One of the great things about spending at least a little time each week at Gangplank is that when I am there I am surrounded by people who are not in the mortgage business.
And since I play a loan officer mortgage originator on Twitter, to many of the geeks at Gangplank I am that guy they can bounce individual mortgage questions off of.
I ask them geeky questions, they ask me mortgage questions and we get along great.
So this week, I was asked this question:
“Is it true that you should only refinance your house if you can get your interest rate to be one percent lower? Because I got this thing in the mail telling me how much I could save…”
First the easy answer:
In order to know when it makes sense to refinance, first figure out how long you plan to stay in the home – this will help you know what kind of loan to get. For example, if you know you will be moving in 2 years, right now you can save a significant amount of money by going with an Adjustable Rate.
After you have a good idea of your timeframe, next calculate the total closing costs that you will have to pay (or are rolled into your loan) and divide that by how much you will save each month by lowering your interest rate.
The resulting number can be considered your break-even point and will give you a good idea of how long it will take to recoup your closing costs.
There are more complicated ways to calculate this, but in my opinion – simpler is better for this because this is not the simple rule of thumb that can save you thousands on your next mortgage.
The simple rule of thumb that can save you thousands on your next mortgage is this:
If you choose to work with a mortgage originator that you “got a direct mail piece from”, you will probably pay more (possibly much more) for your mortgage than you need to.
And I speak from experience (note: any mail that comes from me is not “junk”).
Consider these facts:
- Your mortgage originator is not your agent who has a fiduciary responsibility to you.
- Your mortgage originator will charge you as much as he wants.
- Direct mail is expensive – perhaps the most expensive way to acquire a customer.
- To stay in business, you must generate a profit.
My experience + these four facts = you will simply pay more if you get a piece of direct mail and call the number on it for a mortgage.
And you can take that rule of thumb to the bank.
Photo credit: http://www.flickr.com/photos/farronfotos/3472457443/
About the Author: Justin McHood is a mortgage broker with VanDyk Mortgage Corporation. You can find him at Arizona Mortgage Team, on the Zillow’s Mortgages Unzipped Blog, and at most East Valley Friday Nights gatherings. He’s the one in the blue shirt.