How to Compare Mortgage Refinance Quotes

August 23rd, 2011

How to compare mortgage refinance quotes

As you go through the process of gathering information from different lenders on refinancing your mortgage, you'll start to collect a lot of information on interest rates, annual percentage rates (APRs), closing costs, monthly payments, terms and conditions and finally the requirements for submitting the application for the refinance.

After you gather all of these quotes, spread them out on the table and get your calculators ready. Knowing how to truly compare the quotes is what will lead you to the right choice.

New interest rate

The first logical stop for comparing your refinance options is of course the interest rate that each lender is charging. The interest rate is the starting point, but it's certainly not the ending point. The best way to think of the interest rate is that it's the rate that your monthly mortgage payments are calculated on, but it's not the final decision maker.

Closing costs

When you took out your original mortgage, you had to pay closing costs. When you refinance into a new mortgage, you'll have to pay closing costs as well. You can use a closing costs calculator so that you know how much money you'll need to come up with out of pocket, or roll into the amount of your mortgage, if your lender allows you to do so. You'll need the closing costs and the amount of the savings between your new and old mortgage payments to determine if it benefits you financially to refinance.

New annual percentage rate (APR)

While closing costs are part of the comparison, the number that you really need to hone in on is the annual percentage rate, or APR, which is the annualized cost of credit including closing costs. The APR is the number that tells you which of the refinance offers is providing you with the best deal. In some cases the lender with a higher interest rate but lower closing costs may cost you less in the long run. Use the APR calculator to predict, compare or confirm your lender's calculations.

Your break-even point

When you are comparing refinance quotes, you should run a break-even analysis for each one. A break-even analysis tells you how long it will take for the difference or savings between your old and new mortgage payment to recoup your closing costs. If you have one offer that allows you to recoup your costs or at least break even prior to leaving the home and another quote that doesn't, then it makes it financially more logical to choose the one where you are going to get your money back faster.

Good faith estimate

A lender is required to provide you with a good faith estimate (GFE) of closing cost which breaks down the estimate of costs on a line-by-line basis. While the APR and interest rate are beacons, you should also compare each line item because these items can make it clear why one lender's APR is higher than another's.

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