Mortgage Refinance Guide

       
     If you are a home owner who was fortunate to purchase a house when mortgage rates were low, you probably have no interest in refinancing your current loan. Or may be you bought your home when rates were higher. Or perhaps you have an adjustable rate loan and your current fixed introductory rate is almost up and you would like to obtain a loan on a different terms.

            Should or should you not refinance?

     That is a million dollar question.  This page will answer most of the questions that may help you decide. If you are planning a refinance, the process will remind you of what you already went through in obtaining the original mortgage loan, because in reality, refinancing a mortgage is simply obtaining a new mortgage. Most of the procedures that you have encountered while obtaining your original mortgage loan will be the same and the similar types of costs the second time around will be enquired.

            Refinancing, Will It Be Worth It?

     Refinancing a mortgage loan can be very beneficial, but it does not make good financial sense for everyone. A generally accepted rule is that refinancing makes sense if the current interest rate on your mortgage is at least 1.5% - 2% percentage points higher than the current market rate. This figure is accepted as the safe margin when balancing the costs of refinancing a mortgage versus the savings received by doing the refinance.

     There are might be some other considerations, too. Such as how long you plan to live in this house. Majority of mortgage experts agree that it takes at 2 to 4  years to realize fully the savings from a lower rate of interest on the refinanced loan, given the high costs of the refinancing.

     In some cases, depending on your loan amount and the particular situation, you might elect to refinance a loan that is only 1% to 1.5% percentage points higher then the current market rate. In other cases, you may find that you could recoup the refinancing costs in a shorter time generally 1 to 2 years after the refinance.

     Refinancing can be a worth while investment for home owners who:

·         Want to take advantage of lower interest rates. This is a good idea only if you intend to live in a house for a minimum period of 2 to 4 years to recoup the initial refinancing costs.

·         Currently have an adjustable rate mortgage (ARM) and want to have a certainty of a fixed-rate loan (knowing exactly how much they have to pay every month for the lifetime of the loan)

·         Want to change over to an ARM loan with a lower interest rate or more economical features (such as a lower rate or lower payment caps) than the ARM they currently have.

·         Want to build up equity more quickly by choosing the loan with a shorter term.

·         Want to withdraw the equity built up in a current house to get cash out for a major purchase or to finance children's education

     After calculating refinancing costs you decide that refinancing is not worth while, ask your current lender whether they can make some modifications to your existing loan.

            Should You Refinance ARM Mortgage Loan?

     In deciding whether to refinance an ARM you should consider these questions:

·         Will the next interest rate adjustment on your current ARM loan likely to increase your monthly payments? Will the newly adjusted interest rate be 1.5% to 3% points higher than the current rates being offered for a fixed-rate loans or other ARMs?

·         If you currently have caps on your mortgage monthly payments, are your payments large enough to pay off your loan by the end of the originally set term?

            Types of Refinancing Fees.

     The fees below are the charges that you will likely to see in loan refinancing.

·         Title Search and Title Insurance
This fee covers the cost of searching the public record to confirm the possession of the property. It also covers the cost of a of insurance policy, issued by a title insurance company, that insures the policy holder in a specified amount for a loss caused by discrepancies in the title to the property.  

·         Lender's Attorney's Review Fees
The lender in most of the cases will charge you a fee paid to the lawyer or company that performs the closing for the lender. Settlements are performed by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller. In most situations, the person performing the settlement is providing a service to the lending company. You may want to hire your own attorney to represent you at all stages of the transaction, including settlement.

·         Loan Origination Fees and Discount Points
The origination fee is charged by the lender for the work in checking and preparing your mortgage loan.

·         Discount points are prepaid charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate. 1 point = 1% of the loan amount. For instance, 1 point on a $100,000 dollar loan would equal to $1,000. In some of the cases, the points you prepay can be added to the loan amount. The number of points a lender charges depends on market conditions and the interest rate 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 determent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies be 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 your 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.

     At the end, a homeowner should put a site between 3 and 6 % of the outstanding principal for the refinancing costs, in addition to any prepayment penalties and any  costs of paying off any second mortgage (if exist).

     One of the way to save on some of these charges is to contact the lender who is possession of your current mortgage. The lender may waive some of them, in particular if the work relating to the mortgage closing is still up to date. This could include but not limited to the fees for the title search, surveys, inspections, and others.