|
Points
· Tax Tips ·
When to refinance
· Why Refinance ·
Myths vs. Facts
Frequently Asked
Questions ·
Refinancing Essentials ·
Cost of Refinancing
· Process
Lower
Your Rate with Points
[back to top]
A point,
defined as charges paid to the lender, usually paid at
closing, equals one percent of the loan amount. If you have
a $250,000 house, one point is $2,500. If you're planning to
refinance your home at say 6%, for example, you may want to
consider making your interest rate even lower by paying one
point. Reducing the interest rate by paying these points is
called "buying down" the rate because you're paying interest
up front. Points are also referred to as "prepaid interest".
In some instances, a lender may finance the points so you
will not have to pay them up front. If you do have to come
out of pocket for the points at closing, you would just add
it to the other closing fees for the loan.
Before you
refinance, compare different lender rates and points.
Usually, a lower rate indicates more points. For example, a
lender may charge six and three quarter percent interest
with one point. Generally, each point that you pay will
reduce the interest rate offered by the lender by about
one-eighth to one-quarter of one percent.
When to
Use Points [back to top]
If you plan
to move within two years of refinancing, paying points might
not be a good idea. It takes about 5 to 7 years to recover
the cost of points paid at closing. James Morgan has a
30-year fixed mortgage loan for $100,000. James has an
interest rate of 6 3/4% with one point and his monthly
payment is $645. If he did not pay the point, his interest
rate would be 7% and his monthly payment would be $661.17.
So the point saves him $16.17/month. In five years, James
will have recouped the point he paid to get the lower rate.
Because he will continue to pay lower payments each month
after that, James will benefit from lower monthly payments.
But if he moves after two years, he will not recover his
costs.
Tax Tips
[back to top]
Note: The
following includes an overview of tax laws that is not
intended as legal advice. You should consult a tax advisor
to get answers to your specific tax questions.
If you
itemize on your tax return, you should be able to deduct the
points you pay either upfront in the year you pay them or
each year during the life of the mortgage. You may be able
to deduct points paid at closing and in the year they are
paid by meeting the following requirements:
Cash
Accounting - You report income yearly and deduct expenses
you've paid for that year.
Permanent
Address - Your loan is secured by your primary address
Status Quo
- Points are a standard practice where you live
Origination
points - The points were not lender fees (i.e. amounts paid
to originate and process your loan)
Homeowners
who will claim itemized deductions on their tax returns and
who purchased last year should be eligible to deduct all the
points paid at closing, even if the seller paid the points.
If the points on your loan are not deductible in the first
year, you can generally deduct them over the life of the
loan. In addition, the IRS has ruled that you can deduct the
points on future returns even if you are claiming a standard
deduction.
Is Now The
Time To Refinance?
[back to top]
With
mortgage interest rates still at their historic lows, the
time may be right for you to refinance your existing
mortgage. What is involved in the process? Will your monthly
mortgage payment be lower? Will it be worth the cost of
refinancing? With possible rate increases on the horizon,
the time to consider refinancing is now.
Click here to see some tips
when to refinance.
The
Refinance Process: Is It Right for Me?
[back to top]
To
determine whether a refinance might be right for you, you
should begin to think about the following questions:
What are
your reasons for refinancing?
How long
you plan to stay in your home?
How much
equity you have built up in your home?
What is the
interest rate of the existing mortgage?
What is the
interest rate of the new mortgage?
What costs
are associated with refinancing?
What is
your current income and credit status?
To be
eligible to refinance, a lender usually requires that you
have at least 10 percent equity accumulated in your
property.
Why
Refinance?
[back to top]
A refinance
of your current loan may make sense for several reasons:
You may
want to get a mortgage with a lower interest rate to reduce
your monthly payment.
You may
want to borrow additional funds for home improvements,
education bills, or other needs. This is often referred to
as a "cash-out" refinance.
You may
want to switch from one type of loan product to another: for
example, from an adjustable-rate loan (ARM) to a fixed-rate
loan. This may make sense if interest rates have fallen
since you took out your ARM and you now want the assurance
that your mortgage payment will remain the same for the life
of your loan.
