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How to Compare Mortgage Refinance Offers

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Investments Refinance Mortgages signWith mortgages once again at historic lows, I’ve once again considered refinancing our mortgage. A few months ago we weren’t sure how long we’d be living in our current home and so we put off refinancing, despite rates being as low as 4.75% APR. Fortune has smiled on us and rates have once again come close to those lows and I’m taking another look.

Mortgage refinancing, much like buying a home, can sometimes be a scary process because it involves what usually is the largest asset you have. That’s the case for us, our home is our more valuable physical financial asset by far, and so any decision involve something of that magnitude can be a little scary.

Fortunately, mortgages aren’t quite that complicated and there is a wealth of resources available to help you compare different offers.

Analyzing Mortgage Refinance Offers

When you get mortgage refinance quotes, there are a lot of information to process. Here’s what I always try to find out:

  • APR – This is the interest rate on your mortgage.
  • Term – This is the the length of your mortgage (30 years, 15 years, etc.).
  • Points – To get the listed rate, you may need to pay “points.” A point is 1% of your mortgage amount. You may be able to deduct mortgage points if you meet some requirements, outlined in Topic 504 at the IRS.
  • Fees – The fees the lender will charge to process the refinancing.

You can get sample rates, by providing only your ZIP, by going to Bankrate or you play with live ammunition and actually request quotes through Lending Tree (if you don’t want a deluge of calls, Quicken Loans had the top listing for my zip code).

Comparing Mortgage Refinance Offers

Now that you have a couple offers, is the lowest APR the best offer? Maybe, maybe not.

Whether you refinance depends on more than your interest rate because the fees and points involved in a refinance, combined with your future plans, dictates what’s financial smart. For example, if you plan on moving next year, you won’t refinance because you don’t have enough time to recoup savings from monthly payments.

Should you refinance? First, fire up this useful refinance breakeven calculator from DinkyTown.net. Enter in your existing mortgage information and the offer you think is your best refinance offer, then click calculate.

Here’s what the screen may look like, with some sample information (click to enlarge):
Mortgage refinance calculator

If you use the calculator, they’ll explain the difference in the four bars.

Click on View Report and scroll down to Refinancing Summary because this is where the real fun happens. The report will tell you how much in actual total interest you’ll pay over the life of the loan. In my example above, I have $120,167 total interest remaining on the last 16 years. If I were to refinance and increase the number of years on the mortgage back to 30, I would see a $600 drop in monthly payments but I’d slide backwards on the amortization table; I’d pay an additional $73,000 in mortgage interest.

The Decision: The decision now becomes, do you want a monthly lower payment or do you want to pay the least in total interest? If the answer is a lower monthly payment, the correct choice is to get the new loan. This isn’t unexpected because you’ve taken your existing loan balance and stretched it back to 30 years, naturally the monthly payments will be lower.

What if I want to lower the total interest?

Converting to a Different Term

In our comparisons above, we looked at how the monthly payment changed and how much you saved on a month to month basis. If I want to lower the total interest, rather than just the monthly payment, perhaps I should go to a 15 year mortgage.

According to Bankrate, I could get a 15-year mortgage at 4.525% APR. I’ll spare you the screenshot but the four breakeven bars are 8 months, 7 months, 9 months, and 9 months. Again, it would take less than a year to recoup the closing costs of $1500.

What about my payments? I click on the View Report button and I see that my monthly payment has actually gone down by $80 and I would, over the course of the 15 year loan, pay $36,500 less in interest! That wounds like a win win situation to me.

Note: 4.525% APR, right now, seems like an insanely good interest rate. I don’t know that I’d be able to get that interest rate if I were to get live quotes.

Refinance?

All of the breakeven points were under a year and since we don’t have any plans to move within the next year, I’m thinking I’m going to try this exercise with live ammunition. I’ve had good success with Lending Tree in the past, it was a resource I leaned on whenever I bought the house for the first time and I might go back. The one caveat I have with them is that you’re dealing with a broker, so expect a ton of phone calls.

Are you thinking about refinancing? Or have you already refi’d?

(Photo: paul_fisk)

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20 Responses to “How to Compare Mortgage Refinance Offers”

  1. Dave says:

    I refinanced a few weeks ago – dropped my rate from 6.75% to 5.25%(with zero points). In the end, with the lawyer/title fees, bank fees, etc, it ended up costing me about $3500-4000. I’ll be saving around $400/month, so the payback is less than a year.

  2. Dan Danford says:

    Don’t be prey to aggressive lendors. Mortgages are an area where salepeople (mortgage brokers) have significant knowledge and communication advantage over customers. They know exactly what to say and how to say it. The best approach is to seek out someone you already know or trust, and let them guide you through the process. Now is a great time to refinance, but be wary of any discusisons you didn’t initiate. Be smart with your money.

