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Should I refinance?
Here is some information that may help you decide. If you do refinance, the process will remind you of what you went through in obtaining the
original mortgage. Refinancing a mortgage is simply taking out a new mortgage therefore you will encounter many of the same procedures-and the same types of costs-the second time around.
Is Refinancing Worth It?
Refinancing can be worthwhile, but it does not make good financial sense for everyone. In general refinancing becomes worth your while if the
current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. This figure is usually accepted as the safe margin when balancing the costs of refinancing a mortgage
against the savings.
Another consideration is how long you plan to stay in the house. Most sources say that it takes at least three years to realize the savings from a
lower interest rate, given the costs of the refinancing. This depends on your loan amount and the particular circumstances, however, you may choose to refinance a loan that is only 1.5 percentage points higher than
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:
nWant to get out of a high interest rate loan to take advantage of
lower rates. This is a good idea only if they intend to stay in the house long enough to make the additional fees worthwhile.
nHave 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.
nWant 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.
nWant to build up equity more quickly by converting to a loan with a shorter term.
nWant 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 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 I refinance my adjustable rate mortgage?
In deciding whether to refinance an ARM you should consider these questions:
nIs the next interest rate adjustment on your existing loan likely
to increase your monthly payments substantially?
nWill 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?
nIf 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 to a new ARM or a fixed-rate loan 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 are most likely to encounter in a refinancing.
Application Fee
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 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 also be required to pay for other legal services relating to your loan which are provided 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 Points
The origination fee is charged for the lenders work in evaluating and preparing your mortgage loan. 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 deterrent 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 loans including loans 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.
Generally 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 above information is intended to help you ask the right questions when considering a possible refinancing of 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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