One common
type of refinance is when you have an adjustable-rate
mortgage and you refinance to a fixed-rate mortgage. Your
mortgage payments with an ARM adjust with changes in market
rates; so when interest rates go up, your monthly payments
likely go up at the next rate adjustment period. But with a
fixed-rate mortgage, your interest rate stays the same for
the entire term of your loan. The predictability that comes
with locking in the same interest rate for as long as you
live in your home is one reason why changing from an
adjustable-rate mortgage to a fixed-rate loan is one of the
more popular refinancing choices -- especially when interest
rates are falling.
Here is
another scenario. You might want to change from one type of
ARM to another ARM to get a better combination of rate and
term: for example, from a one-year ARM to a 5/1 ARM (in
which the new rate remains fixed for the first five years
and then adjusts annually). You should compare the financial
index, margin, and any rate caps in your existing ARM with
current market rates before you decide to refinance to
another type of ARM. It is important to understand how often
your mortgage will adjust and how much your payment can
change with each adjustment and over the life of the loan.
Also, be sure to ask whether any conversion terms apply or
if there are costs to convert to another type of mortgage.
Another
reason to refinance is to use the equity in your home,
perhaps for a major purchase, a child's education, or even
debt consolidation. You have been building equity in your
home since you first started making monthly mortgage
payments. A portion of your payments is used to pay
principal -- helping you build equity -- and the rest is
used to pay interest, taxes, and insurance. With this type
of refinance -- often referred to as a "cash-out" refinance
-- your new loan lets you draw on the equity in your home
and provides an easy way to get cash you may need for other
purposes.
Refinancing: Beneath the Surface
[back to top]
Refinancing
can do a lot for you. From lowering your mortgage and
interest rate, to getting a shorter loan term, to absolving
your spouse from the deed, to trading an ARM for a fixed
rate, to protecting yourself in case of a job layoff,
refinancing can be used as a serious strategy for long term
savings.
Strategy #1
- Don't Wait to get Lower Rates Refinancing generally
becomes cost effective when current interest rates are lower
than your current mortgage rate. This strategy may lower
your monthly payments as well as the interest over the life
of the loan. For example, say you have a $300,000 30-year
loan at a fixed rate of 7%. You refinance at 6.5% which will
save you approximately $100.00 a month, and about $35,000 in
interest over the life of the loan.
Strategy #2
- Less is More By reducing your loan term from 30 years to a
10, 15 or 20- year loan, not only can you speed up the
equity process, but you can lower the total interest rates
and pay more towards the principle. Robert Benson moved into
his house 6 years ago with a salary of $23,000. Robert now
owns his own business and makes $60,000. By shortening his
loan term, he will pay a slightly higher mortgage, but he
can afford it. He will also be able to pay off his home loan
before he retires.
Strategy #3
- Separate When You Separate If you are divorced, you can
remove your ex-spouses name from the deed by refinancing,
because, in a refinancing, the old loan is paid off and you
get a new one. Consider Gretchen and Byron Martin, who
divorced 6 months ago. Byron leaves the house to Gretchen,
who is able to afford the mortgage by herself. Now Gretchen
can refinance and change her interest rate from 7.5% to 6%.
Refinancing will also make her solely responsible for the
property.
Strategy #4
- Take the Surprise out of an ARM and get it FIXED When
interest rates run high, many owners take advantage of an
Adjustable Rate Mortgage (ARM) which tend to offer great
introductory interest rates. However, the key word is
"adjust". Your interest rate could change considerably after
a specific time period. Trading in your ARM for a fixed rate
is another effective refinance strategy. Jason and Renee
moved in their house 5 years ago. They were offered a loan
with a fixed interest rate of 8%. Instead, they opted for a
five-year arm of 5.59%, which was due to adjust in five
years. After their initial 5-year rate period expires, their
mortgage rate, which resets based on the one-year Treasury
rate, could increase by two points a year or more. Since
they plan to stay in their house, it makes sense for them to
refinance now to get a new loan with a fixed rate of 6%.
Strategy #5
- Don't Let A Layoff Force You to Layoff Mortgage Payments
With such a volatile economy, layoffs and pay reductions
have become common. One of the ways you can protect your
home after being laid off, is to refinance for more than the
balance and put the difference in a safe place. This
strategy is called "cashing out". Linda, who works in Human
Resources for her company, found out they were going to lay
off 70 people. She wondered if she would be one of them.
