The Facts about Mortgage Refinancing

How worthwhile is it to refinance?

Refinancing can save you considerable expense, but it won’t be the best option for every homeowner. You will want to consider refinancing when the current interest rate on your mortgage is at least two percentage points higher than the current market rate. Since there are always closing costs involved, the homeowner must factor those costs into their final decision.

Your first consideration is to estimate how long you plan to reside at your current house. Usually, it takes at least three years to see an overall cost savings. Of course, if your loan amount is quite high, you may still choose to refinance your home even if the refinanced rate is only 1.5 points lower.

When can refinancing work well for homeowners?

• They want to lower their mortgage
  loan rate.
• A fixed-rate loan is desired instead of an adjustable rate mortgage (ARM). This will enable the homeowner to know exactly what their payment will be for the remainder of their loan.
• They need an ARM with a lower interest rate or interest rate payment caps.
• The homeowner needs to maximize their equity earlier so they convert the loan to a shorter time period.

Points to Consider when Refinancing an ARM (Adjustable Mortgage)

• Monitor the amounts of your monthly payments. Adjusting your interest rate on your present loan could increase your monthly payments substantially.
• Know the market rates! Confirm that the new ARM interest rates offered to you are not two or three points higher than the prevailing market rates.
• Can you still pay off the loan? Will you still be able to pay off your loan by the end of the original term, if your new mortgage sets a cap on the amount of your monthly payment?
• Will your loan be paid off in the same time? Keep in mind that refinancing a new ARM means you need to evaluate if you will still be able to pay the loan in full in the same amount of time.

Typical Refinancing Costs

Do not forget the refinancing fees listed below. While you may be saving considerable expense for the life of your loan, these costs need to be included in your overall refinance cost.

Application Fees

Your lender adds this charge to cover the initial costs of processing you loan request and checking your credit report.

Title Search and Title Insurance

The public record will need to be examined to confirm ownership of the property. This fee also insures the policyholder in a specific amount for any loss caused by discrepancies in the title to the property.

Loan Origination Fees and Discount Points

For the work involved in preparing your loan, the lending institution charges an origination fee. 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 $200,000 loan would be $2,000.

Lender’s Attorney’s Review Fees

Usually, an attorney or a company will conduct the closing for the lender. Therefore, the lender will charge a specified sum for this service. It’s a good idea to retain your own lawyer to ensure that you receive the utmost representation in your interests at all stages of the transaction, including settlement.

Appraisal Fee

Your property may need an appraisal to assess its market value. This fee pays for having a licensed appraiser evaluate the condition and value of the real estate.

Prepayment Penalty