Is it Time To Refinance Your Mortgage?

When you first bought your home, you probably got the very best mortgage for which you were eligible. But times have changed, and today’s interest rates may be lower than when you first obtained your loan. If that is the case, you may be considering refinancing. Before you contact a lender, though, make sure refinancing is appropriate for you. These deals can save you a lot of hard-earned dollars – but only under the right circumstances.

What it is
In a nutshell, refinancing is the process of paying off an existing loan with the proceeds from a new loan, and using the same property as collateral. Because the interest rate on the new mortgage is less than the old, the loan costs less and you save money.

The benefits
Many people choose to refinance because the reduced interest rate decreases their monthly mortgage payment – freeing up cash for other expenses. Every percentage point makes a difference. For example, if you refinanced a $200,000, seven percent interest loan to a loan with six percent interest, you’d have about $130 more in your pocket each month.

Another reason to refinance is to repay your mortgage faster, which is done by switching a long-term loan for one with a shorter term. With it, your mortgage payment would be higher, but you’d pay much less in interest over the life of the loan while building equity more quickly.

Cash-out refinancing yet another attractive option. With this type of loan you’d refinance your current mortgage plus take out some cash from the equity you’ve built up. The benefit? Interest rates on the cashed-out portion are often lower than a home equity line of credit, home equity loan, or second mortgage.

The costs
Sign me up, you say? Sure it sounds great, and it may very well be, but first you’ve got to weigh the savings in interest against the fees associated with refinancing. A new loan means you’ll have to pay most of the same costs you paid the first time around. These may include points, appraisals, attorney’s fees, settlement costs (such as fees for the loan application, title search, appraisal, loan origination, credit check, and lawyer’s services), recording fees or transfer taxes, and sometimes a pre-penalty penalty. All totaled, these costs can be high, and some lenders require at least a portion of them be paid at the time of application.

Much of the loan’s price depends on points. One point equals one percent of a loan, and to get you the lowest rate, most lenders will charge several points. The total cost can run between three to six percent of the whole amount you borrow. Therefore, on a $100,000 mortgage, the lender might charge between $3,000 and $6,000 in points alone.

Some lenders do offer zero points, but the loan will have a higher interest rate. So while a “no points loan” may indeed reduce your initial outlay, your monthly payment will be higher.

To know what combination of rate and points is best for you, compare the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive points (and other refinancing costs) become. For example, if your refinancing costs are $3,000 and your payments are $125 lower each month, it will take you 24 months just to break even.

The tax effect
One of the primary advantages of homeownership is the savings you receive on your income taxes – all that interest (up to a million dollars for the first loan, and $100,00 for the second) is tax deductible, after all. Yet if you refinance the loan with a lower interest rate, you’ll have less interest to deduct. The effect may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.

If, however, you are in the final years of your mortgage, your payments probably consist of more principal and less interest. In that case, refinancing your mortgage with a longer-term loan will mean you’ll again pay more in interest – and increase your tax deduction.

The best deal
So where do you find the best refinancing deal? Chances are that many offers have come to you already by way of the good old U.S. postal service. Lenders want your business and many have conducted mass mailings to entice you to make a switch.

The best arrangement may be with your current lender, since some offer original mortgage customers the lowest rates and cut-rate closing costs. Before deciding, though, shop around by calling several lending institutions and ask each one what interest and fees they charge. If you have Internet access, research rates before speaking to a lender, so you’ll be armed with the knowledge of what is out there.

Consumer protection
If the idea of refinancing fills you with as much fear as it does excitement, you have reason. This is a major financial decision, and one not to be taken lightly. Thankfully, some powerful consumer laws protect you against lending abuses.

When you refinance, your lender must provide a written statement of the costs and terms of the financing before you become legally obligated for the loan. Review this statement carefully. If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to cancel within three business days following settlement, receipt of your disclosures, or receipt of your cancellation notice, whichever occurs last.

If your lender charges an application processing fee, ask how much it is and under what circumstances it is refundable. Some lenders do not offer refunds if you are not approved for the loan or if you decide against taking it.

So is it time to refinance your mortgage? If you will come out ahead financially, then it is definitely worth considering. However, if the difference is minimal or nil, then save yourself the time and trouble. Refinancing is not the magic answer for everyone.

10 Ways to Avoid a Predatory Lender

Each year, thousands of consumers lose money to unscrupulous lenders and brokers. To protect yourself, keep the following tips in mind before agreeing to a loan of any kind:

1. Learn more about financing through books, the Internet, or classes.

2. Read all loan paperwork carefully and ask plenty of questions before signing.

3. Only borrow the amount you know you can repay – and never let anyone convince you that you can do more.

4. Interview at least two to three lenders before settling a deal.

5. Question such charges as payment processing fees, document prep fees, or administrative fees – they may be unnecessary.

6. Never be persuaded to make a false statement on your loan application.

7. Do not sign blank documents or those containing blanks.

8. Have your loan agreement reviewed by a trusted attorney, real estate professional, or HUD-approved housing counseling agency.

9. Make sure that the cost or loan terms at closing are what you initially agreed to.

10. Walk away from anyone who tells you that refinancing can solve all credit and money problems – if used the wrong way, refinancing can make financial woes worse.


Recommended Reading

Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan
by David Reed (AMACOM Publishing, 2004)

Unless you are in the real estate or lending industry, chances are that home loans of any kind are confusing at best. To clear up the mystery and ensure your being comfortable and knowledgeable throughout the process, mortgage guru David Reed wrote Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan. This book is an indispensable guide to being comfortable with the key points of home mortgages.

What sets this book apart from the countless others on the same subject is that Reed wrote it in a question and answer style. This unique approach makes it a simple and interesting primer on a subject that can easily be dreary.

Mortgages 101 covers virtually everything you need to know both before you buy and after you’ve moved in. Reed (a long-time loan officer and Realty Times columnist) explains mortgage fundamentals, determining how much home you can buy, getting your finances together, down payment costs, credit issues, the pros and cons of each loan type, and how to use refinancing and home equity loans to your greatest advantage.

A home is the most expensive purchase most people make in a lifetime. Why make it more costly than it has to be? With Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan by your side, you won’t have to.

Copyright © 2006 CCCS
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