| 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 worth while, but it does
not make good financial sense
for everyone. A general rule
is that refinancing becomes
worth your while if the current
interest rate on your mortgage
is at least two 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 savings.
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
then 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
who:
- Want
to get out of a high interest
rate loan to take advantage
of lower rates. This is
a good idea only if you
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 a 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 a
new ARM or a fixed-rate
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 most likely
to encounter in a refinancing.
- Application
Fees
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 want to retain 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
for the lender's work in
evaluating and preparing
your mortgage loan. Discount
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 determent
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 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 on.
The
information contained in this
brochure is intended to help
you ask the right questions
when considering refinancing
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.
Refinancing
Savings On A $100,000
Loan |
Your
Present
Mortgage Rate |
|
Current
Monthly
Payment |
|
Monthly
Payment
@ 8.0% |
|
Monthly
Savings
@ 8.0% |
|
Annual
Savings
@ 8.0% |
| |
|
|
|
|
|
|
|
|
| 14.0% |
|
$1,185 |
|
$735 |
|
$451 |
|
$5,412 |
| 13.5 |
|
1,145 |
|
|
|
411 |
|
4,932 |
| 13.0 |
|
1,106 |
|
|
|
372 |
|
4,464 |
| 12.5 |
|
1,067 |
|
|
|
333 |
|
3,996 |
| 12.0 |
|
1,029 |
|
|
|
295 |
|
3,540 |
| 11.5 |
|
990 |
|
|
|
256 |
|
3,072 |
| 11.0 |
|
952 |
|
|
|
218 |
|
2,616 |
| 10.5 |
|
915 |
|
|
|
181 |
|
2,172 |
| 10.0 |
|
878 |
|
|
|
144 |
|
1,728 |
| 9.5 |
|
841 |
|
|
|
107 |
|
1,284 |
| 9.0 |
|
805 |
|
|
|
71 |
|
852 |
2465
E. Orangethorpe Ave.
Fullerton, CA 92831
Phone: (714) 992-66355
Fax: (800) 449-4041
California Real Estate License
# 01138374 |
