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What to do: refinance basics

By Trulia | Published: Oct 14, 2009 | 12 Comments

If interest were the only "cost" in borrowing money, life would be a lot simpler. There would be no application fees, title insurance premiums or "points" to consider, and whenever rates fell by some significant fraction, you'd run out and refi.

Life is more complicated than that, especially with the array of creative mortgage products that didn't exist a generation ago. A reduced rate is great, but if locking it in will cost you $4,000, is it worth it? If not, what is the better rate "worth" to you?

The list of one-time costs is finite, and it's good to have at least a basic understanding of each one. These ones, for example, are pretty common.

  • Title insurance: Charged by title companies to guarantee your title is free of liens and encumbrances.

  • Appraisals: Charged by appraisers, required by lenders, to determine the value of the home to be financed.

  • Broker commissions: Charged by a broker, if you elect to use one, for his trouble in finding you the best rate.

  • Credit applications fees, loan origination fees, paperwork processing fees, etc

Another kind of cost is extremely important but often optional. "Discount points" let you buy down your interest rate to something lower. A point is usually worth one percent of the loan amount.

Aside from one-time costs, certain ones, if you incur them, are ongoing. Premiums for mortgage insurance, if it's required by the lender, may boost your monthly payments by a few percentage points for the life of the loan.

Much of the science of considering a refi is driven by the concept of "breaking even." How many months will it take you, for example, to earn back those $3,600 in fees and costs if your monthly rate is lowered by $100? The answer, of course, is 36. You would thus "break even" after three years.

Again, life would be simpler if someone merely handed you a rate sheet with a bottom line cost of $3,600, but it doesn't work that way. So many costs are percentages, based on the amount you'll borrow. One point on a $250,000 loan costs more than one point on a $200,000 loan.

Typically, the break-even question is expressed like this: What interest rate would justify the refi? The best, most exacting way to answer this question is to use an online tool such as Trulia's mortgage calculator.

Comments

By D,  Sat Jan 30 2010, 15:03
Clarification is needed in regards to some comments mentioned by Trulia.

One is broker commission. I don't think you would find any broker "troubled" for researching the best interst rate. This comment also implies you pay an additional cost to use a broker vs. a direct lender. Mind you both have origination charges. Brokers do not charge extra for using them.

The break even point takes into consideration more than just payment savings. What if your payment is lowered but you are actually extending your term (e.g. you were already into your current loan 5 years but you just decided to refinance to a 30 yr fixed. You just extended the amount of interest you would pay by 5 years). Some choose to shorten their term (e.g. going from a 30 yr fixed to a 15 yr fixed). In this case your payment may not lower but the interest savings is huge. Maybe you are paying off other debt. In this case, a good loan officer can help determine whether this saves you money or just extends the term of your debt. Bottom line, there are several issues to consider. It takes looking at the whole picture to decide what is best for you.

Crystal Beard
Ambient Home Lending
Lending throughout the State of Oregon
Phone 541-858-2522
Toll Free 877-777-9763
http://www.ambientlending.com 50% off Special ~ See website for details!
By Robin Silverberg,  Sun Sep 26 2010, 08:00
This is the second article I have read by Trulia's staff in reference to mortgages, and it is clear that they are not using the right people to write them, As Crystal has mentioned, finding the best interest rate is what we consider to be our job, not something that is trouble. I have worked as a banker and a broker, and sometimes both at the same time, which is what I do now. We bank anything that is conforming, high balance, or FHA, and generally broker anything that doesn't fit into the Fannie/Freddie/FHA box. I look to find what will be best for my client, and that is not only why they come to me, but come back to me when they want to refinance.
As far as points go, it seems that in some areas of the country, everyone pays points. In NY, perhaps because our closing costs are higher to begin with, we are less likely to charge points. We get whatever we can in YSP or Service Release Premium, so don't charge additional fees other than standard application, processing or underwriting fees.
Each deal has to be looked at individually, and there is no way to say things like they used to, "If you can't lower your rate by 2%, don't bother." This does not apply any more. The deciding factor often changes, as far as percentages go, based on size of loan. On a smaller loan, you would need your percentage difference to be more, so that it makes more sense to do.
Some things are no-brainers. If you can lower your rate enough going to a 15 year so that your payment is still affordable, that is great. If you are going from an adjustable to a fixed for the same rate, that's worth it.
The other deciding factor is personal, to some, a $200 savings is worth it, wheras for someone else, they may say that a $500 savings is not. What good loan officers do is present all the facts to the person, and let them make up their mind.
By Trent Warner Monopoly Builder,  Fri Oct 15 2010, 05:45
Here are some more Tips:

How To Shop For A Mortgage

Selecting a mortgage may be the most important financial decision you will make. Most likely, you will be paying off this debt for years, and after all, a small difference in the mortgage rate can make a big difference in monthly payments. We hope the following will help you shop for a mortgage most effectively.

