When the prevailing interest rates on home mortgages are low, home owners begin to seriously consider refinancing their mortgage. When a refinance takes place, the existing mortgage is paid off from the proceeds of the newly acquired loan and the new mortgage takes the place of becoming the priority lien on the property. There are different goals that can be achieved via a mortgage refinance:
* Lowering of the Interest Rate and Saving Money on Interest Costs
* Adjustment of the Loan Term in Years – Increase or Decrease
* Consolidating a First and Second Mortgage into One Loan
* Switching from an Adjustable Rate Loan to a Fixed Rate Loan
* Obtaining an Adjustable Rate Loan with More Favorable Adjustment Terms
* Accessing the Equity in the Home
A home owner should define and assess the desired goal or goals that he hopes to accomplish by entering into a refinance transaction. He should then take into consideration the length of time that he has been obligated under his existing mortgage, whether or not his existing mortgage contract provides for a prepayment penalty, how many more years he intends to reside in the current residence and the out-of-pocket costs that will be incurred as a result of taking out a new loan.
1) If the home owner has had his existing mortgage for a long time, he need only have a basic understanding of how a loan amortizes to realize that refinancing may not be a good idea. In the early years of a mortgage, most of the mortgage payment is applied toward interest. As time passes, the amount of the payment applied toward the mortgage principal proportionately increases, thus building equity in the home. To refinance an aged mortgage would restart the amortization process, with the homem owner paying more interest than principal with each mortgage payment.
2) The home owner should check his existing mortgage contract to confirm whether or not the obligation provides for a prepayment penalty. A prepayment penalty is a fee charged by the lender, which could be substantial, if the loan is paid in full before expiration of the loan term in years. This usually includes a pay-off resulting from loan refinancing.
3) It may not prove to be worthwhile to refinance an existing mortgage if the home owner does not intent to remain in the home for longer than a few more years. The potential savings that may result from a lowering of the monthly payment may not exceed the cost of obtaining a new loan.
4) Many of the same costs the home owner incurred when he made application for his existing mortgage will be repeated in the case of a refinance. This includes the costs of the application fee; the origination fee; points; appraisal fee; inspection fee; legal review and closing fees; homeowner’s insurance; mortgage insurance; title search, examination and insurance; and survey. The following ranges represent estimates of what these fees could run:
Application – $75 to $300;
Loan Origination – 0% to 1.5% of the amount of the loan principal;
Points – 0% to 3% of the amount of the loan principal;
Appraisal – $300 to $700;
Inspection – $175 to $350;
Legal Review/Closing – $500 to $1,000;
Homeowner’s Insurance – $300 to $1,000;
Mortgage Insurance – 0.5% to 1.75% of the amount of the loan principal;
Title Search/Insurance – $700 to $900;
Survey – $150 to $400.
Prior to embarking on the journey to refinance an existing mortgage, a home owner must essentially compute what the total cost of the refinance will be and weigh that cost against the potential savings that will be gained. Improved loan terms may make the refinancing option enticing, but ultimate analysis may prove there is no real advantage to the action.
Source: Federal Reserve Board Consumer’s Guide – http://www.federalreserve.gov/pubs/refinancings/default.htm