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. 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.
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 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 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 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 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.
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?
The fees described below are the charges
that you'll most likely encounter in refinancing.
-
Title Search and Title Insurance
This charge will cover the cost of examining the public record
to confirm ownership of the property. 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 $100,000 loan would be
$1,000. 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 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
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 costs of
paying off any second mortgage 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 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.
Refinancing Savings On A
$100,000 Loan
|
Your Present
Mortgage Rate |
|
Current
Monthly
Payment |
|
Monthly
Payment
@ 8.0% |
|
Monthly
Savings
@ 8.0% |
|
Annual
Savings
@ 8.0% |
|
|
|
|
|
|
|
|
|
14.0% |
|
$1,185 |
|
$735 |
|
$451 |
|
$5,412 |
13.5 |
|
1,145 |
|
|
|
411 |
|
4,932 |
13.0 |
|
1,106 |
|
|
|
372 |
|
4,464 |
12.5 |
|
1,067 |
|
|
|
333 |
|
3,996 |
12.0 |
|
1,029 |
|
|
|
295 |
|
3,540 |
11.5 |
|
990 |
|
|
|
256 |
|
3,072 |
11.0 |
|
952 |
|
|
|
218 |
|
2,616 |
10.5 |
|
915 |
|
|
|
181 |
|
2,172 |
10.0 |
|
878 |
|
|
|
144 |
|
1,728 |
9.5 |
|
841 |
|
|
|
107 |
|
1,284 |
9.0 |
|
805 |
|
|
|
71 |
|
852 |
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