If you already own a home, but would like to take advantage of a lower
interest rate, you may be interested in refinancing your loan. Refinancing
allows you to lower your monthly payments, get cash back, shorten the
term of the mortgage, or consolidate your first and second mortgage
into one loan.
Until recently, the rule of thumb for refinancing was to wait until
mortgage interest rates were at least 2% lower than your current rate.
But with low and no-closing cost refinancing programs, you may benefit
from refinancing with smaller rate reductions.
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 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.
When deciding whether to refinance your home, think about the following:
Weigh the savings: check the current market for available
rates and determine the costs associated with refinancing. These costs
can include an appraisal, points, and various fees.
Consider how long you plan to stay in your home: if you're
planning on moving in a few years, then the month-to-month savings
of refinancing your home may not outweigh the costs. But if you are
planning to live in your home for at least three to five years, you
might benefit from paying the points and closing costs to get the
lowest available rate.
Think about your taxes: lower interest on your home loan means
you'll have less to deduct on your federal income tax return, which
may impact the amount of money you'll save refinancing your home.
(Consults your tax professional.)
Let us calculate your current equity: if you've had your current
mortgage for at least three years, you've probably reduced your balance
by several thousand dollars. So you may be able to "roll"
your refinancing closing costs into your new loan and still end up
with a mortgage that is smaller than your original one, with a lower
interest rate and monthly payment.
Get some cash: one way to make refinancing work for you is
to "cash out" — refinance for more than the balance
of your current mortgage. With favorable interest rates, you may be
able to cash out without increasing your monthly payments. For example,
at an interest rate of 8.5% APR, the payment on a $200,000, 30-year,
fixed rate mortgage is $1,538. But at 7.5% APR, your same monthly
payment would allow you to borrow nearly $20,000 more!
Consider other mortgage programs: switching to another type
of mortgage may save you money. Three options include shortening the
loan's term, trading a fixed rate mortgage to an adjustable rate mortgage
loan, or vice versa - trading an adjustable rate mortgage for a fixed
rate mortgage.
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
your 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 reissue 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.
