Tips From Experts : Advice on How to Refinance Home at a Lower Rate
With mortgage rates in single-digit territory for the first time in eight years, millions of homeowners are catching refinancing fever. But thousands of others with the fever are not doing anything about it, perhaps because they don’t know exactly what to do.
Rest assured, financial experts say. While the process can be long and traumatic, it is not much different from getting a new loan for a home purchase. The process might even be less traumatic because most homeowners will have an easier time qualifying for a refinanced loan if they are making payments on the current loan without problems.
Qualification worries aside, “you can be much more selective and can take time to shop around and find the best deal,” advised Kirk Hallahan, spokesman for the California League of Savings Institutions.
Unfortunately, however, consumers might find the process taking longer these days, largely because the boom in refinancings has backed up many lenders in paper work.
“In this booming time, everybody’s backlogged,” said Sigmund Anderman, president of CompuFund, a Dublin, Calif.-based computerized mortgage-search service.
Consumers have also found that mortgage rates have edged up by as much as a half percentage point since April 22 and that some institutions have raised fees because of the high demand. Although many housing experts expect rates to remain near current levels for the next few weeks, they nonetheless urge homeowners to go ahead and refinance now.
“If you think you can get a good deal at today’s rate that will save you money over time, then do it,” said Thomas Lawler, economist for the Federal National Mortgage Assn.
The following is a refinancing primer:
When is refinancing worthwhile?
Many financial experts say it is worthwhile to refinance if you can cut two percentage points off your current mortgage rate and plan to live in your home for at least two years. That is because it will generally take about two years for the savings in monthly mortgage payments to offset the points and other loan fees charged by lenders. For example, a borrower refinancing a $100,000, 30-year loan to 9.75% from 12% would save about $160 a month on loan payments. If the total loan fees were $3,500, he would thus need 22 months to recoup them.
But homeowners planning to live in their homes longer than two years might find that refinancing will be beneficial even with a smaller cut in their current rate.
However, prepayment penalties on your current loans might reduce the attractiveness of a refinance. Another drawback would be if you have to increase your equity in the home with a new cash outlay, since many lenders require 20% or more equity for certain refinancings.
What are some of my refinancing options?
Just as in deciding on a new loan, “don’t assume there is one best loan program,” Richard Rosenthal, president of the California Assn. of Realtors, urged. The options on a refinance are much the same as on a new loan, he said.
A 15-year mortgage might be attractive if you want to shorten the term of the loan and don’t mind keeping the monthly payment the same, even with a lower interest rate. Or you might want to increase your loan amount to get cash for remodeling.
You also must decide between an adjustable- and fixed-rate mortgage. If you choose adjustable, some lenders allow you to choose which index the rate will be pegged to.
How should I start shopping around?
Start by calling or visiting a loan officer at your current lender. In some cases, your current lender might have special deals for existing customers.
But don’t stop there. Shop around. Other lenders may have better rates, fees or quicker approvals. And don’t just stick to S&Ls; or banks. Try mortgage banking firms or even a computerized mortgage service, which searches for the best deals among dozens of lenders listed by the service.
What is involved in the process?
After settling with the loan officer on a fixed or adjustable rate, maturity and fees, you will fill out and submit a loan application. You also must fill out various forms, such as verification of employment and deposits.
Within three days of submission of the application, the lender is required to give you a statement of estimated fees and other closing costs. Be sure to ask for one if you don’t get one. Review it carefully.
“Customers should make sure that everything is disclosed up front,” said Jim Dangerfield, Glendale Federal’s senior vice president in charge of residential lending.
How long is the process?
Generally, you should now figure on between six and eight weeks for closing conventional loans, up from between four to five weeks before refinancing fever took hold, said Scott Myre, product manager of real estate loans for Wells Fargo Bank. Appraisals and verifications are taking longer because of the demand.
A borrower might quicken the process by going through his existing lender. That may save time in getting approvals and in verifying the loan’s history.
Some lenders are offering quicker approvals. Wells Fargo, for example, offers a loan approval in three days after submission of the loan application, provided that the information in the application is correct.
Some lenders also are looking at doing loan “modifications” instead of refinancings. Under a loan modification, the old loan would simply be rewritten with a new rate, saving the need for new appraisals and verifications.
How much should I expect to pay in points and other fees?
Fees, including points for loan origination, closing costs and other charges, generally will total about $3,500 for a $100,000 loan at most S&Ls; and other lenders.
Points for loan origination generally range between 1.5 and 2.5. (One point equals 1% of the loan amount, so one point on a $100,000 loan would total $1,000).
However, some institutions have offered points as low as zero, while others as high as five. Points generally are less on adjustable-rate mortgages and on 15-year mortgages.
Institutions often adjust points every week, and some mortgage bankers adjust them daily. Experts say consumers should make sure that they clarify what their points will be not only at the time of loan application but also when the loan closes.
The $3,500 typical fee also includes between $1,000 and $1,500 for various closing costs and other fees for such things as the appraisal, title insurance, title search, credit report, processing and documentation. That also includes a $200 application fee at many S&Ls.;
How much do mortgage rates vary?
Rates vary widely between institutions, depending in part on how badly it wants your business. Many institutions offer several rates, depending on the loan maturity, terms and fees. For example, rates on 15-year fixed-rate mortgages often are a half percentage point lower than rates on 30-year mortgages.
Rates generally are a half percentage point higher for loans larger than $133,250, the maximum size for loans that the Federal National Mortgage Assn. (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) will buy for their mortgage-backed securities.
Rates also tend to be a half-point or more higher for refinances of rental or vacation homes, as opposed to owner-occupied homes.
How can I get a lower rate?
Some lenders allow borrowers to “buy down” the interest rate by paying more points. Generally, the rule is four to six points for each percentage point increase or decrease in the rate. Imperial Savings offered, as of Thursday, choices on 15-year fixed-rate loans under $133,250 ranging from 9.875% for a one-point origination fee to 9% for 4.5 points.
How can I lock in the rate I want?
Many lenders guarantee, or “lock,” the rate. Some do so at the date of application or the date of loan approval (such locks can run as long as 60 days) while others do it when all verifications and other documentation have been received (these locks usually are 14 to 21 days).
However, recent delays in getting loans closed have made many of these lock provisions moot, because loans often aren’t closed until the lock period has ended, Wells Fargo’s Myre said. Some institutions, however, are willing to extend lock periods.
If rates were to fall while the loan is being processed, some lenders will allow borrowers to take the lower rate after paying an additional document redrawing fee, usually about $150.
‘If you think you can get a good deal at today’s rate that will save you money over time, do it.’
--Thomas Lawler, economist for
the Federal National Mortgage Assn.
