Back to Keystone Residential Website
This section was created to help you decide if refinancing your home makes sense for you. It’s designed to make the process of refinancing your mortgage a little easier and a lot less confusing.
But while this information is a helpful guide, there is no substitute for a direct relationship with a reputable mortgage lender. Deciding to refinance your home is a complicated decision, influenced by many different factors. An experienced lender can help you sort them out.
So be sure to turn to your lender for help if you’re a serious candidate for refinancing. He or she will be happy to help you consider all your options.
Introduction
Refinancing Your Home:
A Complex
Decision.
Recent years have seen a boom in refinancing, as hundreds of thousands of homeowners refinanced their homes to take advantage of lower interest rates.
But the decision on whether to refinance involves more than just interest rates, and balancing all the factors to reach a decision that works for you can be confusing.
This section of our web site gives you the information you need to consider all aspects of refinancing, so you can decide if it might be worth your while.
Table of Contents
SECTION 1: What is refinancing and should I care?
SECTION 2: When refinancing makes sense
SECTION 3: How much will I save: Monthly Payment Estimator
SECTION 4: The costs?—and no-costs? -- of refinancing
What Is Refinancing— And Should I Even Care?
A definition of refinancing... and why you might want to consider it (or not).
In a way, "refinancing" is a misleading term, because it suggests to many homeowners a process of changing or altering their mortgage.
In fact, refinancing is simply the process of taking out a new mortgage, and using the money obtained to close out—or pay off—your current mortgage.
That means refinancing involves many of the same steps that were involved in applying for and getting your mortgage in the first place—and can also involve some of the same expenses.
On the other hand, depending on how the terms of mortgages that are available now compare with the terms of your current mortgage, refinancing can save you a significant amount of money.
Balancing act
Refinancing is most likely to make sense for you if your current mortgage has an interest rate that is higher than current interest rates. (See the next page for other specific examples.)
If you refinance with a lower interest rate, you’ll pay less each month—even if your new mortgage is for the same amount as your current mortgage. Of course, the process of getting a mortgage involves costs of its own (for a look at them, turn to page 12).
Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing.
But in recent years, lenders have introduced "no-cost" and low-cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate with a higher interest rate, or by including some of the costs in the amount that is financed.)
With traditional refinancing, the most often cited rule-of-thumb is that the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage for refinancing to make financial sense.
However, with the newer low- and no-cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.
How long you expect to stay in your home is also a factor to consider. If you’ll be moving in a few years, the month-to-month savings may never add up to the costs that are involved in a refinancing.
How do I decide—and what else is available?
There are many good reasons to refinance. The most common ones are described on the next page.
If you see your situation there, read more about the costs involved. You’ll get a pretty good picture of whether it could be a sensible alternative for you.
Most importantly, talk to a mortgage lender. With all the options available today, there’s no substitute for experience in working the numbers and deciding whether to refinance—and no one is more qualified to do that than a mortgage lender.
Candidates For Refinancing: Is Your Mortgage Here?
When refinancing makes sense.
No resource could cover every good reason to refinance a home—but here are some of the most common reasons homeowners choose to get a new mortgage
1. Save money on interest rates.
If you got your current mortgage when interest rates were considerably higher than they are now, refinancing could make sense for you. Refinancing at a lower rate will reduce your monthly payments, and if you plan to stay in your home for a reasonably long time, these lower payments will more than make up for the costs associated with refinancing.
How much lower should interest rates be? That depends on how much the refinancing will cost you. Lenders used to say that a difference of 2 percent or more was needed before refinancing made sense. But with the newer low-cost and no-cost refinancing options, refinancing can make financial sense with a smaller difference in interest rates.
It depends on your plans and your refinancing options. You can get a rough idea of how much you could save every month from the Estimator on page 9—but be sure to consult a mortgage lender for a more accurate and detailed analysis before you make your decision.
2. Convert an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
You may have chosen an ARM for its lower initial interest rate. But if prevailing interest rates are currently low, you may decide to opt for the predictable monthly payments of a fixed-rate mortgage.
