Home Mortgage Refinancing
Question: Our current home loan mortgage carries an interest rate of 8.25 percent, and several friends have strongly suggested that we refinance our mortgage. Exactly what does that mean? Are there costs associated with refinancing our home mortgage, and what kind of home mortgages are available? This is our first home and we will probably stay here for a long time.
Answer: Home mortgage refinancing has become a popular topic of conversation throughout the country. It is actually refreshing to hear people discuss refinance home mortgage rates at lunch or at cocktail parties, instead of oil or commodity prices.
To "refinance" simply means that you substitute a new home mortgage in place of your current home loan. Although there are legal and technical distinctions between a "mortgage" and a "deed of trust," for all practical purposes (and for purposes of this article) the terms are synonymous.
Let’s take this example: your house is worth $300,000, and your current mortgage balance is $200,000. Your home mortgage rate is 8.25 percent, and your monthly home mortgage payment (excluding escrow for taxes and insurance) is $1,725. Currently, home mortgage rates are very low, hovering below 6 and one-half percent.
If you refinance your current home mortgage and obtain a new mortgage loan in the amount of $200,000 at 6.375 percent, your new monthly mortgage payment (again excluding taxes and escrow) will be $1,248 -- or a monthly savings to you of $477. In one year, you will be able to save over $5,700 -- or will you?
Here are some "do’s and don’ts" which you should keep in mind while you contemplate whether this is the time to refinance:
DO the numbers. Calculate the new home mortgage rate you are considering, and plug in all of the mortgage loan closing costs. Your potential new mortgage lender must give you a "Good Faith Estimate" of all of the home mortgage refinancing costs you will have to pay in order to put that new mortgage loan on the books. In our example, while the savings look attractive, in reality the first year savings will be considerably lower, after you pay the various closing and settlement costs.
DO talk to your current mortgage lender first. Some mortgage lenders -- who do not want to lose your business as well as your home loan -- may be willing to modify your existing mortgage loan so that you will get a lower home mortgage rate at no cost -- or at reduced settlement costs.
For example, your current mortgage lender already has an appraisal on your house; there should be no reason to require a new appraisal -- at a cost of $300- 500.
DO learn what kinds of home mortgage loans are available. Currently, there is a wide variety of mortgage home loans to chose from, ranging from fixed rate mortgages, conventional mortgages to adjustable-rate mortgage (ARM) loans. Within each mortgage category, there are further options, such as a fixed 30 year mortgage or a fixed 15 year loan, a one year ARM, a five year ARM, or a seven year ARM. When you talk with mortgage lenders, ask them the following questions:
- What home loan programs do you have available for me?
- Give me a the projected monthly mortgage payment for each of the home mortgage loans you can offer me,
- What up-front mortgage costs will I have to pay if I use your services?
DO comparison shopping. Currently, mortgage lenders are quite busy and they may not respond promptly to your phone calls. But don’t give up; keep trying. There is some competition in the mortgage lending business, and you should get at least 3 quotes from three different mortgage lenders before you decide which mortgage lender to use. Make a chart of all of the expenses charged by each mortgage lender you talk with. Determine if the mortgage lender will charge you any up-front points. A mortgage point is one percent of the home mortgage loan amount, and if you were to borrow $200,000, each mortgage point you pay will cost you $2,000. Each point is the equivalent of approximately 1/8 of a home mortgage rate. Thus, you may find a mortgage lender who will be offering 6.25 percent with one point, but 6.375 with no points.
DO inquire about home mortgage rate "lock-ins" and home mortgage rate "float downs". Our economy -- while weak -- is going through unprecedented times; home mortgage rates are very volatile, and subject to rapid change. You should understand that it will probably take between 30 to 60 days in which to close on your mortgage refinance loan from the time you first complete the mortgage loan application. The home mortgage rate on the day your started the loan application process may be quite different from the home mortgage rate on the day of closing your new mortgage loan.
Mortgage lenders now offer two different kinds of protections:
- Lock in rates: here, the mortgage lender commits that your rate is "locked in" for a period of time, usually 30 days. You must get written confirmation of this fact from the mortgage lender.
- Float down rates: here, the mortgage lender will agree that should rates fall from the time of loan application, you will get the benefit of the lower home mortgage rate. Some mortgage lenders will charge you a fee for this commitment; others will not. You must get written confirmation from the mortgage lender as to their practices if you opt for this mortgage float down concept.
DO NOT rely exclusively on promotional mortgage marketing material you receive in the mail. Also, do not accept a mortgage loan from a telephone solicitation -- without first checking out that potential mortgage lender.
There are many mortgage scam artists -- I call them "mortgage loan sharks" -- trying to capitalize on the great demand for mortgage refinancing. If you are doubt as to the validity of a potential mortgage lender, contact your local Better Business Bureau, your State (or local) Banking Commissioner or even the AARP for further information.
DO NOT rely exclusively on a mortgage lender you have found on the Internet. Again, while many of these mortgage lenders may be legitimate, there are a lot of fraudulent people and practices in the world, and you must be on your guard at all times.
DO determine if you will have to pay a mortgage prepayment penalty for paying off your current home loan early. Some mortgage lenders are taking advantage of a Federal law enacted in l982 (entitled Alternative Mortgage Transactions Parity Act), which allows mortgage lenders to charge mortgage prepayment penalties despite local laws to the contrary.
DO not use the mortgage settlement company or title attorney recommended by your mortgage lender without shopping around to get comparison costs. Title companies and title attorneys charge various fees for the services they provide, and often these differences are substantial. You have the absolute right to select your own title attorney, and should not be pressured into using the company that the mortgage lender suggests.
DO confirm with your current mortgage lender whether you will be charged a late fee if you do not make your last mortgage payment to them. Let us assume that you will close on your new loan on December 10th. Keep in mind that when you refinance your mortgage, unless you use the same mortgage lender, there is a three-day "cooling off" period under the Federal Trust in Lending Act before the new loan can be funded.
Thus, there is a strong possibility that the current mortgage lender will not receive the pay-off funds until after the 15th of December, and many mortgage lenders will hit you with a late fee if payment is not received by that date. To be on the safe side, if settlement on the home mortgage refinance loan will take place after the 8th or 9th day of any month, make your last mortgage payment to the old mortgage lender, but advise your title attorney of this fact so that the last payment will be calculated into the final pay- off statement.
In the final analysis, you should understand that when you refinance your current home mortgage, in effect you are going to a brand new settlement. The only difference is that there is no buyer or seller present at closing, and there will be no real estate broker involved.
We used to quote a rule of thumb that one should refinance when rates drop at least 2 percent from your current mortgage. With the tremendous volatility of the financial marketplace, this 2 percent rule of thumb probably makes no current sense. Since rates are extremely low now, and no one knows how long this will last, everyone should seriously consider refinancing today.
For more helpful mortgage tips on mortgage refinancing, home mortgages, reverse mortgages or a home equity line of credit, contact FreeLoanComparison.com today!
Last update: November 14, 2008
