Refinancing Your Mortgage?
interest rate and create cash flow
ARM to a permanent fixed interest rate
fixed interest rate into a ARM
equity into cash
to a shorter term to pay off the loan more quickly
Eliminate Mortgage Insurance (MI)
and "No Fees"
from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Mortgage
from a Fixed Rate Loan to and Adjustable Rate Mortgage (ARM)
Cash Out of your home
Mortgage Insurance (MI)
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 goals
to what's available, 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.
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?
you plan to stay in your home for at least 3 years?
loan where the lender pays all of your closing costs (title & escrow
fees, appraisal, lender's fees, etc.- any non-recurring expenses), is
commonly referred to as a ``no-cost'' loan. A true ``no-closing cost'' loan
differs from both a ``no lender fee'' loan or a loan in which the lender
adds the closing costs to the amount financed. A ``no lender fee'' loan,
sometimes advertised by banks, usually will not cover the title, escrow, and
other outside charges you may need to complete the refinance.
With a true ``no-closing cost'' loan, you can refinance for any incremental
drop in your interest rate since the transaction costs are zero. Even in a
declining rate market, where you believe rates may continue to fall, a
no-cost loan will make sense. Should rates continue to decrease you will
have invested nothing in the loan costs, and can simply refinance at any
time. Some borrowers refinance every year or less!
are a variety of interest rate and point combinations available to the
borrower at any point in time for the same product or loan type. As an
example, for a loan amount of $200,000 a borrower can be quoted 6.75% with
.875% points, 7.0% with zero points, or 7.25% with no closing costs. All
three of these quotes are for a 30 year fixed rate mortgage. The lender
allows the borrower to choose amongst rate and point combinations since some
people prefer a lower rate immediately, while others prefer minimizing how
much they pay out of pocket up front. Thus, the borrower can select the
combination which feels most comfortable to their personal situation. For
some borrowers, the no closing cost option of 7.25%, while providing a
slightly higher rate, still requires the least investment up front and
therefore is the best option.
No cost loans will always carry a slightly higher rate than a loan that does
not pay your costs. In general, a no cost loan is the better strategy if you
plan to keep your loan for the next two and a half to three years. Longer
than that, you should consider paying the costs yourself to get a lower
rate. Over time, the lower rate will save you more money. And if you plan to
keep the loan for four to five years, it often makes sense to pay points to
get an even lower rate.
your loan includes fees, there are several fees associated with refinancing
a loan The fees described below are the charges that you are most likely to
encounter in a refinancing.
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
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
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.
Attorney's Review Fees
Search and Title Insurance
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 or 15
years. Loans are available with fixed rates for 3, 5, 7, and 10 years and
the shorter the initial 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.
Switching to an adjustable (ARM) really
can make sense in some situations. If you've recently decided to start
looking for a new home, or will be relocating within the next few years, it
may make sense to evaluate your current loan. By switching from a 30 year
fixed to a low rate adjustable or short term fixed, such as a 3 Year Fixed,
you can save substantially over the remaining time that you'll be in your
home. In this type of situation it almost never makes sense to pay closing
costs, so shop for a no cost loan with a slightly higher rate. Also, don't
take a loan with a prepayment penalty, unless the prepayment is waived upon
sale of the home. This strategy can be best explained by showing an example.
For simplicity, we're assuming that your loan balance is the same on both
the refinance and original loan.
primary advantage of home mortgage loans is that the interest costs are
deductible for tax purposes. If you are currently
paying a higher rate of interest on credit cards, car loans, or other forms
of debt that are not deductible, it may make sense to pull the cash out of
your home (provided that you have the equity) and use it to pay off those
Lenders will typically allow you to borrow up to 75% of the appraised value
of your home in a cash out refinance. (Some lenders will go up to 80%,
however the loans offered will be less competitive than at 75%.) Paying off
other bills or credit cards, buying a new car, sending the kids to college,
investing in an Internet start-up, or buying additional real estate are all
good reasons to refinance your home and take cash out.
Even if you're able to keep you credit card interest rate at 8-9% with low
introductory offers, when you consider the tax savings of your mortgage
interest, you will be paying less interest if those balances were part of
your mortgage instead. If you are paying 8% on your mortgage and your tax
bracket is 33%, your net interest rate is 5.3% which is still less expensive
than any credit card program over time.
you purchased your home with less than 20% down, chances are you have a loan
that is insured by ``Mortgage Insurance'' (MI). Most borrowers are aware
that they are paying MI on a monthly basis, but you can check your mortgage
statement if you're not sure. As your home appreciates or your loan balance
decreases (or a combination of the two), your equity in the home will exceed
20%. At that time a favored method of eliminating the MI tied to the loan is
to refinance. The savings of eliminating the MI alone will often warrant
Be aware that mortgage lenders value your property at what comparable homes
have sold for in the last 6 months, not the price at which they are
currently listed. If you are close to that 20% mark, ask your mortgage
source to provide you with a ``comp search'' estimate (this service should
be available for free) which will give you an idea of how your lender will
view your home's value.
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