With no children and no car note, Linda only worried about
her mortgage. She pays $1,538 a month on a $200,000 30
year-fixed loan at an 8.5% interest rate. She refinanced at
7.5%, and is able to borrow an extra $20,000 to put aside
just in case she's one out of 70.
Refinancing: Myths vs. Facts
[back to top]
There are
times in the mortgage industry when the market dictates
certain advantages: Whether it's a good time to buy or sell
a home for instance. You may have several reasons for
wanting to pay off your old loan and secure a new loan
through refinancing. Listed below are a few popular
myths/misperceptions about refinancing.
Myths and
Facts
Myth #1
Refinancing simply means making a few changes to my
mortgage. Fact #1 Refinancing is the process of acquiring a
brand new mortgage, and using the money to pay off or close
your old mortgage.
Myth #2
When the Federal Reserve cut the rates again, I'll get a
super deal. Fact #2 Federal rate cuts don't always mean
mortgage rates will be lower. Generally, Fed rate reductions
are figured into mortgage rates weeks before an anticipated
rate cut occurs through Treasury yields.
Myth #3
It's going to cost me too much to refinance. Fact# 3
Probably not. Because this is such a competitive environment
for refinancing, you may be able to convince a mortgage
company to waive some of the application, appraisal and
legal fees, which can run you up to $3,000. Also, work with
your lender to figure out how much you can save each month.
With a good deal, you will be able to recover your refinance
costs in a couple of years and save thousands of dollars in
interest over the life of the loan.
Myth #4
There are always penalties for paying off my loan early.
Fact #4 Some states prohibit penalty points for paying off
an original loan before amortization. The cost of a
refinance depends on the number of points, interest rates
and other costs for securing the loan.
Myth # 5
The only time to refinance is if current interest rates drop
a full 2% below my rate. Fact # 5 As the amount of loans
increase, and the cost of refinancing stays relatively
stable, a mortgage rate ranging from 3/8 to 1/2 a percentage
point may make sense to refinance, and save you thousands of
dollars. For example, a fixed 30 - year $200,000 loan,
borrowed at 7% compared to 7.5%, will save more than $24,000
throughout the life of the loan.
Myth #6
It's ok for me to refinance with less than perfect credit.
Fact #6 Although you may be eligible for a refinance due to
the amount of equity in your home, where you stand with your
credit could make a substantial difference in the rate you
will be offered.
Refinancing: Popular Questions
[back to top]
Buying a
house is probably one of the largest purchases you'll ever
make. Refinancing is probably one of the smartest strategies
you can accomplish to save thousands of dollars in your
investment. Although there's a lot of general information
about refinancing, it's good to know the specifics. Here are
answers to some commonly asked questions:
Popular
Questions
When
does it make sense to refinance? People usually refinance
for 3 basic reasons:
To lower
their interest rate - Will save thousands of dollars over
the term of the loan.
Extend/Change the term of their mortgage - Switch mortgage
products (i.e. Adjustable Rate Mortgage to a Fixed Rate or
change the term of the loan from 30 years to 15 years to
save thousands of dollars in interest).
To get cash
out - Leverage the value in your home by using the cash
received at closing for a large purchase, such as college
tuition or renovation.
What
factors should I consider before refinancing? There are
a few things to consider before you begin the process of
refinancing:
Your
reasons for refinancing.
Your
current interest rate.
The
interest rate of the new mortgage (should be 1 to 2 points
lower than current rate, say from 6% to 4%).
The total
cost of refinancing (includes title, appraisal, legal,
inspection, origination, settlement fees, discount points,
etc.).
The equity
you have in your home (at least 5% to qualify).
The length
of time you plan to stay in your home (is it worth it to
refinance, when it's going to take 3 years to recover your
costs and you plan to move in two?).
Credit (in
good standing).
Current
Income.
Tax
Benefits (know IRS refinance rules).
Time it
takes to recover your refinance costs (up to three years).
What are
the different types of refinancing? There are several
refinance options available to suit your needs:
Traditional
- With this type of financing, you will pay off your
existing loan and secure a new one at a lower interest rate.