Converting your ARM to a conventional fixed-rate mortgage can make sense if rates are low.
3. Convert an adjustable-rate mortgage (ARM) to an ARM with more desirable features or lower rates.
Most ARMs have protective features, called caps, that limit the amount the interest rate or monthly payments can increase. You may want to look for an ARM that offers you better protections than your current loan—which can not only make you feel more financially secure but deliver significant savings.
And even though the interest rates on ARMs fluctuate with prevailing market rates, you may have one that’s tagged to higher indices—and carries a higher interest rate—than other ARMs currently available.
4. Build up your equity faster.
If your financial resources have improved since you obtained your mortgage, you may decide to convert to a mortgage with a shorter term—perhaps a 15-year mortgage instead of a 30-year mortgage. The monthly payments will be higher, but your overall interest costs will be substantially lower, and if current interest rates are below those of your existing mortgage, your monthly payments may not increase by very much at all.
This can be particularly advantageous as you near retirement. A shorter loan term may enable you to own your home before you retire.
5. Convert some of your equity to cash.
If you’ve held your mortgage for some time, you will have begun to reduce substantially the outstanding principal on your loan. That means you’ll be able to finance a considerably larger amount than you owe on your current mortgage. You can use the difference—which can be tens of thousands of dollars—for major purchases, or to finance college costs.
Monthly Payment Estimator
Get a calculator—and get an idea of how much you can save every month with a different interest rate.
"How much will I save every month?" It’s the first question most homeowners ask when considering refinancing. And with all the options in today’s refinancing packages, the only way to get a definitive answer is to discuss your particular situation with a qualified mortgage lender.
But this chart can give you a good idea of the monthly payments you’d make with a new interest rate.
Instructions:
1.Find your new interest rate in column 1.
2.Choose the appropriate payment factor from column 2 or 3:
Column 2 for a 30-year fixed rate mortgage or an ARM;
Column 3 for a 15-year fixed rate mortgage.
This is the monthly principal and interest for $1000 of a mortgage loan.
3.To figure your approximate monthly payment, multiply the payment factor by the amount of your mortgage without the last three zeros (if your mortgage is 120,000: 120,000 = 120).
EXAMPLE: 1
It’s the year 2010, and the world has discovered the key to economic security. As a result, 30-year fixed rate mortgages are now available at 4 3/4 percent interest.
You want to know how much your monthly payments would be on your $95,000 mortgage.
1.Find 4 3/4 in column 1.
2.Find your payment factor in column 2 (30-year fixed rate): $5.22
3.Multiply your payment factor by the amount of your mortgage without the last three zeros:
$5.22 x 95 = $495.90
Payment Factor Chart Column 1:
Column 2:
Column 3
Interest
RatesPayment
Factors
30-Year
and ARMPayment
Factors
15-Year4%
$4.77
$7.40
4 1/4
$4.92
$7.52
4 1/2
$5.07
$7.65
4 3/4
$5.22
$7.78
5
$5.37
$7.91
5 1/4
$5.52
$8.04
5 1/2
$5.68
$8.17
5 3/4
$5.84
$8.30
6
$6.00
$8.44
6 1/4
$6.16
$8.57
6 1/2
$6.32
$8.71
6 3/4
$6.49
$8.85
7
$6.66
$8.99
7 1/4
$6.83
$9.13
7 1/2
$7.00
$9.28
7 3/4
$7.17
$9.42
8
$7.34
$9.56
8 1/4
$7.52
$9.71
8 1/2
$7.69
$9.85
8 3/4
$7.87
$10.00
9
$8.05
$10.15
9 1/4
$8.23
$10.30
9 1/2
$8.41
$10.45
9 3/4
$8.60
$10.60
10
$8.78
$10.75
10 1/4
$8.97
$10.90
10 1/2
$9.15
$11.06
10 3/4
$9.34
$11.21
11
$9.53
$11.37
11 1/4
$9.72
$11.53
11 1/2
$9.91
$11.69
11 3/4
$10.10
$11.85
12
$10.29
$12.01
Costs... And No-Costs.... Of Refinancing
A rough measure of the overall costs you can expect¼ low-cost alternatives...holding down costs¼
How much will refinancing cost you? So much depends on your specific situation that it’s impossible to give a simple answer.
