Consumer guide to home mortgage refinancing


This booklet 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 Office of Thrift Supervision and the Federal Reserve Board created the following information on mortgage refinancing that was intended to help consumers understand some important information of home mortgage financing.

Making a consumer aware of all the important information is the best practice for individuals to make a sound financial decision. If you are thinking of refinancing your current home mortgage loan, the following information can provide you with basic information that is useful for refinancing. It may not provide all the answers that you will need, but we believe it can be a great point to start.

If you are a owner of a home that was fortunate enough to purchase a house when the interest rates were low on mortgages, you may have little interest in refinancing your current home loan. One the other hand, you may have purchased your home when interest rates were higher or you may have a mortgage loan that came with a adjustable rate and would like to refinance under different terms.

If you do decide that refinancing will be the best choice for your future, the loan process will probably remind you of what you went through in obtaining the original home mortgage. The reason is that refinancing a home mortgage is simply taking out a new mortgage. You will most likely encounter the same types of costs and same procedures that you did when you bought the home.

Would Refinancing Be Worth It?

Refinancing you home mortgage can be beneficial, but it may not be a good financial decision for everyone's situation. A general rule of thumb is that home mortgage refinancing becomes beneficial if the current interest rate on your home mortgage is at least 2 percentage points higher than the prevailing market rate. This figure is usually considered a safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other factors to consider, such as how long you plan to stay in the home. According to some experts, it can take at 3 years or more to realize fully the savings from a interest rate that is lower than your current one, given the costs associated with refinancing. (Depending on the particular circumstances and loan amount, 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 recover the refinancing costs in a shorter time frame.)

Refinancing your home can be a great idea for those who want to get out of a high interest rate mortgage loan by taking advantage of lower rates. This is a good idea only if you intend to keep the house long enough to make the additional fees and costs worthwhile.

It can also be a good idea to refinance if you have a adjustable-rate mortgage (ARM) loan and want a loan with a fixed-rate. This can give you "peace of mind" of knowing exactly what the mortgage payment will be for the remaining life of the loan.

Or refinancing may benefit you if you want to convert to a adjustable rate mortgage with more protective features (such as a better rate and payment caps), or a lower interest rate than the current ARM.

Another reason to refinance is to convert to a loan with a shorter term that can help to build up equity in a shorter time period.

Lastly, refinancing might be beneficial if need cash for a child's education or for a major purchase. This can allow you to draw on the equity built up in the house to get much needed cash.

If you decide that refinancing is not worth the extra fees and costs, ask your current 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 agreement instead of a refinancing.

Should You Refinance Your Adjustable rate Mortgage (ARM)?

In deciding whether to refinance a adjustable rate mortgage you should consider these questions:

1) Is the next adjustment on your interest rate for your existing loan likely to substantially raise your monthly payments?

2) Will the new interest rate be 2 or 3 percentage points above the prevailing rates being offered for either Adjustable Rate Mortgages or other Fixed Rate mortgage loans?

3) If your current mortgage sets a cap on your monthly payments, are those payments big enough to pay off your loan by the end of the original loan term? Will refinancing to a new fixed-rate or a ARM loan enable you to pay your loan in full by the end of the term?

What Are the Costs Involved To Refinance?

The fees outlined below are the charges that you are most likely encounter when refinancing your mortgage.

Application Fee - This is a charge imposed by your lender that covers checking your credit report and the initial costs of processing your loan request.

Title Insurance and Title Search - This charge covers the cost of examining public records that will 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 any discrepancies in the property title.

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 a amount up to seventy percent of what it would cost you for a new policy.

Because costs may vary significantly from location to location and from lender to lender, the following are only approximate estimates. Your final and actual costs to close may be higher or lower than the ranges indicated below.

1) Application Fee $75 to $300

2) Appraisal Fee $150 to $400

3) Survey Costs $125 to $300

4) Homeowner's Hazard Insurance $300 to $600

5) Lender's Attorney's Review Fees $75 to $200

6) Title Search and Title Insurance $450 to $600

7) Home Inspection Fees $175 to $350

8) Loan Origination Fees 1% of loan

9) Mortgage Insurance 0.5% to 1.0%

10) Points 1% to 3%

Lender's Attorney's Review Fees - The lender normally charges a fee paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, escrow companies, title insurance companies, real estate brokers, and attorneys for the seller and buyer. In most situations, the person conducting the settlement is providing a service to the lender. You may also be required to pay for other legal services relating to your loan which are provided to the lender. You may want to hire your own private attorney to represent you at all stages of the transaction including the settlement.

Points and Loan Origination Fees - The origination fee is charged for the lenders work in preparing and evaluating your mortgage loan. Points are finance charges that are prepaid and imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals 1% of the amount of the loan. For example, one point on a $85,000 loan would be $850. In some cases, the points you pay can be financed by adding them to the loan amount. The total number of points a lender charges will depend on the interest rate and market conditions.

Appraisal Fee - This fee pays for an appraisal which is a defensible and supportable estimate or opinion of the property value.

Prepayment Penalty - A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The practice of charging money for an early pay-off of the existing mortgage loan varies by state, plus the type of loan, and the type of lender. Prepayment penalties are banned on various loan types including loans from federally chartered credit unions, VA and FHA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a prepayment penalty. In some loans, you may be charged interest for the full month in which you prepay your loan.

Miscellaneous - Depending on the loan type you have and some other factors, another major expense you can encounter is a VA loan guarantee fee, private mortgage insurance, or FHA mortgage insurance. There are a few other closing costs in addition to these.

In conclusion, a homeowner should plan on paying an average of three to six percent of the outstanding principal in refinancing costs, plus any penalties for prepayment and the costs of paying off any existing second mortgages.

One way of saving some money associated with costs is to first check with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the closing of the mortgage is still current. This could include the fees for the inspections, surveys, title search, and so on.

The information contained above is intended to help you ask the right questions when considering a possible refinancing of your loan. It is not a replacement for professional advice. Talk with mortgage lenders, real estate agents, attorneys, and other advisors about lending practices, mortgage instruments, and your own interests before you commit to any specific loan.