Refinancing is structured to save you thousands of dollars
over the life, or term, of the loan.
Accrue
Equity more Quickly - In an attempt to build value (equity)
faster, you can refinance a 30-year mortgage with a 15 or 10
year loan. This will lower your total interest and
accelerate the equity in your home. Equity is defined as the
value of your home minus what you have left to pay on your
mortgage.
Cash Out -
With this refinancing option, you can leverage the equity in
your home, and receive the cash when you close on your loan.
Low Cost
Refinancing - You may be able to get some of the fees and
closing costs waived, which will reduce your up front fees.
By negotiating with your original lender, you may be able to
get a reprieve on point reduction, title search, application
or credit check fees.
No-cost
Refinancing - This type of refinancing will save you
out-of-pocket costs during closing. However, it's important
to note that you may pay a slightly higher interest rate.
Mortgage
Product Change - You may be able to benefit from switching
mortgage products. For instance, say you originally financed
with an Adjustable Rate Mortgage (ARM) when rates were
higher. Typically, ARMS have lower interest rates than fixed
loans for the first few years. But, now that you've been in
your home a while, you may prefer a mortgage that is more
stable than an unpredictable ARM. Consider refinancing to a
fixed rate loan, which will remain the same until you've
paid off your mortgage.
How many
rate quotes should I get? It's important to remember,
refinancing involves more than a good rate, there are
several built-in costs and fees you should be aware of. You
want to be able to compare the Annual Percentage Rate (APR),
which indicates the total credit cost of the refinancing.
Take a look at the fixed rate comparison chart to see the
types of questions you should ask every lender you call.
How much
will a refinance cost me? Your total expenses for a
refinance depends on the number of points, interest rate,
and associated costs of preparing the loan. In an effort to
provide you with a low rate, a lender may charge discount
points that average three to six percent of the borrowed
amount. If you have a $100,000 mortgage, 3 to 6% will cost
you $3,000 to $6,000 to close.
Can I
change my mind? Yes. You have three days to change your
mind about the loan. Officially, it is called your right to
recision. According to federal law, you are allowed to
cancel the refinance process after settlement, receipt of
your Closing Disclosure (CD), or receipt of your
cancellation notice. You are required to put your recision
in writing.
Refinancing
Essentials: The Basics
[back to
top]
What Costs
Are Associated With a Refinance?
Would you
like to get more value in your home by getting a loan with a
shorter payoff term?
Are you
thinking about refinancing your mortgage, but feeling unsure
about the process?
If you
answered yes to any of these questions, then you may well be
a candidate for refinancing your loan.
What is
Refinancing?
When you
refinance, you pay off your old loan and get a new one. Just
as you did for your original loan, you'll pay settlement
costs, related fees and discount points when you close.
Refinancing is designed to help you save money over the life
of your loan with lower interest rates, or to take advantage
of the difference in cash from the value you've earned in
your home, or equity.
What
does it cost?
Just as
every snowflake is different, so are the associated costs
for refinancing, depending on interest rates, points, and
other required costs. For a traditional refinance, you may
have to pay in the range from 3% to 6% of the principle on
your mortgage. Here are a few items you should expect to pay
for:
Fees
relating to your loan
A fee to
have your property re-appraised (unless you refinance with
the same lender)
A credit
report fee
A loan
application fee, which covers the lender's cost to process
your application
A loan
origination fee, which covers the lender's work in
evaluating and processing your loan, generally expressed as
a percentage of your loan.
Other fees,
depending on the type of mortgage refinancing you are
seeking, may include private mortgage insurance (PMI) a VA
loan guarantee, or FHA mortgage insurance.
Pre-payment
penalties, which some mortgages carry for paying off the
loan before the term has expired.
Discount
points lower your interest rate. Each discount point equals
one percent of the loan amount. For example, one point on a
$150,000 mortgage equals $1,500. Points are paid up front at
closing.
Closing
costs
A fee for a
search of the public records of ownership of your property
A title
insurance policy, which protects the lender for any loss due
to a discrepancy in the title. (You may be able to have your
settlement company reissue your current title policy at a
reissue rate, saving you some of the cost to have this
service performed.)