With traditional refinancing, you should expect to pay an average of 3 percent to 6 percent of the outstanding principal in refinanc ing costs. That is, if you’ve paid down your original $80,000 mortgage so the outstanding principal is now just $60,000, you can expect refinancing costs to run between $1,800 and $3,600. Add to that any prepayment penalties you may face for paying off your mortgage early (see below), and the costs of paying off any second mortgages you may have.
Today, however, many lenders offer no-cost and low-cost refinancing. As the names suggest, they involve little or no out-of-pocket costs (low-cost refinancing may involve about $500 in costs). These no-cost and low-cost loans compensate for the lack of up-front expenses either through a somewhat higher interest rate, or by including the costs of refinancing in the amount of the loan.
The costs of traditional refinancing
- Title search and title insurance. The title search confirms your legal ownership of the house, and ensures there are no outstanding claims against the property. Title insurance guards the lender against a mistake in thissearch, and is almost always required.
Be sure to ask the company carrying the present title insurance policy if it can re-issue your policy at a re-issue rate. A re-issue could save you up to 70 percent compared to a new policy. Your current lender can tell you who is carrying your title insurance policy.
- Application fee. This covers the lender’s initial costs to process your application and obtain your credit report.
- Appraisal fee. This fee covers the costs of an independent appraisal of the value of your home for your lender’s use in evaluating your application.
- Loan origination fee. This fee covers remaining costs associated with processing your mortgage application and completing your loan.
- Discount points. Discount points are essentially prepaid finance charges, paid when you close on your mortgage loan, usually to obtain a mortgage with a lower stated interest rate. Usually, a lender will offer a number of mortgages with different combinations of interest rates and discount points; the higher the interest rate, the fewer the discount points charged at closing.
One point is 1 percent of the value of the mortgage (for example, $800 on an $80,000 mortgage).
- Closing agent and review fees. Usually the lender will charge you fees for the services of the closing agent, who actually conducts the closing. You may also be charged for other legal services involved in completing your loan.
- Prepayment penalties. Some mortgages carry a penalty for paying off the loan before the stated term is up. While this practice varies by state, type of lender and type of loan (for example, for FHA, VA and some other types of loans, prepayment penalities are forbidden by law), prepayment penalties can be quite substantial.
The mortgage documents for your existing loan will tell you if you face a prepayment penalty, and, if so, how large it is.
- Other costs. Depending on your mortgage, you could face fees for a VA loan guarantee, FHA or private mortgage insurance, and a variety of other possible closing costs.
What next?
If you’re seriously interested in considering refinancing further, your first call should be to the lender who holds your current mortgage.
He or she may be willing to waive some of the fees for such items as the title search, surveys, inspections and other certifications, especially if the information is still current.
But whatever you do, talk to an experienced lender before you make your final decision. As you’ve learned, there are a great many factors to weigh—and a lender can help you sort them out.
About The Mortgage Bankers Association Of America
The Mortgage Bankers Association of America (MBA) represents companies that originate and service mortgages for homes and commercial properties throughout America. The MBA is made up of many different types and sizes of companies in the business of real estate finance, including mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies and others in the mortgage lending field.
To be a member of the MBA, a mortgage lender must agree to conduct business according to the highest ethical standards, and to abide by the MBA’s standards of business practice. Not every mortgage lender can qualify for membership, but MBA members can be found in almost every community throughout the country. MBA members play a major role in originating loans through the federal government’s FHA and VA loan programs, and other special loan programs.
Based in Washington, D.C., the MBA plays an important role for its members by representing their interests before Congress and other government agencies, and by serving as an informational and educational center for the industry. The MBA enables mortgage lenders to work together on behalf of home buyers like you in seeking new ways to make mortgages more available, affordable, and easy to understand