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Refinancing
Refinancing is the process of taking out a new mortgage, and using the money obtained to pay off your current mortgage.
That means refinancing involves many of the same steps that were involved in applying for and getting your mortgage in the first place and can also involve some of the same expenses.
On the other hand, depending on how the terms of mortgages that are available now compare with the terms of your current mortgage, refinancing may save you a significant amount of money.
If you refinance with a lower interest rate, you'll pay less each month , even if your new mortgage is for the same amount as your current mortgage. Of course, the process of getting a mortgage involves costs of its own. We use a very sophisticated software to help you analyze these costs.
Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. But in recent years, lenders have introduced "no cost" and "low cost" refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate with a higher interest rate, or by including some of the costs in the amount that is refinanced.)
With traditional refinancing, the most often cited rule-of-thumb is that the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage for refinancing to make financial sense. However, with the newer low and no cost refinancing programs, it can be worth your while to refinance to obtain a much smaller reduction in interest rates (even as low as 3/4%).
How long you expect to stay in your home is also a factor to consider. If you'll be moving in a few years, the month-to-month savings may never add up to the costs that are involved in a refinance.
Here are some of the most common reasons for refinancing:
- Save Money on Interest Rates
- Convert an Adjustable Rate Mortgage (ARM) to a Fixed Rate
- Convert an Adjustable Rate Mortgage (ARM) to an ARM with More Desirable Features or Lower Rates
- Build Your Equity Faster
- Convert Some of Your Equity to Cash
If you originally obtained your current mortgage when interest rates were considerably higher than they are now, refinancing could make sense for you. Refinancing at a lower rate will reduce your monthly payments, and, if you plan to stay in your home for a reasonably long time, these lower payments will more than make up for the costs associated with refinancing.
You may have selected an ARM for its lower initial interest rate. If prevailing interest rates are currently low, you may decide to opt for a fixed rate mortgage. The safety and security of knowing what your monthly payment will be every month is priceless to many people.
Most ARMs have protective features, called caps, that limit the amount the interest rate or monthly payments can increase. You may want to look for an ARM that offers you better protections than your current loan - which will not only make you feel more financially secure but deliver significant savings. And, even though the interest rates on ARMs fluctuate with prevailing market rates, you may have one that's tagged to higher indices - and carries a higher interest rate - than other ARMs currently available.
If your financial resources have improved since you obtained your mortgage, you may decide to convert to a mortgage with a shorter term - perhaps 15 years instead of 30 years. The monthly payment will be higher, but your overall interest costs will be substantially lower, and if current interest rates are below that of your existing mortgage, your monthly payments may not increase very much at all. This can be particularly advantageous as you near retirement. A shorter loan term may enable you to own your home before you retire.
If you've held your mortgage for some time, you will have begun to reduce the outstanding principal on your loan. That means you'll be able to finance a considerably larger amount than you owe on your current mortgage. You can use the difference - which can be thousands of dollars - for major purchases, for financing college costs, or to invest in stocks or bonds. Remember, your home will appreciate the same whether your equity is 10%, 20% or 50%. Putting your equity to work in other investments may give you a much greater overall return than leaving it in your home. Before doing this, you should consult your financial advisor for more information and advice on your particular situation.
Refinancing . . . Does it Make Cents for You?
Saving money, gaining security, building equity faster, paying off debt or investing are some of the reasons people refinance.
"How much will I save every month?" It's the first question most homeowners ask when considering refinancing. And with all the options in today's refinancing packages, 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.
With traditional refinancing, you should expect to pay an average of 2 to 5 percent of the outstanding principal in refinancing costs. That is, if you've paid down your original $80,000 mortgage so the outstanding principal is now just $60,000, you can expect refinancing costs to run between $1,800 and $3,600. Add to that any prepayment penalties you may face for paying off your mortgage early and the costs of paying off any second mortgages you may have.
Today, however, 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 somewhat 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
- APPLICATION FEE
- APPRAISAL FEE
- LOAN ORIGINATION FEE
- DISCOUNT POINTS
- CLOSING AGENT AND REVIEW FEES
- PREPAYMENT PENALTIES
- OTHER COSTS
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.
This covers the lender's initial costs to process your application and obtain your credit report.
This fee covers the costs of an independent appraisal of the value of your home for your lender's use in evaluating your application.
This fee covers remaining costs associated with processing your mortgage application and completing your loan.
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).
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.
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.
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.
R.E. Opportunity Network
3160 Crow Canyon Rd. #300
San Ramon, Ca.94583
Phone 925-330-6484
Fax 925-362-0849