A new
survey of your property to confirm that no changes to the
land or physical structures have been made that would affect
its potential sale.
Attorney's
fees and most of the other fees associated with closing.
Many
lenders offer a "no-cost" refinance in which the fees and
other costs are absorbed in the new mortgage. This means
that you may have limited or no out-of-pocket costs at
closing, but the lender may increase the interest rate or
add the cost to the principal amount you borrow thus
increasing your monthly payment.
Note that
if you choose to pay points, generally these are tax
deductible over the life of the loan unlike the total
deduction you may take when you first purchase the home. So
if you refinance with a 30-year mortgage and pay $1,500 in
points, you likely will be required to deduct 1/30 of $1,500
or ($50) each year you own the home, rather than deducting
all $1,500 in the year you do the refinance.
What's
In it for You?
While the
benefits of refinancing seem apparent when interest rates
drop, you have to add lender fees and closing costs. It will
take some time to recover the costs of refinancing your
mortgage. You can calculate how long it will take to recover
your up-front refinancing costs through lower monthly
mortgage payments with this simple formula:
Refinance
Costs/Monthly Savings = Months to Recover Costs
(Approximately)
Refinance
Essentials: The Nuts and Bolts
[back to top]
Refinancing
may save you thousands of dollars over the life of your
loan. Here's how:
The "IF"
Factor
If the
current interest rate is at least 1.5 to 2% points lower
than the rate you originally financed,
If you've
been in your house long enough to build equity,
If you
bought your house with equity (i.e. foreclosure),
If you need
a large sum of money (i.e. cash-out),
If you can
convert your 30 year mortgage to a 20 or 15 year mortgage,
shortening your term and reducing your interest rate,
If you can
convert an Adjustable Rate Mortgage (ARM) to a fixed rate or
an ARM with better terms,
You may
want to consider refinancing.
How Does
a Refinance Work?
The
refinancing process is similar to the one you followed when
you got your first mortgage loan. The four-step process is
listed below:
1. Check
Your Credit
You should
order a copy of your credit report and review it before
beginning the refinance process. Please check our
resources Web page for more
information in obtaining your
free annual credit report.
You can also order a credit report by contacting one of the
major credit bureaus:
Equifax:
(800) 685-1111;
www.equifax.com
Experian:
(800) 682-7654;
www.experian.com
Trans
Union: (800) 916-8800;
www.tuc.com
2. Get
Your Paperwork Ready
It's likely
you will have to provide the lender with documentation and
information that are similar to those you submitted for your
original loan. This checklist can help you organize your
paperwork and get it ready for your new loan application.
Check with your lender to find out if additional
documentation is required. For more
information on required
documents.
Income -
W-2s for the past two years - paycheck stub(s) covering the
past 30 days (must include year-to-date earnings, name and
Social Security number) Note: If you are self-employed, you
may also need to submit the most recent years' personal tax
returns proof of other income for consideration in loan
application such as alimony, child support, or gift letter.
Assets -
bank statements covering the past 3 months for all savings
accounts, checking accounts, 401(k) accounts, and any other
asset account
Debts -
documentation for liabilities -- most recent loan statement
for current mortgage, student loan, car leases/loans, and
credit card debts, as well as alimony and child support, if
applicable
Other
original property settlement documents -- deed, deed of
trust, survey, and title policy insurance policies --
homeowner and flood, if applicable insurance policies --
homeowner and flood, if applicable
3. Apply
for Financing
Figure out
the type of mortgage that best meets your needs.
Decide
whether you want to tap into some of the equity in your home
by applying for a "cash-out" refi, or whether you prefer to
minimize up front costs by a "no-cost"refi.
Talk to
your loan officer for advice on how best to accomplish your
financial goals.
Discuss
with the loan officer interest rate lock options and when
best to lock in a rate.
Be sure to
review your disclosures (which should be given to you at
application or within 3 days), in particular:
Good Faith
Estimate of Settlement Costs, which estimates your
closing costs.
Truth in
Lending statement, which shows your estimated monthly
payment, the cost of your finance charges, and other facts
about your mortgage.
Find out
how long the process will take before you get a commitment
and can close the transaction. Generally, refinances are
processed much faster than purchase loans. Check that your
rate lock extends to the scheduled closing date (and a
little beyond for safety).
