If you're a homeowner who was lucky enough to buy or savvy enough to finance real estate when rates were low, you may have no need to refinance. However, if you bought your home when rates were higher or perhaps have an adjustable rate mortgage, you may be able to enjoy a substantial savings.

How do I know if refinancing is worth it?

Refinancing can be worthwhile, but it does not make good financial sense for everyone. A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. (Depending on your loan amount and the particular circumstances, however, you might choose to refinance a loan that is only 1.5 percentage points higher than the current rate. You may even find you could recoup the refinancing costs in a shorter time.) But if ultimately a new or different type of home is what you really want, perhaps now is the time to start looking--after all you can take advantage of these great rates as a re-buyer or a "re-fier".

Refinancing can be a good idea for homeowners who:

• Want to get out of a high interest rate loan to take advantage of lower rates. This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.
• 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.
• Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM you currently have.
• Want to draw on the equity built up in your house to get cash for a major purchase or for your children's education.

Re-buying may be a good idea for:

• Empty nesters. Your kids have left and your house is too big, too much to care for or just not what you need or want anymore.
• Growing families. Your house is too small. Another child is on the way and you're in need of another bedroom or otherwise your family is on top of each other.
• You simply want a different style of house, location of house or frankly, a more or less expensive house--at today's rates you may be able to afford more house for the same payment you are making now, because of lower interest rates.

Should you refinance your ARM?

In deciding whether to refinance an ARM you should consider these questions:

• Is the next interest rate adjustment on your existing loan likely to increase your monthly payments substantially? Will the new interest rate be two or three percentage points higher than the prevailing rates being offered for either fixed-rate loans or other ARMs?
  
• If the current mortgage sets a cap on your monthly payments, are those payments large enough to pay off your loan by the end of the original term? Will refinancing a new ARM or a fixed-rate enable you to pay your loan in full by the end of the term?
  

What are the costs of refinancing?

The fees described below are the charges that you are most likely to encounter in a refinancing or for financing a purchase:

Application Fees
This charge covers the initial costs of processing your loan request and checking your credit report.

Title Search and Title Insurance
This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company, that insures the policy holder in a specific amount for any loss caused by discrepancies in the title to the property. Be sure to ask the company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.

Attorney's Fees
In our area, settlements are conducted by title insurance companies and attorneys for the buyer and seller. In most situations, the person conducting the settlement is providing a service to the buyer or in the case of a refinance the borrower. The settlement agent issues the required title policy as required by the lender.

Loan Origination Fees and Discount Points
The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan. Discount 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 one percent of the loan amount. For example, one point on a $75,000 loan would be $750. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on market conditions and the interest rate to be charged.

Appraisal Fee
This fee pays for an appraisal which is a supportable and defensible estimate of value or an estimate of the acceptability of the property. Gilpin's appraisal fee is covered by your application fee.

Prepayment Penalty
A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies by state, type of lender, and type of loan. Prepayment penalties are forbidden on various loans including loans from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which you prepay your loan.

Miscellaneous
Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.

In conclusion, a homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in financing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.

Refinancing Savings On A $100,000 Loan

Your Present Mortgage Rate	Current Monthly Payment	Monthly Payment at 6.5%	Monthly Savings at 6.5%	Annual Savings at 6.5%
12.00	$1,029	$632	$397	$4,764
11.5	990	$632	358	4,296
11.0	952	$632	320	3,840
10.5	915	$632	283	3,396
10.0	878	$632	246	2,952
9.5	841	$632	209	2,508
9.0	805	$632	173	2,076
8.5	769	$632	137	1,644
8.0	734	$632	102	1,224
7.5	699	$632	67	804
7.0	665	$632	33	396