Refinancing: Is It Right For You?

If you're a homeowner who financed 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.

There are many considerations, including how long you plan to stay in the house. Most sources say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs of the refinancing. (You may even find you could recoup the refinancing costs in a shorter time.) But the bottom line is you have to do the math! That is where we can help.

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 draw on the equity built up in your house to get cash for a major purchase or for your children's education.
• Want to shorten the term of the loan to pay it off sooner

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 Deposit
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 reissue your policy at a reissue 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 (PA & MD) and attorneys (DE) 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.

Origination Fee 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. Points are often paid to "buy" a lower interest rate.

Appraisal Fee
This fee pays for an appraisal, an estimate of value of the property.

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.

If you'd like to be pre-qualified for a mortgage, email us or call our Wilmington office at 302-656-5400.