4. Close
the Loan
You have
the option of choosing your own settlement attorney or using
the one recommended by the lender. The closing attorney and
lender will coordinate all the necessary paperwork. Request
a copy of the settlement statement (also called the HUD 1)
prior to closing so that you can review all the costs.
Unless you are getting a "no-cost" refi, you will need to
bring a cashier's check to settlement.
When you
refinance, you have 3 business days after closing in which
to change your mind and rescind the transaction. This is
called the rescission period. Until that time is over, no
funds are disbursed, so your old mortgage is not paid off
and your new mortgage is not funded. If you do have a change
of mind, you must notify the settlement attorney in writing
by midnight of the third day.
Refinancing: Things You Should Know
[back to top]
Now that
Refinancing is popular, it is important for you to
understand that there could be some companies that might try
to take advantage of you. From giving you phony rates over
the telephone to adding ridiculous hidden costs in your
loan, some financial companies will do anything to make
money off of you. Here are some tips to make sure that you
get the most out of your refinance experience:
Tips:
Make sure the company is reputable
Many new
companies will try and get a slice of the refinance pie.
Lack of experience, no reputation, and no company history
are just a few of the factors that can contribute towards a
bad deal.
What should
you do? Ask lots of questions and make sure you feel
comfortable with their level of service. Make sure you
understand every aspect of your refinance process.
Know
What Questions to Ask
It takes more than calling a lender and asking "What's your
rate?" A lender could tell you the rates are at an all time
low of 5%. But what they don't tell you is that there are
three origination points involved, there are 20% refinance
penalties involved, etc. It is your responsibility to ask
about the conditions of the rate, talk about the kind of
loan you need, i.e. cash-out, low-cost refinance, lock
period, etc. Did you know that a loan with a lock period of
15 days is much lower than 60 days? But how many of us are
prepared to go to closing in two weeks? So be careful, and
be specific.
Refinance for the right reasons
Don't exchange one debt problem for another. Aggressive debt
collectors may be putting the pressure on you to pay
outstanding medical expenses, credit card debt, etc. You may
feel that by refinancing your property and receiving a "cash
out " payment, everything will be ok. Make sure you
understand that "cash out" refinancing might mean that you
owe even more debt, especially if you use your house as
collateral to consolidate debt. A higher mortgage loan
balance may mean you need to make a bigger monthly mortgage
payment when you're trying to save money with penalties,
charges and fees. You need to understand that if you fall
behind on your mortgage payments, the lender can take your
home in a foreclosure on the mortgage loan.
3 is the
magic number
You have a right to change your mind about the refinance
process. The law says you have 3 days to cancel a refinance
deal. It is called the right to recision. So if you feel you
have erred, or refinancing isn't for you at this time, you
may opt out by signing a letter with the date and
cancellation of the transaction.
Tax
Facts
It is important to understand the tax rules of a refinance,
or hire someone who does. There is tax deductible interest
on a mortgage, but it won't count if you don't itemize. Or,
if you refinance twice, there are potential tax write-offs
for the points that haven't been deducted from the life of
the loan that can be written off in a lump sum. There can be
lots of tax benefits for you, but you need to be certain you
are complying with current federal and state tax laws.
"The above
information is a general discussion of tax rules and not
intended as a substitute for the professional advice of
attorneys, tax preparers, or others. Your tax treatment
depends on your particular circumstances, therefore, you
should consult a tax advisor or Internal Revenue Service
materials to determine how the rules apply to you."
The Costs
of Refinancing
[back to
top]
If you are
considering refinancing your existing mortgage, it is
important to understand the costs and fees you'll have to
pay and how long it will take you to recover those costs.
This article provides in-depth information about
refinancing, and takes away the questions about how the
money is allocated during the process.
What You
Can Expect To Pay
Refinancing
is similar to applying for an original mortgage, so you can
expect to pay similar costs. Some of these may include:
An
application fee, which covers the lender's cost to process
your application.
A fee for a
search of the public record of ownership of your property.
A title
insurance policy, which protects the lender for any loss due
to a discrepancy in the title (you may be able to have your
settlement company re-issue your current title policy at a
reduced rate, saving you some of the cost to have this
service performed).
