Refinance Considerations

mclerma@azmortgagelending.com

Refinance Considerations

When you're making your decision, here are several things in mind.

First, even a small rate cut can pay off quickly. Especially if your current rate is one or two percent above the current market rates.

Second, if you are planning to stay in your home for at least three to five years, it may make sense to pay "points" (one point equals 1% of the loan amount) and closing costs to get the lowest available rate.

And third, you can avoid laying out cash and still get a low rate by "rolling in" the points and closing costs to your new mortgage. Does that mean adding a lot of extra debt? Not necessarily. If you've had your current mortgage for a few years, you've probably reduced your balance by several thousand dollars. So you may be able to tack your closing costs onto your new loan and still end up with a mortgage that's smaller than your original one -- plus, of course, a lower rate and lower monthly payment.

Build Home Equity Faster

Many borrowers use a refinance to shorten the term of the mortgage. Now keep in mind, even at a lower rate, a shorter term does mean a higher monthly payment. The benefit is that you'll build up equity faster and pay far less in total interest over the life of the loan.

Get Some Cash

Another way to make a refinance work for you is to refinance for more than the balance remaining on your old mortgage, called a "Cash-out" Refinance. Thanks to today's low rates, you may be able to do so without increasing your monthly payment.

The extra cash can be used to pay off other high interest debt, like credit cards and automobiles. Or on such things as home improvement, college tuition, or even that dream vacation you have always wanted to take.

Trade your ARM For A Fixed Rate

By switching to a fixed-rate loan, you will not only reduce your payment, you will also likely lock in an attractive rate for as long as you own your home. In fact, while ARMs currently offer tempting introductory rates, most experts recommend avoiding them, because you could easily find yourself facing sharply higher payments in the near future, even if interest rates don't rise.

There are certain cases, however, where an ARM makes sense. If you are fairly certain you'll be moving within five years, you can save some money -- and avoid rising payments -- with a five-year ARM. Such loans offer a fixed rate for five years and adjust annually thereafter.

Refinance Costs

Title Search and Title Insurance	This is a legal requirement all lenders must meet in issuing a new mortgage. The title Title Insurance search confirms that no outstanding claims exist against the property, and that the insurance guards the lender against mistakes made in the search. Tip: Be sure to ask if the company holding the present title insurance policy can re-issue your policy at a re-issue rate. This could save you up to 70%. (Your current lender can tell you which company is holding your policy.)
Application Fee	This fee covers the lender's initial processing costs and credit report fees.
Appraisal Fee	Your home must be appraised again to verify its current value. This fee will cover the cost of that independent appraisal.
Loan Origination Fee	This fee covers all the costs associated with processing the loan.
Points	One point is 1% of the value of the mortgage. Another way to define a point is as a pre-paid finance charge, payable when you close on your mortgage loan. Generally, the more points you pay, the lower your interest rate.
Closing Agent and Review Fees	Most lenders charge a fee for the services of the closing agent. You may also be charged for other legal services involved in completing your loan.
Prepayment Penalties	Some mortgages carry a penalty for paying off a loan before the stated term is up - and it can be quite substantial. If your mortgage is less than 10 years old, the chances of such penalty slim. Check your original mortgage for information.
Other Costs	Depending on your mortgage, you could also be charged fees for a VA loan guarantee, FHA or private mortgage insurance, and a variety of other possible costs.

Analyze Your Savings

Check the market closely to determine the available rates and the costs associated with refinancing. These costs can include items such as an appraisal and other various fees and points. Then determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). However, the ultimate amount you may save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Paying Points For A Lower Rate

To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time that you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.