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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 advisors about lending practices,
mortgage instruments, and your own interests before you commit to any
specific loan.
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 advisors about lending practices,
mortgage instruments, and your own interests before you commit to any
specific loan.