A fee to
have your property re-appraised.
A new
survey of your property to confirm that no changes to the
land or physical structures have been made that would affect
its potential sale.
A loan
origination fee, which covers the lender's work in
evaluating and processing your loan. It is usually expressed
as a percentage of your loan.
Other fees,
depending on the type of mortgage refinancing you are
seeking, may include a VA loan guarantee, FHA mortgage
insurance, or private mortgage insurance.
Other
Costs and Considerations
Some
refinance costs may be waived under certain circumstances.
For example, an appraisal may not be necessary if you
refinance with your original lender. Or you may be able to
get a lower rate or have some of the fees dismissed with
through negotiation.
If you have
additional cash for the closing, you may be able to bring
your interest rate down by having discount points applied to
your new mortgage. Each discount point equals one percent of
the loan amount (for example, one point on a $150,000
mortgage equals $1,500).
Be sure to
ask your lender if your existing mortgage contains a
prepayment penalty. Many states limit this penalty or
prohibit it altogether.
You may
choose to hire your own attorney to review documents and to
represent and guide you through the stages of this
transaction. If you do, you will have to pay your attorney
out of your own pocket.
Check with
the lender to see if "no-cost" financing is offered. Under
this plan, you don't pay many of the typical costs, but the
interest rate on your mortgage may be higher.
You may be
able to save paying some fees by talking to more than one
lender and selecting the one that best meets your
refinancing needs at the lowest cost.
Recouping Your Costs Over Time
An
important question to ask before starting the refinance
process is "How long will it take to recoup the up-front
costs of the refinance?" In some cases, you may have to
remain in your home for several years before you have
recouped these costs.
To
determine if you're likely to recover the fees you pay to
refinance within an acceptable amount of time, just divide
your total refinancing cost by your total monthly savings.
This will show you approximately how long it will take to
recover your up-front costs through your lower monthly
mortgage payment. If you find it would take longer to
recover your costs than you plan to remain in your home, you
may not want to refinance your mortgage. Your lender can
help you make this decision.
The Money
You Need to Refinance
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Financially, refinancing shouldn't hold too many surprises
for you. Primarily, you are paying off your old loan and
securing a new one. Many of the costs are similar to what
you paid when you first closed on your existing property.
You may be able to eliminate costs and save even more money
during the refinance process.
How Much
Money Do You Need?
To take
full advantage of lowered interest rates, your lender may
charge 3 to 6% of the principle, or total amount you borrow.
For example, if your original mortgage was $80,000, and
you've paid $20,000 to have a remaining principal of
$60,000, then your refinancing costs will average $1,800 to
$3,600.
Today,
since market conditions are favorable for refinancing,
several lenders offer low to no-cost refinancing in return
for a slightly higher interest rate, or increased loan
amount. Typically, the lender will build in fees that are
usually paid up front to save you out of pocket costs. In
the case of low-cost refinancing, you may have to pay
something like $500.
Just in
case you've gotten a little rusty, here are a few estimated
costs to use as you consider refinancing. Some of these
costs may not be charged in your situation. It's also
important to remember that these costs are estimates; your
actual costs will vary depending on lender and state.
Application Fee: $75 - $300
This fee
covers your credit check, and the initial cost of processing
the loan.
Appraisal Fee: $150 - $400
This will
cover the cost of an appraisal for your property. If you are
using your existing lender, they should already have this
information in their records.
Survey
costs: $125 - $300
Hazard
Insurance: $300 - $600
Legal
Fees: $75 - $200
These fees
will pay for the attorney used for closing on behalf of the
lender.
Title
Fees: $450 - $600
This will
cover the amount of cost of a policy insuring the
policyholder for a certain dollar amount to cover property
loss. The fee will also include the cost to examine public
records to validate the property owner.
Home
Inspection: $175 - $350
Points:
1 - 3% of loan amount.
Defined as the percentage of fees the lender will charge to
originate, or prepare the loan, there are two kinds of
points; origination and discount. Discount points are
prepaid finance charges to help you get a lower interest
rate. One point is equal to 1% of the value of the mortgage.
So, if your property is valued at $100,000, a point is equal
to $1,000.
