Most people only think about one thing when refinancing their mortgage: getting the lowest interest rate possible.
After all, the whole point is to lower your home payment so you have money to spend on, well, whatever you want.
Savvy refinancing can definitely result in significant monthly savings. However, this shouldn’t be the only thing you take into account when choosing a lender. Whether you choose to stick with your existing lender or shop around for someone new, we want to help you do it the smartest way possible, and with all the facts.
Want to pick the right mortgage lender for your refinance? Here are 5 factors to consider other than interest rates.
Loan Terms
Loan terms shouldn’t be ignored, but they go well beyond simply the lowest interest rate. Loan terms also include:
- The length of the loan
- Fees
- Whether there’s a pre-payment penalty (some lenders charge these because they lose a fair bit in interest if you do pay off early).
You should carefully review the loan estimate your lender gives you to make sure you’re aware of any hidden costs. However, the cheapest loan is not always the best.
Some other factors to consider:
Customer Service
How easy is it to get in touch with your lender? Do they answer the phone? If you email them, do they reply in a timely manner? Or do they ghost you and you end up Googling your way through? A very good reason not to refinance with your existing lender is if you have had communications frustrations with them.
Consider the type of customer service offered. An online lender may give you easy, 24/7 access, but only to somebody who answers your questions. A local lender might be more interested in building a relationship, but could be keeping bankers' hours. Consider what is more important to you and what fits your schedule and communication needs.
Suitability for Your Specific Loan
Another factor is whether the lender will offer the best deal for your specific circumstances. This could be your income, debt-to-income ratio, credit score, and the size of the loan.
For example, many lenders won't actually lend you less than $75,000 to $100,000 because it doesn't give them enough money to make it worth their time. This means you’ll be turned away because they don’t see financial gain.
This may limit your options, and you should consider a credit union or a small, local bank.
If you’re refinancing, say, a VA loan, then you should look for a lender with experience refinancing government loans, which can generate specific issues that typical conventional mortgages don't.
Think of it as buying a cake, would you go to the corner store that sells everything or a bakery?
You also need to work out whether you should refinance into the same loan type or a different one. It's common, for example, to refinance an FHA loan to a conventional mortgage once you have 20% equity to avoid paying mortgage insurance.
Rate-and-Term versus Cash-Out
Another aspect to consider is the kind of refinance loan you’re looking at. Worrying about loan terms and interest rates is primarily for a rate-and-term mortgage. So, what are the differences?
- Rate-and-Term. This kind of refinancing is to get a lower interest rate, shorter loan duration, or otherwise improve the terms of your existing loan. The point here is to save as much money as possible. You don't get any money at closing, just a better deal. In general, rate-and-term is most likely to work if interest rates have dropped. It's a way for existing homeowners to take advantage of low-interest rates.
- Cash-out. With cash-out refinancing, you actually increase the amount of money you owe. You then receive the difference as a lump sum. Cash-out refinancing is an alternative to a home equity loan that may or may not be a better deal. Usually, people get a cash-out refinance to pay for expensive remodeling, get rid of credit card debt, or otherwise get an influx of cash. The usual limit is as much as 80% of your home's value, although it's generally unwise to go that high. Cash-out loans are generally more expensive than rate-and-term.
Most refinances are rate-and-term. If you're considering cash-out, then you should carefully compare it to a home equity loan and see which offers you the best deal. It’s also important to have a good credit score to get a good deal.
Can You Lock Your Rates?
It's important to choose a lender that is offering you a "locked" interest rate. This means that the lender is required by law to provide you this rate and any fees associated. The opposite is "floating" where the rate and fees could change with the market.
So if you’re considering refinancing your mortgage, remember that the lowest rates alone may not be the only thing you’re looking for. Consider what kind of mortgage you need, whether the lender is suitable for the specific loan you have, and the quality of customer service.
For people who’ve been paying their mortgage on time, have a decent (620 plus) credit score, and are refinancing a primary residence, our RefiNow program is worth considering. And if you qualify for RefiNow, we will even help you pay for your appraisal with the credit provided by Fannie Mae! Speak with one of our agents today to see how much RefiNow could save you each month.
