Refinancing is the process of taking out a new mortgage, and using the money obtained to pay off your current mortgage. Refinancing involves many of the same steps that were involved in getting your mortgage in the first place and can also involve some of the same expenses.
On the other hand, depending on the terms of a new mortgage compared to the terms of your current mortgage, refinancing may save you a significant amount of money.
If you refinance with a lower rate, you’ll pay less each month , even if your new mortgage is for the same amount as your existing mortgage. However, the process of getting a mortgage involves costs of its own.
Traditionally, deciding whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. Lenders have now introduced "no cost" and "low cost" refinancing packages that minimize or completely eliminate the out-of-pocket costs of refinancing. These packages compensate with a higher interest rate, or by including some of the costs in the amount that is refinanced.
In the past, the most often cited rule-of-thumb for refinancing is that the interest rate on your new mortgage should be about 2 percentage points below the rate of your current mortgage. However, with the newer low and no cost refinancing programs, it can be worth your while to refinance for a much smaller reduction in interest rates.
How long you expect to stay in your home is also a consideration. If you’ll be moving in a few years, the savings may never equal the costs that are involved in a refinance.
Here are some of the most common reasons for refinancing:
- Save Money on Interest Rates
If you obtained your current mortgage when interest rates were higher than they are now, refinancing could make sense. Refinancing at a lower rate will reduce your monthly payments, and these lower payments may make up for the costs associated with refinancing. - Change an Adjustable Rate Mortgage (ARM) to a Fixed Rate
If prevailing interest rates are currently low, you may decide to get a fixed rate mortgage. The security of knowing what your monthly payment will be every month is important to many people. - Convert an Adjustable Rate Mortgage to an ARM with more desirable features or lower rates
Most ARMs have protective features, called caps, that limit the amount the rate or monthly payments can increase. You may find an ARM that offers you better protections than your current loan - which will not only make you feel more secure but deliver significant savings. And, even though the interest rates on ARMs fluctuate with prevailing market rates, you may have one that’s pegged to higher indices than other ARMs currently available. - Build Your Equity Faster
If your financial resources have improved since you obtained your mortgage, you may decide to convert to a mortgage with a shorter term such as 15 years instead of 30 years. The monthly payment will be higher, but your interest costs will be lower, and if current interest rates are below your existing mortgage, your monthly payments may not increase much at all. This can be especially good as you near retirement. A shorter loan term may let you to own your home before you retire. - Convert Some of Your Equity to Cash
If you’ve held your mortgage for some time, you will have reduced the outstanding principal on your loan. That means you’ll be able to finance a larger amount than you owe on your current mortgage. You can use the difference for major purchases, for college costs, or to invest in stocks or bonds. Remember, your home will appreciate the same whether your equity is 10%, 20% or more. Putting your equity to work may give you a greater overall return than leaving it in your home. You should consult your financial advisor for more information and advice on your particular situation.
Refinancing . . . Does it Make Sense for You?
"How much will I save every month?" is usually the first question most homeowners ask when considering refinancing. And with all the options in today’s mortgages, the only way to get a definitive answer is to discuss your particular situation with a qualified loan officer.
Monthly Payment Estimator
How much will refinancing cost you? So much depends on your specific situation that it’s impossible to give a simple answer.
Some lenders offer no-cost and low-cost refinancing. As the names suggest, they involve little or no out-of-pocket costs (low-cost refinancing may involve about $500 in costs). These no-cost and low-cost loans compensate for the lack of up-front expenses either through a higher interest rate, or by including the costs of refinancing in the amount of the loan. The costs of traditional refinancing usually include:
- TITLE SEARCH AND TITLE INSURANCE
The title search confirms your legal ownership of the house and ensures there are no outstanding claims against the property. Title insurance guards the lender against a mistake in this search and is almost always required. Be sure to ask the company carrying the present title insurance policy if it can re-issue your policy at a re-issue rate. A re-issue could save you up to 70 percent compared to a new policy. - APPLICATION FEE
This covers the lender’s initial costs to process your application and obtain your credit report. - APPRAISAL FEE
This fee covers the costs of an independent appraisal of the value of your home for your lender’s use in evaluating your application. - LOAN ORIGINATION FEE
This fee covers remaining costs associated with processing your mortgage application and completing your loan. - DISCOUNT POINTS
Discount points are essentially prepaid finance charges paid when you close on your mortgage loan, usually to obtain a mortgage with a lower stated interest rate. Usually a lender will offer a number of mortgages with different combinations of interest rates and discount points; the higher the interest rate, the fewer the discount points charged at closing. One point equals 1 percent of the value of the mortgage (for example, $800 on an $80,000 mortgage). - CLOSING AGENT AND REVIEW FEES
Usually the lender will charge you fees for the services of the closing agent who actually conducts the closing. You may also be charged for other legal services involved in completing your loan. - PREPAYMENT PENALTIES
Some mortgages carry a penalty for paying off the loan before the stated term is up. While this practice varies by state, type of lender and type of loan, prepayment penalties can be quite substantial. The mortgage document for your existing loan will tell you if you face a prepayment penalty, and, if so, how large it is. - OTHER COSTS
Depending on your mortgage, you could face fees for a VA loan guarantee, FHA or private mortgage insurance, and a variety of other possible closing costs.
WHAT NEXT?
If you’re seriously interested in considering refinancing further, simply complete the online application or print and fax the PDF application, and we will assess your situation to let you know if re-financing will work for you. As you’ve learned, there are a great many factors to weigh - and we can help you sort them out.
