Points Worth Consideration Before Rushing to Refinance
Should you refinance your mortgage? Answer these questions and see.
How much would you save on monthly payments? Consumers save about $30 for each half-percentage-point drop in interest rates on a $100,000 loan. The savings would be twice as much for a $200,000 loan--or if the percentage drop was 1% instead of 0.5%. You can use this as a gauge to estimate the savings for your loan. If you want a more-accurate estimate, use the multipliers in the Mortgage Rate chart in the Times Real Estate section or the Web-based calculators at www.bankrate.com.
What are the upfront costs? Upfront costs on a mortgage loan generally range from 1% to 2% of the loan amount, but can be significantly higher or lower. These fees include “points”--prepaid interest--to fees for title insurance, appraisals and document preparation. The Real Estate Settlement Procedures Act requires lenders to provide a good-faith estimate of these fees to consumers within three days of applying for a loan. If the actual fees are significantly higher than the good-faith estimate, consumers have the right to cancel the deal.
How long would it take to recoup the upfront costs through the monthly savings? Divide the upfront costs of the loan by your monthly savings. The result is how many months it will take to recoup the refinancing costs.
How long will you remain in the home? If you plan to live in the home well past the point that the refinancing costs will be paid through monthly savings, refinancing makes sense.
Can you get better loan terms? If you had a low down payment or bad credit when you first bought your home, you’re likely to be paying private mortgage insurance--costly coverage that protects your lender, not you. If your credit has since improved or you’ve paid enough principal to boost your loan-to-value ration, refinancing may allow you to drop the PMI, which could make it a good deal regardless of whether you were able to cut the rate.
Are you willing to take a chance? Even if fixed-rate loans aren’t low enough to warrant refinancing, some borrowers might consider certain types of adjustable loans.
So-called 5/1 ARMs offer fixed rates for five years. After that, the loan rate adjusts once a year. The benefit of these loans? They cost about 1 percentage point less than 30-year fixed-rate loans, which makes them ideal for people who pan to trade up, move or refinance before that point. People who are in starter homes and those who get transferred frequently would be wise to consider this type of loan, said Steven Filsinger, president of Asset Alliance Mortgage in Carlsbad, Calif. By accepting some interest rate risk, these consumers can save a bundle with this type of loan.
