Courtesy of: http://www.pueblo.gsa.gov/
The Federal Reserve Board and the Office of Thrift Supervision
prepared this booklet on refinancing your mortgage in response
to a request from the House Committee on Banking, Finance and
Urban Affairs and in consultation with many other agencies and
trade and consumer groups. It is designed to help consumers understand
an important aspect of home financing.
We believe a fully informed consumer is in the best position
to make a sound financial choice. If you are considering refinancing
your home loan, this booklet will provide useful basic information
about refinancing. It cannot provide all the answers you will
need, but we believe it is a good starting point.
A Consumer's Guide to Mortgage Refinancing
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 Your Home 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
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
than the current rate. You may even find you could recoup the
refinancing costs in a shorter time.)
Mortgage 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 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
mortgage 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 Mortgage?
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 Mortgage Refinancing?
The fees described below are the charges that you are most likely
to encounter in a refinancing.
Mortgage Application Fee: This charge imposed
by your mortgage 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.
Because costs may vary significantly from area to area and from
loan lender to lender, the following are estimates only. Your
actual closing costs may be higher or lower than the ranges indicated
below.
| Application Fee |
$75 to $300 |
| Appraisal Fee |
$150 to $400 |
| Survey Costs |
$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 |
| Mortgage Insurance |
0.5% to 1.0% |
| Points |
1% to 3% |
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.
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.
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 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.
Miscellaneous: Depending on the type of home
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 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.
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