How To Refinance Your Mortgage

Refinancing a mortgage therefore simply means replacing an old mortgage with a new one. Refinancing your mortgage can mean great savings for you and your family. Replacing your existing mortgage with a lower interest loan, changing the term of your loan, or even consolidating all your debts into this new loan could save you money, both monthly and over the life of the loan.

The rule of thumb is when interest rates are 1.5 to 2% lower than you are currently paying on your mortgage, it's time to consider refinancing.

Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make financial sense for everyone. There are a number of items to consider, such as how long you plan to stay in the house. Most sources say that it takes at least 3 years to fully realize the savings from a lower interest rate, given the costs of the refinancing.

Refinancing can be a good idea for homeowners who:

1. Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
2. Want to build up equity more quickly by converting to a loan with a shorter term.
3. Want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.

Costs of Refinancing
Costs can vary significantly from area to area and from lender to lender, so the following are estimates only. Your actual closing costs may be higher or lower than the ranges indicated below.

Application Fee $75 - $300. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.

Appraisal Fee $150 - $400. This fee pays for an appraisal, which is a defensible estimate of the value of the property.

Survey Costs $125 - $300

Homeowner's Hazard Insurance $300 - $600
Lender's Attorney's Review Fees $75 - $200. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender.

Title Search and Title Insurance $450 - $600. This charge will cover the cost of examining the public record to confirm ownership of the real estate, and the cost of an insurance policy.

Home Inspection Fees $175 - $350
Loan Origination Fees 1% of loan. The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan.

Mortgage Insurance 0.5% - 1.0%. Depending on the type of loan you have and other factors, another major expense you might face is the fee for private mortgage insurance.

Points 1% - 3%. Points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals 1% of the loan amount.

Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The mortgage documents for your existing loan will state if there is such a penalty. In some loans, you may be charged interest for the full month in which you prepay your loan. In the future, always make sure there is NO prepayment penalty.

Refinancing Your Mortgage
If you are considering refinancing your mortgage, there are a couple of things to keep in mind. Unlike the rushed process of trying to get funding for a purchase, you have more time to evaluate and compare mortgage options. Shop around and find out what different lenders are offering that fit your potential needs.

1. What is your goal? - Is your goal to lower the monthly payment or to simply try to pay less interest? While these questions may seem like the same thing, a lower interest rate can be translated into the same month payment amount, but with more of the payment being applied to the principal of the loan. This, of course, helps you pay off the note faster. The bigger point is to simply figure out your goal and find a loan that meets it.

2. Shop Lenders - One of the best ways to do this is seek a pre-approval from a variety of lenders. You might be concerned this will hurt your FICO score, but refinance credit requests often don't ding your FICO. If you're not sure about this, simply don't supply the lender with you social security number. They will give you a less definite loan offer, but you'll still have the advantage of reading the fine terms to make sure it accomplishes your goals.

3. In Writing - Once you choose a lender, you need to nail down three important things in writing. The first is the interest rate. The second is the closing costs, if any. The third is any pre-payment penalty associated with the loan. If the lender drags there feet on any of these, consider walking away from the loan.

In Conclusion
A homeowner should plan on paying an average of 3 - 6 % of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. Whether or not that is a wise decision is purely a numbers matter.