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 brochure 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 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.
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 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 in this brochure 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.
|
|
|
|
| 14.0% |
$1,185 |
$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 |
As
you can see, even if you refinanced your mortgage from
only 9.0 percent to 8.0, you would start saving immediately
and would recoup the entire costs (assuming them to
be approximately $3,000) in about 3 1/2 years. In the
first month alone you would be contributing more than
$70 toward recouping the costs of refinancing, and by
the end of the first year, you would have saved approximately
$852. The greater the spread between your current mortgage
rate and your new rate, the greater your savings.
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