Refinancing Tips
If you are a homeowner who was lucky enough to buy when mortgage
rates were low, you may have no interest in refinancing your present loan.
But perhaps you bought your home when rates were higher. Or perhaps you have
an adjustable rate loan and would like to obtain different terms.
Should you refinance? This refinancing tip will answer some
questions that may help you decide. If you do refinance, the process will
remind you of what you went through in obtaining the original mortgage. That's
because, in reality, refinancing a mortgage is simply taking out a new mortgage.
You will encounter many of the same procedures-and the same types of costs-the
second time around.
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make good financial
sense for everyone. A general rule is that refinancing becomes worth your
while if the current interest rate on your mortgage is at least two percentage
points higher than the prevailing market rate. This figure is generally accepted
as the safe margin when balancing the costs of refinancing a mortgage against
the savings.
There are other considerations, too, such as how long you
plan to stay in the house. Most sources say that it takes at least three
years to realize fully the savings from a lower interest rate, given the
costs of the refinancing. (Depending on your loan amount and the particular
circumstances, however, you might choose to refinance a loan that is only
1.5 percentage points higher then the current rate. You may even find you
could recoup the refinancing costs in a shorter time.)
Refinancing Can Be a Good Idea
for Homeowners Who:
Want to get out of a high interest rate loan to take advantage of lower
rates. This is a good idea only if you intend to stay in the house long enough
to make the additional fees worthwhile. Have an adjustable rate mortgage
(ARM) and want a fixed-rate loan to have the certainty of knowing exactly
what the mortgage payment will be for the life of the loan. Want to convert
to an ARM with a lower interest rate or more protective features (such as
a better rate and payment caps) than the ARM they currently have. Want to
build up equity more quickly by converting to a loan with a shorter term.
Want to draw on the equity built up in their house to get cash for a major
purchase or for their children's education.
If you decide that a refinancing is not worth the costs, ask
your lender whether you may be able to obtain all or some of the new terms
you want by agreeing to a modification of your existing loan instead of a
refinancing.
Should You Refinance Your ARM (Adjustable
Mortgage)?
In deciding whether to refinance an ARM you should consider
these questions:
Is the next interest rate adjustment on your existing loan
likely to increase your monthly payments substantially? Will the new interest
rate be two or three percentage points higher than the prevailing rates being
offered for either fixed-rate loans or other ARM's? If the current mortgage
sets a cap on your monthly payments, are those payments large enough to pay
off your loan by the end of the original term? Will refinancing a new ARM
or a fixed-rate enable you to pay your loan in full by the end of the term?
What Are The Costs of Refinancing?
The fees described below are the charges that you most likely
will encounter in a refinance.
Application Fees
This charge imposed by your lender covers the initial costs
of processing you loan request and checking your credit report.
Title Search and Title Insurance
This charge will cover the cost of examining the public record
to confirm ownership of the real estate. It also covers the cost of a policy,
usually issued by a title insurance company that insures the policyholder
in a specific amount for any loss caused by discrepancies in the title to
the property. Be sure to ask the company carrying the present policy if it
can re-issue your policy at a re-issue rate. You could save up to 70 percent
of what it would cost you for a new policy.
Lender's Attorney's Review Fees
The lender will usually charge you for fees paid to the lawyer
or company that conducts the closing for the lender. Settlements are conducted
by lending institutions, title insurance companies, escrow companies, real
estate brokers, and attorneys for the buyer and seller. In most situations,
the person conducting the settlement is providing a service to the lender.
You may want to retain your own attorney to represent you at all stages of
the transaction, including settlement.
Loan Origination Fees and Discount
Points
The origination fee is charged for the lender's work in evaluating
and preparing your mortgage loan. Discount points are prepaid finance charges
imposed by the lender at closing to increase the lender's yield beyond the
stated interest rate on the mortgage note. One point equals one percent of
the loan amount. For example, one point on a $75,000 loan would be $750. In
some cases, adding them to the loan amount can finance the points you pay.
The total number of points a lender charges will depend on market conditions
and the interest rate to be charged.
Appraisal Fee
This fee pays for an appraisal that is a supportable and defensible
estimate or opinion of the value of the property.
Prepayment Penalty
A prepayment penalty on your present mortgage could be the
greatest determent to refinancing. The practice of charging money for an
early pay-off of the existing mortgage loan varies by state, type of lender,
and type of loan. Prepayment penalties are forbidden on various loan including
loan from federally chartered credit unions, FHA and VA loans, and some other
home-purchase loans. The mortgage documents for your existing loan will state
if there is a penalty for prepayment. In some loans, you may be charged interest
for the full month in which you prepay your loan.
Miscellaneous
Depending on the type of loan you have and other factors,
another major expense you might face is the fee for a VA loan guarantee,
FHA mortgage insurance, or private mortgage insurance. There are a few other
closing costs in addition to these.
In conclusion, a homeowner should plan on paying an average
of 3 to 6 percent of the outstanding principal in refinancing costs, plus
any prepayment penalties and the costs of paying off any second mortgages
that may exist. One way of saving on some of these costs is to check first
with the lender who holds your current mortgage. The lender may be willing
to waive some of them, especially if the work relating to the mortgage closing
is still current. This could include the fees for the title search, surveys,
inspections, and so on.
The information contained in this refinancing tip is intended to help you
ask the right questions when considering refinancing your loan. It is not
a replacement for professional advice. Talk with mortgage lenders, real estate
agents, attorneys, and other advisers about lending practices, mortgage instruments,
and your own interests before you commit to any specific loan.