There are times when it's a good move to refinance your mortgage. Simply put, refinancing means you borrow the money to pay off your current mortgage. This is generally done in order to lower mortgage payments and/or take advantage of lower interest rates.
If you have an adjustable rate mortgage (ARM) it will save you a considerable sum to refinance during periods of rising interest rates. You can choose to refinance to a fixed rate mortgage, which guarantees that the rate you finance at stays the same no matter how high interest rates rise.
If you already have a fixed rate mortgage but interest rates have fallen below what you're presently paying, it might be a good idea to look into refinancing. However, if you're planning to sell your home within the next couple of years it would not pay to refinance.
There are many factors that determine the cost of refinancing. One of these is points, which are prepaid fees. Each point is one percent of the amount that you are borrowing and these points are subtracted from the mortgage proceeds that you receive.
Most lenders will charge a point as a fee for the loan. They may also charge points if your loan's interest is less than the current market rate. This is how the lender makes a bit more money and you get lower interest. If you plan to stay in your home for a long time and can afford to pay more points in the beginning, this may actually save you money over the long term and allow you to get a better interest rate.
There are other costs involved in the refinancing process. Private mortgage insurance (PMI) premiums will be added into your payment to insure that the lender is recompensed should you default on the loan. PMI is tacked on when the loan amount is more than eighty percent of the property's value.
Other refinancing fees include having your home appraised, a title search, county recording fees and various processing fees. All these costs must be taken into account when you are decided whether to refinance your home. You should also consider any tax savings you may lose if you refinance. By paying less interest on your mortgage you will have less of a deduction on your yearly tax return.
So will it pay you to refinance? You can determine this by dividing the total of the points and all fees and closing costs involved in refinancing by the monthly savings that the new loan affords you. The final monthly savings is your reduction in interest less any tax advantage losses and the PMI premiums your new loan may involve. If the final figure actually does save you money, it may be a good idea to refinance.
There are lenders who offer to roll the points and closing costs into your new loan. While this may seem like a good deal at first, it would be better to pay the costs up front rather than pay interest on that amount for the life of the loan.
As always, there are unscrupulous lenders who are always on the lookout for people to rip off. Most mortgage lenders will charge document and administrative fees separately but the mortgage origination fee should cover these. Be sure to ask your lender to waive, or forego, these charges up front.
Your lender will obtain a credit report, which will cost between $6-12 and perhaps involve $20 in courier fees. However, you can be charged as much as $200 for this! Be sure that you are aware of what your lender will charge you for getting a credit report and negotiate if the amount seems exorbitant.
Some lenders advertise refinancing with no points or closing costs. If you choose to take advantage of such an offer, be sure to read every word of the contract and ask questions if something seems untoward. A no-cost refinancing often hides the costs you generally pay in other fees added to the mortgage and actually do cost you as much as paying the points and closing costs up front. You may end up paying for them for the life of your loan.