Refinancing FAQ

Q is it time for me to refinance?

When interest rates fall, a homeowner should
definitely call a lender about refinancing, but he or she should discuss
their entire financial situation and goals before making any final
decision. Is your goal to lower your monthly payment? Consolidate debts?
Get cash out for large purchases? Change your interest deduction expense
for your taxes? Ask your lender to provide a couple of refinancing
scenarios for you, showing how your loan term length, monthly payment and
your total interest expense on the loan will change. After looking at
these scenarios, it will be clear whether or not you should spend the
money to refinance.

Q. When should I refinance my current mortgage loan?

A. It is often said that
you should refinance when mortgage rates are 2% lower than the rate you
currently have on your loan. Refinancing may be a viable option even if
the interest rate difference is less than 2%. A modest reduction in the
loan rate can still trim your monthly payment. For example, the monthly
payment (excluding taxes and insurance) would be about $770 on a
$100,000 loan at 8.5%. If the rate were lowered to 7.5%, the monthly
payment would be about $700, a savings of $70. The significance of such
savings in any scenario will depend on your income, budget, loan amount
and the change in interest rate. Your trusted lender can help calculate
the different scenarios.

Q. Should I refinance if I plan on moving soon?

A.Most lenders will charge fees to refinance a
loan. If you plan to stay in the property for less than a couple of years,
your monthly savings may not get a chance to accumulate and recoup these
costs. Let's say a lender charged $1,000 to refinance your loan, but it
resulted in a monthly savings of $50. It would take 20 months (1,000
divided 50) to recoup the initial costs before you start to realize some
savings. Some lenders will charge a slightly higher than average interest
rate on refinance loans, but waive all costs associated with the loan. The
attractiveness of these loans will depend on the interest rate you are
being charged on your current loan.

Q. How much will it cost me to refinance my current home loan?

A. in addition to an application fee ($250-350)
you will likely have to pay an origination fee (typically 1% of the loan
amount). In many cases you will have to pay much of the same costs that
you had to pay with your current home loan (title search, title insurance,
misc. lender fees, etc.). The sum of these fees could cost you up to 2-3%
of the loan amount. If don't have the money to pay for associated loan
costs, look for lenders that offer 'no-cost' loans. These loans will
charge a slightly higher interest rate, so ask a lender if it would still
make sense to refinance using this type of program.

Q. What are points?

A.Points are costs that need to be paid to a
lender in order to receive mortgage financing under specified terms. A
point is a percentage of the loan amount (one point = one percent of the
loan). One point on a $100,000 loan would be $1,000. Discount points are
fees that are used to lower the interest rate on a mortgage loan (you are
discounting the interest rate by paying some of this interest up-front).
Lenders may express other loan-related fees in terms of points. Some
lenders may express their costs in terms of basis points (hundredths of a
percent). 100 basis points = 1 point (or 1 percent of the loan
amount)
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