home :: Refinancing a Home

Refinancing a Home:

It's more than just an interest rate reduction

Article By: Supatra Chowdhury

Refinancing a home is not a process of changing or adjusting your existing mortgage. It's the process of taking out a new mortgage and using the money to pay off your current mortgage. Most people refinance their mortgages to get a lower interest rate. The lower rate translates into a faster mortgage payoff or a lower monthly payment.

But, a low rate isn't the only reason you should consider refinancing your home. It can also help you:

1. Lower your monthly payment
2. Pay off your mortgage and get out of debt more quickly
3. Lock in a lower rate
4. Get a better adjustable rate for your adjustable rate mortgage
5. Consolidate debt

When you refinance, you start the loan process over, which means you will be asked to make an application and then undergo a credit check, title search, appraisal and so on. You will incur closing costs just like a first time home buyer. You may be asking: What are the costs of refinancing? and How do you get started?

Should you refinance a home?

When rates are low, refinancing a home can be a no-brainer. But, what if they're not? Is refinancing still an option? You bet. Here are five reasons why you should consider refinancing:

1. You want lower monthly payments
A lower rate may mean lower monthly payments. Consider taking out a new loan for the
same length of time that remains on your current mortgage.

Choose this option of refinancing a home if you plan to stay in your home for the life of the mortgage or need more cash for current financial obligations such as college or a new car.

2. You want to pay off your mortgage more quickly
You may be able to shorten the length of your mortgage (say, from 30 years to 15 years)
while keeping your monthly payment at or near its current level. You could save thousands of dollars in interest and assume full ownership of your house more quickly.

Choose this option if you don't plan to stay in your house for very long and you have ample current cash for your current financial obligations.

3. You want to lock in a low rate
Refinancing a home may be an easy way to convert your Adjustable Rate Mortgage into a Fixed Rate Mortgage, ensuring a stable mortgage payment. Check first to see if your current loan has a no-charge lock-in feature.

 4. You want a better Adjustable Rate Mortgage (ARM)
Mortgage options are constantly changing. A new adjustable rate program may be available that has more favorable rates and terms than your current loan.

 5. You want to consolidate debt
If you have enough equity in your home, you might want to combine a home equity loan with your original mortgage and have one manageable payment. Or you might want to wipe out some other high-interest debt, such as credit and charge card balances or installment loans.

There are a few costs to consider when refinancing a home. In fact, traditional refinancing costs can average between 3% and 6% of the loan amount - for example $2,400 to $4,800 on an $80,000 loan. These costs can wipe out any savings you may realize from the lower rate or the decrease in your monthly payment may help offset these costs.

What do these costs cover? Essentially, the same fees and services you paid when you first bought your house.

What are the costs of refinancing a home?

Title Search and Title Insurance

This is a legal requirement all lenders must meet in issuing a new mortgage. The Title Insurance search confirms that no outstanding claims exist against the property, and that the insurance guards the lender against mistakes made in the search.

Tip: Be sure to ask if the company holding the present title insurance policy can re-issue your policy at a re-issue rate. This could save you up to 70%. (Your current lender can tell you which company is holding your policy.)

Application Fee  

This fee covers the lender's initial processing costs and credit report fees. 

Appraisal Fee 

Your home must be appraised again to verify its current value. This fee will cover the cost of that independent appraisal. 

Loan Origination Fee 

This fee covers all the costs associated with processing the loan. 

Points

One point is 1% of the value of the mortgage. Another way to define a point is as a pre-paid finance charge, payable when you close on your residential mortgage loan. Generally, the more points you pay, the lower your interest rate. Make sure you compare interest rates using a constant number of points. An 8 percent rate tied to 2 points is a lot more expensive than an 8 percent rate tied to 0 points.

When faced with the need to compare different rate/point combinations among lenders, consumers should first convert each quoted rate to one based on a constant number of points and then find the lender with the lowest rate. In making this conversion, consumers should use a traditional rule of thumb that equates each point to a 1/4 of 1 percent change in the interest rate. This would make an 8 percent loan with 0 points equivalent to a 7.75 percent loan with 1 point. 

Closing Agent and Review Fees 

Most lenders charge a fee for the services of the closing agent. You may also be charged for other legal services involved in completing your loan.

Prepayment Penalties 

Some mortgages carry a penalty for paying off a loan before the stated term is up - and it can be quite substantial. If your mortgage is less than 10 years old, the chances of such penalty slim. Check your original mortgage for information on refinancing a home.

Other Costs 

Depending on your mortgage, you could also be charged fees for a VA loan guarantee, FHA or private mortgage insurance, and a variety of other possible costs. 

How do you get started? 

Get Started In 3 Easy Steps: 

Step 1: Determine the rate you're paying on your current mortgage.

Step 2: Get A Personalized Rate Quote.
Any Mortgage Professionals can provide you with a personalized rate quote and determine other costs associated with refinancing a home.

Step 3: Begin the application process.
Your Loan Officer or the Preferred Lending Center can help you with the application process.

About The Author 

Supatra Chowdhury, is an international research scholar and a part time content writer. She has written high quality articles for many websites and has also done editing and copywriting. Ms Chowdhury works for Freelance Writer organization, and is a contributor to www.super-mortgages.com .