Refinance Info

Refinancing is simply taking out a new mortgage

If you are considering refinancing your home loan, the first steps are determining your short and long term goals and then evaluating the different types of refinance programs available.  Once you have your free mortgage quote, you will be able to make an informed decision on how you want to proceed.

The first thing to consider is your current interest rate.  If you purchased your home when interest rates were high or if you have an adjustable rate mortgage, chances are refinancing to a different- lower term may be able to save you money immediately and over the course of your loan.  If you purchased or refinanced your home when interest rates were low, refinancing may not be the best thing to do.

In the past, it was a general rule that refinancing makes good financial sense if your current interest rate is at least 2 percentage points higher than the current market rate and you plan on owning your home for at least 3 years.  The 2 point difference in the interest rate was necessary in order to recoup refinance fees.  Nowadays, it makes sense to consider refinancing with less fluctuation in the interest rate because it is possible to refinance and pay no fees or no points! You consider the length of time for which you will own your home because of the costs involved in refinancing. 

Is your current interest rate 2 percentage points above the current market rate?
Do you plan to stay in your home for at least 3 years?

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.

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.

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.  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.

Fee Cost

$75 to $300
Appraisal Fee

$150 to $1000
Survey Costs

$125 to $300
Homeowner's Hazard Insurance
ave $300 to $600

Lender's Attorney's Review Fees
$75 to $200

Title Search and Title Insurance
(Range from Loan to Loan)
Home Inspection Fees
$175 to $350

Loan Origination Fees
1% of loan

Mortgage Insurance
0.5% to 1.0%
Points
1% to 5.99%

Switch from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Loan

If your adjustable (ARM) has moved up on you in the last few years and you don't feel like starting with another low rate only to watch it move again,  consider refinancing into the security of a fixed rate loan. You must remember that all fixed rate loans are not the same.

Today's market offers numerous choices for loans that are fixed for a shorter time than the traditional 30 years. Loans are available with a fixed period, the lower the interest rate. All of these loans are amortized over 30 years so there's no need to worry about the payment being too high. All you need to do is match up how long you expect to keep the loan with the closest fixed term. This may be shorter than how long you plan on keeping your home, if you feel comfortable with the refinance process.

At the end of the fixed term, these loans automatically convert into ARMs with adjustments annually, so there is no balloon payment.  Often the current fixed rates will be above the rate on your current ARM, unless of course, you are several years into your adjustable. You will need to decide if the security and insurance against further rate increases is worth the additional payment that you might incur.