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 page 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 worth while, 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 one and a half 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?
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 ARMs?
- 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 to encounter in a
refinancing.
- 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 policy holder 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, the points you pay can be financed by adding them
to the loan amount. 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 which 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
be 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 your 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 on
this page 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 advisors
about lending practices, mortgage instruments, and your own
interests before you commit to any specific loan.
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