Single family house on pile of money. Concept of real estate.
Getty
In the wake of the pandemic, mortgage interest rates have plunged to near-record lows, which has lead to an unprecedented boom in the mortgage refinance industry. However, as more and more people rush to refinance, it’s important to remember that securing a good interest rate is only part of the goal when you’re shopping for a new loan.
In order to learn more about what else borrowers should keep in mind as they shop around for the best refinance rates, I spoke to Kevin Parker, the Vice President of Field Mortgage at Navy Federal Credit Union. Here’s what he had to say:
On important factors for consumers to consider when they’re shopping for a loan:
“There’s no denying that the interest rate is important. After all, it’s a huge contributor to what your monthly payment will be,” says Parker. “As a rule of thumb, if you can save at least half a percentage point in interest, a refinance might be worth considering.”
That said, Parker acknowledges that interest rates are only part of the story. Other important components include:
- Fees: Does the lender charge an origination fee or a processing fee to cover the costs of closing on the loan? What other third-party fees (appraisal fees, recording fees) will you be charged during the process?
- Type of loan: Should you consider switching from a 30-year loan to a 15-year loan in order to secure a better interest rate? Is it worth switching from an adjustable-rate mortgage to a fixed-rate loan in order to secure a stable monthly payment?
- The lender: Parker suggests doing some research on the bank or lending institution that you’re going through for the loan. What type of loans do they specialize in? How much flexibility do they have with their qualifying requirements?
On how to receive that crucial information from a lender:
“Borrowers should ask their lender to provide them with a loan estimate,” advises Parker. “That’s the formal document that will list out the interest rate you’re given, any fees you’ll be charged, and any other terms for that loan.”
However, he does note that borrowers will actually have to apply for the loan in order to gain access to a loan estimate, which means submitting your social security number and undergoing a credit check.
He recommends asking your lender if they provide a closing cost estimate. While each lender may refer to this document in slight different ways, Parker says that it essentially provides an estimate of what your fees an interest rate will be without subjecting you to a hard credit pull.
On what tips he would give would-be borrowers who are shopping around for the loan:
“Comparing APRs, or annual percentage rates, is a great tool when shopping for a loan,” suggests Parker. “The APR includes the interest rate that you’ll be given, but also takes into account the fees that the lender will charge for the loan. It’s how you can make sure that you’re making an apples-to-apples comparison.”
He also recommends being upfront and truthful with your lender. He explains: “The more information your lender has, the more they can customize your financing to your financial situation.”
Lastly, he suggests asking your lender about what time frame you should expect for the refinance. Like other mortgage experts, Parker points out that this refinancing boom means that many lenders are swamped with loan applications. As a result, the process may take a bit longer than usual.