How to Compare Refinance Proposals and Select the Right One for You
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How to Compare Refinance Proposals and Select the Right One for You
Shopping for Your Refinance
You should treat the mortgage refinance process like you would any other major purchase, such as buying a car. Shop around, compare refinancing proposals from multiple lenders and select the best one with the best loan terms, which usually means the lowest combination of mortgage rate and closing costs. We recommend that you contact at least five lenders when comparing proposals as the more lenders you shop, the more likely you are to find the lender and mortgage that are right for you. A recent study showed that borrowers that compared at least five mortgage quotes saved an average of $3,000 on their loan as compared to borrowers that compared two lenders, who saved an average of only $1,400. In short, the more lenders you compare, the more money you save on when you refinance.
It takes extra time to compare and negotiate mortgage proposals but spending an extra hour or two can save you thousands of dollars. For example, on a $300,000 30 year fixed rate mortgage, reducing your interest rate by just .125% will save you almost $8,000 in interest expense over the life of your mortgage. Follow the steps below to negotiate the best terms for your mortgage:
- Gather refinancing proposals from at least five lenders, including one mortgage broker. There are different types of lenders such as banks, mortgage brokers, mortgage bankers and credit unions and they are ALL competing for your refinancing business. Some mortgage lenders such as banks, mortgage bankers and credit unions are direct lenders, which means they lend you money directly for your mortgage, potentially allowing them to offer you a lower interest rate. Other lenders such as mortgage brokers do not fund mortgages directly but instead act as a personal mortgage shopper for borrowers and compare rates and fees from multiple funding lenders to find you the best terms for your refinancing, so you benefit from lender competition. Gathering proposals from at least five lenders will ensure that you have a range of options, which puts you in a stronger position when you negotiate your refinancing.
- Request a Loan Estimate, written quote or Lender Fees Worksheet from the lenders you contact. When you contact lenders request a Loan Estimate, written quote or Lender Fees Worksheet that outlines the key items in their mortgage proposal. Borrowers should use the mortgage rate and closing cost information presented in these documents to compare mortgage proposals and select a lender. Lenders should ask you questions regarding your personal and financial profile as well as the details of your home purchase so that they can provide the most accurate proposal possible. When you contact lenders ask that they not pull your credit report as this can negatively impact your credit score. They can use summary credit information to provide you a Loan Estimate, mortgage quote or Lender Fees Worksheet. Please note that lenders cannot charge you for a Loan Estimate, written quote or Lender Fees Worksheet.
- Loan Estimate. The Loan Estimate outlines a good faith estimate of the key terms of the mortgage including interest rate, Annual Percentage Rate (APR), closing costs and mortgage features including rate lock period. Lenders are legally required to provide a Loan Estimate within three business days of a borrower submitting a loan application but some lenders may provide a preliminary Loan Estimate without submitting an application. The Loan Estimate is a standard document that is the same across all lenders which makes it easier to compare mortgage proposals.
- Written Mortgage Quote. In some cases the lender may not provide a Loan Estimate so borrowers should request a written mortgage quote, usually via email, including mortgage rate, closing costs and rate lock period. A written mortgage quote is not an official document so it does not carry the same weight as the Loan Estimate but it should allow borrowers to quickly compare mortgage proposals.
- Lender Fees Worksheet. Borrower should also request a Lender Fees Worksheet that provides a detailed breakdown of all the costs and expenses associated with a mortgage including fees charged by lenders and other third parties. The lender is not required to provide you with the worksheet by law, but will likely provide it to you if you ask.
- Compare refinancing proposals. When comparing mortgage proposals, we recommend that you focus on two key items that have the most impact on your upfront and long-term mortgage costs: 1) mortgage rate, and 2) closing costs. You can use the Loan Estimate, written mortgage quote or Lender Fees Worksheet to help with the comparison. If you are using a Loan Estimate, you can find the interest rate at the top of page one and the estimated closing costs at the bottom of page one. Page two provides a detailed, item-by-item breakdown of the all the mortgage closing cost items you are required to pay. You should also use the Annual Percentage Rate (APR) on the top of page three of the Loan Estimate to quickly compare and identify excessive closing costs.
- In short, the APR represents what your interest rate would be if it included all upfront lender and closing costs so it is a way to use one figure to compare both the mortgage rate and closing costs. If the APR is much higher than your mortgage rate then you know that the closing costs are relatively high and you should negotiate lower costs or select a different lender. Additionally, if you have proposals from two lenders that are offering the same mortgage rate but one APR is lower than the other, then you know the lender with the lower APR is charging lower closing costs. The table at the bottom of the page shows you exactly where on the Loan Estimate you can find the mortgage rate, closing costs and APR.
- Use ourMORTGAGE COMPARISON CALCULATOR to compare mortgage with different rates and closing costs
- Negotiate the best terms. Some lenders may offer a lower interest rate with higher fees while other lenders may offer a higher interest rate with lower fees. Use this information to your advantage to negotiate the lowest interest rate and fees for your refinancing by asking a lender to match the interest rate or fees offered by another lender. Additionally, you can use the Lender Fees Worksheet to perform a more detailed review and comparison of refinancing closing costs. For example, one lender may charge an appraisal fee of $600 while another lender may only charge $500. Use information from the Lender Fees Worksheet to negotiate specific cost items and reduce your overall refinancing closing costs. Comparing mortgage proposals from multiple lenders and doing a little negotiating should enable you to find the mortgage with the lowest mortgage rate and fees, which can save you thousands of dollars.
When you compare refinance proposals keep in mind that interest rates and closing costs vary by loan program and length. For example, a fixed rate mortgage typically has a higher interest rate than an adjustable rate mortgage. In some cases borrowers consider different types and lengths of mortgages so be sure you are comparing similar programs when you select your lender and loan. Additionally, make sure the cost items, including discount points which you may choose to pay to lower your mortgage rate, are the same across all lenders so it is easier to compare proposals.
The table below compares refinance rates and closing costs for leading lenders. We recommend that you contact multiple lenders in the table to request refinance terms. Shopping lenders is the best way to save money when you refinance.
Where to Find Information to Compare Refinance Proposals
The table below shows you where on the Loan Estimate you can find 1) the interest rate, 2) estimated closing costs, and 3) the APR. These are the most important items to review when you review refinance proposals. Your interest rate determines your monthly payment and total interest over the life of your mortgage. Closing costs are the fees you pay when your loan closes and can run thousands of dollars for most refinances. The APR is basically away to look at your combined interest rate and closing costs using one figure. Comparing these figures for multiple proposals helps you select the mortgage and refinance lender that are right for you. Click on the rectangle icons to see where each figure is located on the Loan Estimate.
Key mortgage costs items
- One of the first items on the LE and easy to compare across lenders because it is a single figure
- Total of all closing costs including lender, appraisal and title fees as well as any taxes, prepaids and escrow payments
- Found at the bottom of page one of the LE
Annual Percentage Rate (APR)
- The APR represents what your interest rate would be if it included all up-front lender and closing costs
- Use the APR to compare mortgage proposals from multiple lenders
- If you have proposals from two lenders that are offering the same interest rate but one APR is higher than the other, then you know the lender with the higher APR is charging higher closing costs
- Found at the top of page three of the LE
Use our free mortgage quote form to compare no obligation refinance quotes from leading lenders. Our quote form is easy-to-use, requires minimal personal information and does not impact your credit. Comparing multiple refinance proposals enables you to find the best mortgage terms.
‚ÄúComparing loan offers.‚ÄĚ CFPB. Consumer Financial Protection Bureau, 2017. Web.About the author