To Refinance or Not to Refinance? That is the Question!

When interest rates are lower than a homeowner’s mortgage rate, the homeowner should definitely contact multiple lending institutions for competitive home mortgage loan refinancing rates. I would start with the lender who services my loan. Some lenders have “Express” or “Streamline” refinance programs for their clients and offer reduced rates and fees.

If you are ready to consider refinancing, first you need to carefully assess your financial situation and goals before making any final decisions. Answer the following questions:

1. Is your goal to lower your monthly payments?
2. Do you need to consolidate debt?
3. Do you need cash for large purchases?
4. Are you seeking to adjust your interest-deduction expense for tax purposes?

Once you determine your reason for refinancing, consider the amount of cash back you require. Using a mortgage refinance calculator (Bankrate.com or your bank’s Web site), determine the amount of savings per month and annually according to the lowest available refinance rates.

Q. Should I refinance?

Sometimes it makes sense to refinance. Sometimes it does not. It depends greatly on what your financial goals are. For instance, wanting to lower your interest rate and/or payment are good reasons to refinance, but there are other factors to consider. Here are a few things to think about:

·     How long do you expect to be in the home? (Under two years—-probably not a wise move to refinance.)

·       How much equity do you have in the home? (What is the current market value of your home minus what you owe?)

·       How much will your closing costs be? (Your lender should supply you with a good-faith estimate.)

·       To get that low rate, will you have to pay points? (A point is one percent—see question on “points” below.)

·       Will your lower payments more than make up for the closing costs, fees, and points, if any?

·      Is there a pre-payment penalty on your current loan? (If there is, it will be added to your closing costs or to the final pay-off of your current loan.)

Q. Should I refinance from an adjustable-rate to a fixed-rate mortgage?

It depends on your situation. Generally it's a good idea to get the lowest fixed rate possible; however, if you're in the first year of a five-year adjustable rate mortgage (ARM) and you plan to move in three years, it may not make sense for you to refinance.

 

Q. Are interest rates higher for a cash-out refinance?

The interest rate you pay on a cash-out refinance loan will generally be the same that you pay on a non-cash-out loan. There may be an incremental fee associated with a cash-out refinance loan depending on the specific loan program you choose and the loan-to-value ratio. Using the equity in your home to pay off other bills can be a smart thing. Consider taking some money out to pay off credit card bills, auto loans, and any debt that has interest that is not tax-deductible. You may be able to deduct the interest on the money you take out to pay off that debt. Consult your tax advisor.

 

Q. When should I “lock-in” an interest rate?

Nobody can predict interest rates, but historically, rates go up much faster than they come down. If you're thinking about buying a home or refinancing your mortgage, get the good rate now (you can always refinance later if rates drop again). Normally your rate is locked at the time of application.

 

Q. Should I pay points to get a lower rate?

A point is 1%. (One point on a $200,000 loan is $2,000, 2 points is $4,000.) If you're refinancing your mortgage, paying points may not be your best option. Points paid on a refinance can be deducted from your taxes only in small increments—1/30th a year for a thirty-year mortgage. It could be several years before your lower rate makes up for the points you pay.

 

Q. Are there really loans with no closing costs?

There are few loans that truly have no closing costs. Sometimes lenders will not charge application fees and agree to pay the appraisal and title fees, but they may increase the interest rate. Lenders can also roll the costs into the amount of your loan, so because you're not paying costs up front, it's called a "no closing cost" loan. While slightly increasing your mortgage might be acceptable to you, keep in mind that it's not really a cost-free loan. Do you really think the appraiser that comes to your home is doing it for free or that your attorney is doing a title search and recording at no charge? There are no free lunches in lending money.

 

Q. How much money will I need to bring to closing?

A general guideline is that you'll need three percent of the purchase price of the home for prepaid interest to cover the time between the date you close and your first mortgage payment. Some states may also require prepayment of property taxes. When refinancing, however, your old mortgage will most likely have money in escrow that can cover these costs. Some borrowers get short-term loans while this escrow transfers back to them, but most pay the money at closing, knowing they'll get it back when their escrow is returned.

 

Refinance Check List

The first thing you'll do when refinancing your mortgage is complete a loan application. You may also need to provide a variety of documents to help your mortgage lender approve you for a home loan. The documentation will vary depending on the lender you choose, your loan program, and your personal financial situation.

The following is a list of documents generally required when applying to refinance. You may or may not need them all, but for a fast and easy loan process, have these items available when you're ready to complete your mortgage application.

·      Proof of income—typically, you'll need to show original pay stubs for the previous thirty days.

·       Copy of homeowners insurance—this information verifies that you have current and sufficient coverage on your home.

·       Copies of your W-2 forms—each loan applicant is required to supply these forms; they help your lender verify past employment and income history.

·       Copies of asset information—asset information includes statements for savings, checking, and 401(k) accounts, investment records for mutual funds or stocks, and accounts holding money for closing costs.