Consumer's Guide to Refinancing Your
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.
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not
make good financial sense for everyone. A general role of thumb is that refinancing
becomes worth your while if the current interest rate on your mortgage is at least 2
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
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 than 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
- Want to get out of a high interest rate loan to
take advantage of lower rates. This is a good idea only if they 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 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.
Should You Refinance Your ARM?
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 to a new ARM or a fixed-rate loan enable you to pay your
loan in full by the end of the term?
What Are the Costs of Refinancing?
The fees described below are the charges that
you are most likely to encounter in a refinancing.
(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.)
||$75 to $300
||$150 to $400
||$125 to $300
|Homeowner's Hazard Insurance
||$300 to $600
|Lender's Attorney's Review Fees
||$75 to $200
|Title Search and Title Insurance
||$450 to $600
|Home Inspection Fees
||$175 to $350
|Loan Origination Fees
||1% of Loan
||0.5% to 1.0%
||1% to 3%
Application Fee. This
charge imposed by your lender covers the initial costs of processing your loan request and
checking your credit report.
Appraisal Fee. This fee
pays for an appraisal which is a supportable and defensible estimate or opinion of the
value of the property.
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.
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.
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.
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.
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
The information contained in this brochure is
intended to help you ask the right questions when considering a possible refinancing of
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.