Basics of Mortgage REfinancing

Needful homeowners totaling in the millions have found their way to take advantage of the low rates offered by the banks and gone ahead and refinanced their mortgages. But what are the advantages and hindrances associated with refinance?

The Basics of Home Refinancing

Over the past few years American homeowners have taken up the cause of refinancing and lined up to refinance their mortgages for a myriad of reasons. In the year 2003 the practice of refinance has hit an all-time high and remained so for two years following.

Despite the fact that it has proven to help reduce costs that are associated with the borrowing of money in order to own a home it is not always the strategy that makes total sense for each individual homeowner for any given situation. Before making any sort of steadfast commitment to refinance it’s important that you research your options to be certain that such an action is your best one.

Should You Refinance

The usual rule to which one would follow in order to come to the conclusion of whether or not to refinance is if you can lower your rate of interest by a minimum of two points so if you can move your current rate of, let’s say, 10% down to 8% then you’ve achieved what you set out to do. The bottom line though is how long it may take you in order to hit the break even point and if you’re even planning to remain in the home that long. Just be sure you’re comfortable with how long it will take for you to see the actual savings from your refinancing.

The numbers are very important to your refinancing efforts. If you took out a 30 year mortgage for 200k and an interest rate of around 8% your payment per month would be $1,468 and if you refinanced at 6% then your monthly payment would be $1,1999 saving you $269 a month. If the closing costs were $2,000 it’d take 8 months to hit the break even mark. So the bottom line is that if you were planning to live in the same home for at least 8 more months then you’re golden and refinancing would be a viable option. However, if you planned to move before that time then it wouldn’t be very wise to refinance.

Not All The Same

Do not choose a mortgage based solely on its reported annual rate of percentage, its APR, because there are more variables to take into consideration such as:

1. Term: How long will it take you to pay off the loan’s principal and interest? Mortgages in the short term usually offer less interest than longer running mortgages and usually involve higher monthly payments. The other hand of the equation is that they result, hopefully, in significantly lessened costs over a period of time.
2. Interest Variability: Mortgages consist of two basic types of mortgages. Fixed or unchanging and then those with variable rates that can change over time that has been predetermined. Though an adjustable rate typically offers lower rates on introduction than that of a fixed mortgage with comparable terms. The adjustable rate can change if the interest rates increase. If you plan to remain in your home for many years you may wish to choose predictability and security that a fixed rate mortgage brings. On the other hand if you plan to vacate your home before that time then an adjustable rate would be your choice. Keep in mind that interest rates that are typically lower are more likely to go up before they go down.
3. Points/Fees: Origination or discount fees are paid to the lender or the broker when a deal is closed. Some mortgage loans are what they call “zero” or “no-point” loans which do not have this cost associated with them but they can be more expensive as the lending company will usually replace this zero cost with a higher interest rate. In the end you’ll need to figure out if the savings are justified. One single point is equal to a percentage point.

Savings: How Much?

A standard figure is that a homeowner with a 30 year mortgage that charges a rate of 8% on a 200k price tag would be paying $1,468 per month. The potential savings are shown below in the table along with the varying break-even points by refinancing your home with several different rates.

Rate After Refinancing New Monthly Payment Monthly Savings Months to Break Even*
7.5% $1,398 $70 29
7.0% $1,331 $137 15
6.5% $1,264 $204 10
6.0% $1,199 $269 8
5.5% $1,136 $332 7
5.0% $1,074 $394 6
*$2,000 closing cost assumed and rounded up.

Mortgage Fees at a Closer Look

Using averaged out fees to consumers and based on an average home loan amount of $180k the fees broke down to:

Average Lender/Broker Fees
Administration fee: $336
Application fee: $205
Commitment fee: $498
Document preparation: $194
Funding fee: $228
Mortgage broker fee: $839
Processing: $320
Tax service: $73
Underwriting: $269
Wire transfer: $31
Third-Party Fees
Appraisal: $327
Attorney or settlement fees: $445
Credit report: $29
Flood certification: $17
Pest & other inspection: $68
Postage/courier: $45
Survey: $174
Title insurance: $605
Title work: $200
Government Fees
Recording fee: $76
Various taxes: $1,339

Keeping With What You Know

Your current purveyor of loans could make your life easier and maybe even cheaper to refinance than any other lend would. Your current lender will have your up to date financial records on hand. It doesn’t sound like much but that does decrease time and resources that would be needed otherwise to process your request. Make a well-informed and confident decision by shopping around. Compare the numbers and ask questions.

Summing it all Up

• Only determine to refinance should the savings in the long run outweigh the expenses you’ll face in the beginning. Calculate your break-even. To do this you divide the refinance cost by your savings per month. This figure is equal to the number of months that you’ll need to remain in your home in order to make refinancing work for you.
• Annual percentage rates change often so do not choose a new mortgage solely based on that.
• Evaluate the terms. Are the rates fixed or variable? Are the merits of paying fees up-front worth it for a lower rate?
• Your current loan provider is already familiar with you and your financial information. With this in mind you may be able to get a better rate than going to a new provider.
• Shop around for the best deal. Do the numbers and ask as many questions as you can think of.