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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.
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| 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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