Mortgage lenders emphasize low refinance rates to grab homeowners' attention, but low rates are only part of the story. Discount points, factors influencing mortgage rates, and the type of refinancing you choose also impact the cost of refinancing your mortgage.
Refinancing Your Mortgage: The Role of Discount Points
Mortgage and refinance quotes often include discount points, which amount to prepaid interest. One point is equal to one percent of your refinance loan. If you borrow $200,000, one point is equal to $2000. Mortgage lenders may offer rock bottom mortgage rates, but also charge discount points. It's important to weigh the combined cost of mortgage rates and discount points when comparing refinance quotes. For example, a mortgage lender may quote a rate of 4.00 percent with no discount points and another lender may quote 3.75 percent with discount points of 0.60 percent, which totals 4.35 percent. Discount points are paid up front at closing or may be rolled into your mortgage depending on the type of refinance loan you're taking out and the mortgage lender's policies.
Discount points aren't a bad thing; in some cases it's worthwhile to pay points. You may also be charged to "lock in" a favorable mortgage rate for a specific period, and lenders may charge discount points to offer a better interest rate to borrowers with credit problems. When comparing mortgage quotes, remember to check for discount points; you can also contact mortgage lenders that provide quotes and ask about discount points.
Refinance Rates Roller Coaster: Why Mortgage Rates Go Up and Down
Mortgage rates are volatile and subject to constant change; they typically vary several times within a day. Although mortgage lenders advertise specific rates, they usually include fine print regarding changing rates. Advertised rates are also typically the best rates available to borrowers with pristine credit histories, solid assets, and stable employment. External factors also affect mortgage rates; when things go haywire in domestic or global financial markets, you can expect to see mortgage rates rise. In recent months, the Federal Reserve's Federal Open Market Committee has been considering when it will raise the target federal funds rate, a move that's part of a process the Fed calls policy normalization. When the Fed raises this rate, consumer lending rates including mortgage and refinance rates will increase. That's the basis for lenders saying that now is the best time to refinance your mortgage.
Risk Factors Increase Refinancing Costs
If you're credit isn't polished as shiny as your mom's sterling flatware, you'll likely find that refinance quotes include refinance rates higher than those advertised. If you're refinancing to take out additional cash, you'll probably pay higher lender fees than you would for refinancing only to lower your mortgage rate. Keep in mind that rates and fees are based on lenders' perceived risk. A good way to understand this is to compare mortgage rates to rates charged for unsecured credit such as personal loans or credit cards. Mortgage rates are much lower than consumer credit rates because mortgage and refinance loans are secured by your home; if you fail to make payments, the lender can foreclose your loan and sell your home to recoup its losses, but lenders have little recourse if you don't pay your credit card bills. Lenders offset potential risk by charging higher interest rates for unsecured loans and credit.
Rates for cash-out refinancing may be higher than for a straight rate-and-term refinance. A cash-out refinance allows you to draw funds against home equity in addition to lowering your mortgage rate. This reduces your cushion of home equity, increases your mortgage balance and you can also use the extra cash for any purpose. Mortgage lenders typically see a higher loan balance as a risk and may consider a cash-out refinance as a sign of financial stress. The Federal Trade Commission cautions homeowners to carefully consider using their homes as collateral due to the increased risk of foreclosure.
Lender policies vary, so shopping several refinancing quotes can help you find your best deal. LendingTree's network of mortgage lenders can quickly provide free refinance quotes for your consideration.