a sound
financial choice. If you are considering refinancing your home loan, this
booklet will provide useful basic information about refinancing. It cannot
provide all the answers you will need, but we believe it is a good starting
point.
CHAPTER TWO
A Consumer's Guide to Mortgage Refinancing
This
was prepared in consultation with the following organizations:
American
Bankers Association
Appraisal
Institute
Comptroller
of the Currency
Consumer
Federation of America
Credit
Union National Association, Inc.
Federal
Deposit Insurance Corporation
Federal
Home Loan Mortgage Corporation
Federal
National Mortgage Association
Federal
Reserve Board's Consumer Advisory Council
Federal
Trade Commission
Independent
Bankers Association of America
Mortgage
Bankers Association of America
Mortgage
Insurance Companies of America
National
Association of Federal Credit Unions
National
Association of Home Builders
National
Association of Realtors
National
Credit Union Administration
Office
of Special Adviser to the President for Consumer Affairs
Savings
and Community Bankers of America
The
Consumer Bankers Association
U.S.
Department of Housing and Urban Development
Veterans
Administration
The
Federal Reserve Board and the Office of Thrift Supervision has prepared a
booklet on refinancing your mortgage in response to a request from the House
Committee on Banking, Finance and Urban Affairs and in consultation with many
other agencies and trade and consumer groups. It is designed to help consumers
understand an important aspect of home financing.
They
believe a fully informed consumer is in the best position to make a sound
financial choice. If you are considering refinancing your home loan, this
booklet will provide useful basic information about refinancing. It cannot
provide all the answers you will need, but we believe it is a good starting
point.
A
Consumer's Guide to Mortgage Refinancing
If
you are a homeowner who was lucky enough to buy when mortgage rates were low,
you may have no interest in refinancing your present loan. But perhaps you
bought your home when rates were higher. Or perhaps you have an adjustable-rate
loan and would like to obtain different terms.
Should
you refinance? This manual will answer some questions that may help you decide.
If you do refinance, the process will remind you of what you went through in
obtaining the original mortgage. That's because, in reality, refinancing a
mortgage is simply taking out a new mortgage. You will encounter many of the
same procedures-and the same types of costs-the second time around.
Would
Refinancing Be Worth It?
Refinancing
can be worthwhile, but it does not make good financial sense for everyone. A
general rule of thumb is that refinancing becomes worth your while if the
current interest rate on your mortgage is at least 2 percentage points higher
than the prevailing market rate. This figure is generally accepted as the safe
margin when balancing 
the costs of refinancing a mortgage against the savings.
There
are other considerations, too, such as how long you plan to stay in the house.
Most sources say that it takes at least three years to realize fully the savings
from a lower interest rate, given the costs of the refinancing.
(Depending on your loan amount and the particular circumstances, however,
you might choose to refinance a loan that is only 1.5 percentage points higher
than the current rate. You may even find you could recoup the refinancing costs
in a shorter time.)
Refinancing
can be a good idea for homeowners who:
1)
Want to get out of a high interest rate loan to take advantage of lower rates.
This is a good idea only if they intend to stay in the house long enough to make
the additional fees worthwhile.
2)
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.
3)
Want to convert to an ARM with a lower interest rate or more protective features
(such as a better rate and payment caps) than the ARM they currently have.
4)
Want to build up equity more quickly by converting to a loan with a shorter
term.
5) Want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.
If you decide that refinancing is not worth the costs, ask your lender whether
you may be able to obtain all or some of the new terms you want by agreeing to a
modification of your existing loan instead of a refinancing.
Should
You Refinance Your ARM?
In
deciding whether to refinance an ARM you should consider these questions:
1)
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?
2)
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 to a new ARM or a fixed-rate loan 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.
1)
Application Fee. This charge imposed by your lender covers the
2) 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 re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy. Because costs may vary significantly from area to area and from lender to lender, the following are estimates only. Your actual closing costs may be higher or lower than the ranges indicated below.
Application
Fee
$75 to $300
Appraisal
Fee
$150 to
$400
Survey
Costs
$125 to
$300
Homeowner's
Hazard Insurance
$300
to $600
Lender's
Attorney's Review Fees
$75 to $200
Title
Search and Title Insurance
$450 to
$600
Home
Inspection Fees
$175 to
$350
Loan
Origination Fees 1% of
loan
Mortgage
Insurance 0.5% to 1.0%
Points
1% to
3%
|
|
Chapter One |
Chapter Three |
