4 Things You Don’t Know That Will Make Your Mortgage Refinance an Even Better Money-Saving Strategy

Even smart homeowners tend to overlook three simple ways to save even more using a home refinance strategy. Here are three things to look for before you refinance your mortgage:





1. The advertised Annual Percentage Rate (APR) isn’t necessarily the rate you’ll actually get. That low number is based on what’s called a Good Faith Estimate, and though it makes for exciting advertising, it’s not a reliable way to compare mortgage refinance rates. Because it doesn’t always include hidden costs – like closing costs and loan origination fees (the fee a broker charges for his or her work, which can go as high as 5%. You don’t need to pay more than 1%.)





2. Are you working with a lender or a broker? Another way around hidden costs and broker fees is to work directly with a mortgage lender. While brokers offer the service of "shopping around" several lenders to find the lowest rate for your situation, their income depends on marking up the lender’s wholesale rate. If you’re willing to shop the market, you can get a wholesale rate directly from a lender.





3. Beware the Yield Spread Premium. Say you qualify for a home refinance rate of 5.75%. But the broker tells you a different – and higher – number. For every ¼ of a percentage point that a broker "earns" a lender, the broker gets an additional 1% commission. Even if your monthly payment is lower than it used to be, you’re still paying $100-200 more each month than you need to.





4. It doesn’t always make sense to pay off your mortgage. "Rates are at historical lows, that’s true," says Financial Planner Cathy Pareto, of Cathy Pareto and Associates, "But before paying off your entire mortgage, consider how that move would impact your whole financial plan." Depending on what phase of your life you’re in (Prime earning years? Retirement?), keeping a mortgage often makes the most sense, because of the tax breaks they provide.





For example, say your mortgage rate is currently 6.0% and you find yourself in a 30% tax bracket. When you factor in deductions for mortgage interest paid, the true cost of your mortgage is actually closer to 4.2% [that is, 6% x (1- 0.3)].





Another factor to consider, according to Ms. Pareto, before you take cash from your savings or investment accounts to payoff your mortgage: the cost of "tying up" capital. What’s the "opportunity cost" of that move? Could you do better investing the money in another asset – one that produces higher returns than the current interest rate on mortgages? The stock market is riddled with risks, certainly, but over the long term, a carefully structured and balanced portfolio of stocks, bonds and alternative assets will often yield higher returns than the after-tax cost of keeping your mortgage.





Jonathan Globerman is a Principal and Mortgage Expert with Berkley Capital, a mortgage refinancing lender.