First of all, if you plan on shopping around for a mortgage it is highly recommended that you take the time to order your credit report from all three credit reporting agencies and check it for errors. An inaccuracy you aren't aware of could cost you thousands of dollars in extra interest or even cause a denial of credit; it is estimated that 50% of all credit reports contain errors significant enough for an individual to be denied a loan!

Secondly, tracking interest rate movements is recommended when shopping for a mortgage. Find out what current mortgage rates are and whether they are going up or down. Mortgage rates fluctuate frequently. One month they are up, the next, down. It is very rare that they remain constant for any lengthy period of time. There are many factors affecting rates and it is often difficult to accurately predict interest rates as the national economy itself, but an understanding of key economic indicators can provide clues to the future direction of interest rates.

Mortgage rates generally rise and fall along with yields on Treasury notes and bonds because those government securities reflect the overall direction of interest rates. By keeping an eye on Treasury market and mortgage market trends a borrower has a better chance of obtaining interest rate savings.

Thirdly, before you begin shopping for a mortgage, you should decide which mortgage program is the best for your situation. A mortgage is a major purchase, so it is important to know that you have the right program for you. Today's market offers borrowers a tremendous choice of loan products and new opportunities that never existed before, so it pays to educate yourself on the different types of loan programs first.

Choosing the right type of mortgage requires you to review your financial objectives and ask a host of questions, such as:
• How long do you plan on staying in the house or with the loan?
• What amount of monthly payment can you comfortably afford?
• How much money do you have for a down payment?
• Is paying the mortgage off early important?
• Do you intend to make extra principal payments?
• Is your income projected to remain stable or increase?
Your personal expectation for the future of interest rates, your tax bracket and adversity to risk are also important factors to consider when choosing a mortgage loan.

Once you have decided to go with a certain loan program, and find out current interest rates, you can begin shopping interest rates among lenders. To find the best possible deal, you should do some research and compare the mortgages offered by several lenders before you commit to borrow. It isn't always easy to compare loans because your mortgage rate is only one part of your mortgage loan. You should also compare points and other fees. There are a number of different fees involved in getting a mortgage that can add thousands of dollars to the cost of your loan, and some lenders have different names for them. One lender might offer to waive one fee and then add another one. Comparing what different mortgage brokers and lenders are charging you to get an interest rate is often the most difficult part of mortgage shopping.

Before deciding which mortgage to get, look at the whole product. Pay close attention to the terms of a loan including the type of the mortgage, the presence of prepayment penalties, low or high down payment, mortgage insurance requirements, payment schedule, lock-in period and many other features. Pick the loan with the rate and other terms that suit your situation best. For example, prepayment penalty clause can be very important if you are planning to sell your house or refinance in the next 3 - 5 years, or if you expect to prepay your loan.

Once you have decided to go with a certain lender (or broker), ask him to specify the documents you will be required to provide for the approval process. Find out also whether the loan application and the lock-in fees, if any, are refundable if your application is rejected.
One should consult with a qualified mortgage professional prior to implementing any mortgage strategies.

If you are a tax, insurance, financial or financial planning professional receiving this newsletter, please call our office and introduce yourself to us. We are always seeking to grow our referral network and expose more service professionals to our client base.

Trent Warner
Sr. Mortgage Consultant

Union Savings Bank – Hyde Park
2691 Madison Rd.
Cincinnati, OH 45208
513.294.8020 - Direct Office
513.842.2196 - Fax
twarner@usavingsbank.com
By Fran Rokicki,  Sun Dec 19 2010, 15:25
I would suggest, to anyone who is thinking of refinancing, to choose a good real estate attorney. He or she will protect you from fees that are over the top for the normal refinance. This has happened to one of my clients. The attorney stopped the closing and questioned the high fees that were being charged to the client. The attorney is there, to protect your interests, no one else will.
By Natale Terranova, Jr,  Tue Dec 21 2010, 07:01
Good points made by all. I wanted to make a correction to mortgage insurance mentioned by Trulia. The Mortgage Insurance premiums do not stay on the mortgage for the life of the loan. It is determined by the loan to value, loan program, and in some cases term of loan. There are also different terms or types of mortgage insurance premiums, some have an upfront and no monthly premium. some an upfront and a monthly premium, some no upfront but just a monthly premium. Mortgage Insurance premiums usually comes off at 78% **of the loan to value unless you request it to come off sooner. **

If it is an FHA loan, and depending on the Loan to value and term of the loan, you may have to pay the premium for five years regardless of the loan to value.