  3. TJ Shah says:

    I am refinancing from 30 year – 5.625 (29 years left) to 4.625 – 30 year with zero points closing costs of 2700. I will be saving 200 a month and my breakeven analysis four bars are 13, 11, 15, and 16 months. So conservatively looking, payback is less than 18 months.

  4. Chuck says:

    Ugh, Lending Tree was an awful experience for me. I kept getting calls from loan sharks trying to trick me into some really bad deals. One actually compared my 30 year conventional to a new 15 year FHA loan and told me it was a better deal because there would be lower total interest payments. (He didn’t bother to tell me that if I made the same payments to my existing loan, it would be paid off even cheaper!)

    If you’re not a math whiz, get someone to help you evaluate offers. Get a good faith estimate from everyone, and compare them line by line. (Ignore the taxes and prepaids, because everyone gets them wrong. They underestimate these to make their offer look better than the other guy’s, but it doesn’t matter because your lender can’t choose how much tax to pay.)

    Choosing a lender is a really really complicated mess, and I’m surprised there are not better resources on the web to help people navigate these shark infested waters.

    My biggest tip– do not use a mortgage broker. You must deal with the lender that will actually fund your loan. Why? Because the lender makes money from your interest payments. The broker makes money on the fees, then sells the loan to a bank or investor. So they have to do their best to jack up the fees, because that’s their only source of income. The lender/servicer will profit for the length of the loan, so it’s in their interest to get you the best deal, so that you don’t refinance in a couple years.

    Your best bet, BTW, is your local credit union. (Credit unions are practically always the answer when it comes to banking.)

  5. Great article! I’ve been looking to refinance myself. I have a little over 6% interest rate and would love to get it at or below 5%.

    Unfortunately I have to mirror the overall experience that Chuck had with Lending Tree several years ago. Got a bunch of bad offers for every reasonable offer. I eventually did refinance with them but I probably wouldn’t do that again.

  6. SK says:

    This post is a real help. I am in the market for refinancing as well. My 5 year ARM is going to adjust next year January, so , I am trying to be proactive and refinance now when the rates are low. My current lender BOA is offering me the Making Home Affordable plan which has a little lesser rate than the regular rate for refinancing and according to him the whole refinance process will be short. I have noticed that BOA’s rate is higher than most of the lenders. I am also considering PNC bank and SECU (MD State Employees Credit Union)in my shopping list. Their interest rates are very low compared to anyone else. I will follow up this discussion thread very closely.
    Thanks.

  7. Brian says:

    What if you refied into the new 30-year but kept paying the “extra” 600/month that you would save? What would be the savings then?

    • Jim says:

      If you were to take a 30 year mortgage and make larger payments, equal to a 15-year mortgage’s payments, then you come out the same as a 15-year mortgage if the interest rate were the same. I did an analysis in my article on a 15 vs 30 year mortgage myth. This is why 15 year mortgage interest rates are lower, if they weren’t then everyone would do a 30 year mortgage.

      • Chuck says:

        I went with the 30 year, because the freedom to make the smaller payments was worth the 0.375% to me. But I do plan to pay it down quicker. If I change my mind, or cash flow gets tight, and want to go back to 30 year payments, I can do that. Freedom is great.

        • Dan Danford says:

          I tell people in my practice that flexiblity is one key to success. One more option for you with the 30 year term: if you can invest the extra money to earn a higher rate. Leverage can be good, too!

        • Jim says:

          That’s why I like the 30 year, it’s more interest if you pay on schedule but nothing says you have to (prepayment penalties are illegal in Maryland). Flexibility is always valuable.

  8. thomas says:

    I’ve only looked into refinancing once. I’m not even a year in and unfortunately was hit with lowered home value. It’s not as bad as others, but the dip is enough.

    What I couldn’t figure out, was that my quote I would have a)lost all my equity b/c the refinance amount would have been the full value b)would have paid $x dollars and my break even point was 5 years.

    Something didn’t sound right about the whole thing, but I reviewed and discussed and that was just the way it was. the difference in what my current loan balance and new balance totally wiped out any reduced costs from the lower rate.

  9. I really want to refinance, but the rates just jumped dramatically over the last week or so. I just hope they go back down again so I can take the plunge.

  10. Christina says:

    We are refinancing right now into a 4.6125 30 year loan with about $3,800 in fees. 4.25% would be great but I don’t know if you can get that rate yet.

  11. sk says:

    Jim, how is you refinance shopping going? Did you find any good deal?


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