Home Mortgage
Refinance Guide
A fully informed consumer is in the best position to make a sound
financial choice. If you are considering refinancing your home mortgage,
this article will provide useful basic information about refinancing. It
cannot provide all the answers you will need, but we believe it is a good
starting point.
A Consumer's Guide to Mortgage Refinancing
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.
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make good financial sense or
everyone. A general role of thumb is that refinancing becomes worth your
while if the current interest rate on your mortgage is at least 1-2
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 than the current rate. You may even find you
could recoup the refinancing costs in a shorter time.)
Refinancing your mortgage 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 they 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 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 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 Your Mortgage?
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.
Because costs may vary significantly from area to area and from lender to
lender, the following are estimates only. Your actual closing costs may be
higher or lower than the ranges indicated below.
Application Fee $75 to $300
Appraisal Fee $150 to $400
Survey Costs $125 to $300
Homeowner's Hazard Insurance $300 to $600
Lender's Attorney's Review Fees $75 to $200
Title Search and Title Insurance $450 to $600
Home Inspection Fees $175 to $350
Loan Origination Fees 1% of loan
Mortgage Insurance 0.5% to 1.0%
Points 1% to 3%
* 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.
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. |
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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 article 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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