertised rates you see is pointless.

Mortgage brokers are no dummies -- they know that if you're shopping for a loan and you're only concern is getting the lowest interest rate, you probably know nothing about the loan process.

AND...if you know nothing about the process, it's easy to take advantage of you on "other" fees since you only want the lowest rate. Beware of being trapped by the "I want the lowest rate" syndrome.

Here's an example of what's really going on behind the scenes with mortgage interest rates and how you can make a much more informed decision as opposed to only asking for the lowest rate.

Your mortgage broker or lender doesn't work for free so there is no such thing as a no closing cost loan when it comes to getting the lowest refinancing rates.

In fact, the no closing cost loans are much more expensive than a loan with closing costs and lender fees included.

The real world way to get the lowest interest rate is this;

Pay Points OR Pre-Paid Interest Up Front

Again, the loan officer or lender has to get paid (based on your loan balance as a percentage) so why not pay it up front in points as opposed to taking a higher interest rate over time like 10, 20 or even 30 years if you even keep the loan that long (average is 5 years).

Everyone seems to avoid paying points however you will almost always save thousands if not tens of thousands over time by paying a small amount of points up front.

Look at the basics; which is better, pay 1 point (or 1%) of your loan amount up front and get 6% for 30 years OR...pay zero points and get 6.5% over 30 years. I'll guarantee you that extra 1/2% over 30 years will costs you tens of thousands.

It almost always makes sense to pay points to the best lender if you're going to live in the home for at least 5 years as a rule of thumb.

[Loan Product Tip: the information in this article does not typically apply to the reverse mortgage loan]

Another term you'll also hear about is discount points. This is simply a percentage point fee buying the rate even lower than the "par" or zero cost price point.

When would it make sense to pay this fee? Usually when you plan an even longer stay in your home, say 15 years or more as a rule of thumb.

One last fee that usually goes undisclosed until loan closing is called the yield spread premium or YSP. This fee is shown on line 824 of the good faith estimate and most loan officers hide it from view on your initial loan documents.

The yield spread premium number is actually a rebate to the broker or loan officer from the lender or bank. It's an incentive for the loan officer to sell you a higher interest rate - meaning more commission.

Again, it's not wrong for the broker or loan officer to get paid (you wouldn't work for free would you?) - however knowing this rebate amount can help you make some educated comparisons.

Here's how;

As a general rule of thumb...

* you aren't getting the lowest loan rate if there is any significant rebate (YSP) to the broker.

* you wouldn't see a refinance rate offer with a discount point fee AND a YSP rebate - it's not possible.

* you wouldn't pay points AND see a YSP rebate at the same time, at least not a YSP of any significance.

* one (1) point is really just a reference, the profit to the loan officer fluctuates with your loan amount. Smaller loan amounts (say below $250,000) might have more than 1 point to cover the profit which needs to be made from processing your loan with any particular funding lender.

Note: these rules do NOT apply to the low rate home equity loan as much as they do the conventional first mortgage. Plus paying private mortgage insurance can skew the figures based on whether it's worked into the closing cost or if it's an ongoing monthly fee. Usually only required if the first mortgage amount is over 80% of the home value.

Also, a simple way to know if mortgage refinancing rates are rising or falling is to watch the 10 year Treasury note.

If the Treasury note is dropping mortgage rates are rising and if the treasury not is rising, mortgage rates are falling.

So, in conclusion -- if you're attempting to compare refinance rates, there's much more to getting the lowest loan rates than looking at refinance rates alone.

Getting the best refinance rate is a function of knowing how to read the good faith estimate, and making the proper comparison between lines 801 (which is the loan origination fee or points section) line 802 (which is the loan discount fee or discount points section) and line 824 (which is the yield spread premium or rebate section, typically not shown unless asked for).

Your mortgage refinance rate is almost entirely dependant on those three areas.

Of course, loan officers have been known to leave off the proper tax calculations and underestimate title fees but that topic can be found elsewhere on this website.

How Do Mortgages Work?