Origination Fees: 1% of the loan
The lender
charges you this fee to evaluate your application, process
it and prepare the loan.
Other
- Whether your mortgage loan is FHA, Conventional or VA, you
may have to pay for a VA loan guarantee, FHA or Private
Mortgage Insurance (PMI), or pre-payment penalties.
As you can
see, your costs for refinancing can add up. However, talk to
your lender, as they may waive some of these costs, such as
title search, inspections and surveys. Make sure you ask
specific questions, and ask them to present you with an
itemization of charges before closing.
The
Refinancing Process
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top]
Thinking
about refinancing your mortgage but feeling unsure about the
process? Are you wondering if you can lower your monthly
mortgage payment but aren't sure if it would be worth the
cost of refinancing?
The
refinancing process is similar to the one you followed when
you got your first mortgage. In a nutshell, refinancing
involves paying off your existing mortgage and taking out a
new one. Your new mortgage could be at a more attractive
interest rate, for a different term, or an entirely
different type of mortgage (such as refinancing from a
fixed-rate to an adjustable-rate mortgage).
A good
place to start when considering whether to refinance is to
ask yourself several questions. How long do you plan to stay
in your home? Is the current mortgage interest rate more
attractive than the one you have? How much equity do you
have in your home?
You may
want to take advantage of lower interest rates to reduce
your monthly mortgage payments or you may want to build
equity in your home faster by refinancing to a shorter-term
mortgage. Ask several lenders about the interest rates they
offer, as well as any costs associated with refinancing.
You may
want to start your search for a new mortgage with the lender
you used the first time. Sometimes, this lender will give
you a better deal to keep you as a customer. You can also
get refinancing information from a real estate sales
professional you've worked with in the past.
True or
False - Take a Quiz!
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Statement: The best time to refinance is when the
interest rates fall at least 1/2 point. T or F? True.
The best time to refinance is when current interest rates
are lower than your current mortgage rate.
Statement: Refinancing is a great idea if you're going
to move in two years. T or F? False. It takes
approximately three years to recover the cost of
refinancing. If you are planning to move within two years,
you may lose money in the deal. If the interest rate
difference is considerable, say for 1 and 1/2 points or
more, you may still want to consider refinancing, especially
if you can get a "no-cost" loan, which will reduce your
mortgage payment.
Statement: You can refinance without putting any money
down. T or F? False. You are required to have at
least 5% equity in your home before you refinance.
Statement: You can refinance without having any equity
in your home. T or F? True. There are different
refinance options, such as no-cost refinancing. The lender
may build your fees into the loan.
Statement: You can refinance to get money back during
closing, called a cash-out refinance. T or F? True.
One refinance option is called a "cash-out." This option
allows you to get cash back on the approximate amount of
equity in your home during closing. Homeowners use this
option for a variety of reasons, including college tuition,
or to pay outstanding debt.
Statement: Refinancing usually takes about 6 weeks on
average. T or F? False. Refinancing can take anywhere
from two weeks to a month. To expedite a refinancing, one
rule of thumb is to have most of your paperwork ready as
soon as you're considering refinancing. You should also
arrange to get an appraisal relatively quickly, if you need
one.
Statement: There are no prepayment penalties in
refinancing. T or F? False. In some cases, there may
be prepayment penalties. This provision in your contract
stipulates that if you pay your mortgage loan off early, you
will have to pay the lender a percentage of the interest. In
some states, pre-payment penalties are not permitted.
Statement: You have three days to change your mind after
closing a refinance deal. T or F? True. The three
days allowed by law is called your "right to recision".
Statement: Refinancing can lower your monthly payments,
shorten your loan terms, lower interest rates and make more
available money to pay and outstanding debt. T or F? True.
Refinancing can offer lots of flexibility and save you money
during the term of your loan.
Building
Capital
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You would
like to build home equity faster.
By
decreasing the term of your mortgage, such as refinancing
from a 30-year loan to a 20- or 15-year mortgage, you can
usually get a better interest rate and pay off your mortgage
loan earlier, saving thousands of dollars in interest costs.
Generally, in order to pay the higher monthly payment of a
shorter-term mortgage loan, you're making more money or
you've got less debt.
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