Natale Terranova, Jr
Sr. Mortgage Banker
By Aram Arakelyan,  Fri Sep 9 2011, 09:49
Selecting a mortgage is a very important financial decision. Person will be paying off this debt for years. Even a small difference in the mortgage rate will make a big difference in the monthly payments. Good loan officer will present all the facts to the person, and let them make a decision.

Aram Arakelyan
Your LA Broker For Life!
http://www.housevaluecheck.com
By Kevin Cotterill,  Thu Nov 3 2011, 16:04
The article and various comments made above are quite infomative, but I'd like to add another angle--the "low or no cost" refi.
Many of my borrowers believe that there is only one or a limited range of rate and point combinations on particular (such as a 30 year fixed rate) loan at a time. What they don't know--and the writers above don't mention--is that it is usually possible to reduce the costs dramatically just by bumping up the rate a little from the advertised rates that get all of the attention. If the cost is "absorbed" by the higher rate, a borrower can then capitalize on the present low market even if they already have a fairly good rate.
If you do make the call to your friendly mortgage person, be sure to weigh the effect of starting over on a new loan. In my experience, the borrower can often preserve the present loan's payoff date by diverting some of the monthly savings into additional principal payments and still enjoy a lower monthly payment.
So, for a free consultation, get the infomation about your loan in hand (amount owed, current rate, how the present payment breaks down by principal/interest, taxes and insurance, etc.) and call one of us. We will then be able to quickly run the numbers for you to see if it make sense.
By Shawn Rosa,  Tue Dec 13 2011, 13:47
general rule is to refi once rates drop 1% or more below your current rate
By Miles Jones,  Tue Dec 20 2011, 20:40
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By Matie,  Wed Jul 18 2012, 02:26
The break even point takes into consideration more than just payment savings. What if your payment is lowered but you are actually extending your term (e.g. you were already into your current loan 5 years but you just decided to refinance to a 30 yr fixed. You just extended the amount of interest you would pay by 5 years). Some choose to shorten their term (e.g. going from a 30 yr fixed to a 15 yr fixed). In this case your payment may not lower but the interest savings is huge. Maybe you are paying off other debt. In this case, a good loan officer can help determine whether this saves you money or just extends the term of your debt. Bottom line, there are several issues to consider. It takes looking at the whole picture to decide what is best for you.

If you do make the call to your friendly mortgage person, be sure to weigh the effect of starting over on a new loan. In my experience, the borrower can often preserve the present loan's payoff date by diverting some of the monthly savings into additional principal payments and still enjoy a lower monthly payment.

Before deciding which mortgage to get, look at the whole product. Pay close attention to the terms of a loan including the type of the mortgage, the presence of prepayment penalties, low or high down payment, mortgage insurance requirements, payment schedule, lock-in period and many other features. Pick the loan with the rate and other terms that suit your situation best. For example, prepayment penalty clause can be very important if you are planning to sell your house or refinance in the next 3 - 5 years, or if you expect to prepay your loan.

Once you have decided to go with a certain lender (or broker), ask him to specify the documents you will be required to provide for the approval process. Find out also whether the loan application and the lock-in fees, if any, are refundable if your application is rejected.
One should consult with a qualified mortgage professional prior to implementing any mortgage strategies.

http://www.indexpost.com/
By evonnekarrie,  Mon May 20 2013, 02:23
It is better to take advise before refinancing because there may be some better opportunity. http://www.tradecoverwa.com/income-protection.html
By Kobe,  Wed Oct 30 2013, 01:23
Well if someone has really planned to go for refinance, then the best things would be knowing all priorities of their finance and would be capable of managing it smartly. Make sure to get the best deal that should get along with the flexibility of payments. As in refinance, either the time period is being extended or interest rate is being lowered. Do select company while looking towards its services, reviews, assistance, registrations, and much more like: http://www.paydaybank.co.uk good company that going to fit according to your needs.

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Refinancing is most often motivated by lower interest rates, which can bring the dual benefit of lower mortgage payments and lower interest costs over time. But there are many other legitimate motivations. Some are a product of "creative" financing products ...

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