REFINANCING OVERVIEW

If you're considering refinancing your home, take some time to examine your current mortgage and financial status:

  • How many years are remaining on your current mortgage?
  • Is your current rate competitive in today's market?
  • What is the current market value of your home?
  • How much longer are you planning to keep your home?
  • If looking to cash out, how much do you anticipate needing?
  • Do you have a pre-payment penalty on your existing mortgage?

Keep in mind, depending on how long you've had your loan, even a 1/2% rate reduction could make sense for you.

1.  Reasons to refinance

  • To lower your monthly mortgage payments.
  • To switch to a different loan format.
  • To borrow extra cash (commonly referred to as "cashing out").

2.  Lower monthly payments

If interest rates are lower now than when you got your current mortgage, you may be able to refinance at a lower rate.

FOR EXAMPLE:
A $250,000 loan at 8.5% over 30 years costs you $1,923 a month. At 6.5%, your payment would drop to $1,508 a month, saving you $100,000 over the life of the loan.

3.  Switch to a different loan format

  • For a fixed monthly payment — Switch to an Adjustable Rate Mortgage (ARM)
  • To take advantage of lowering interest rates — Switch from a Fixed Rate Mortgage to an ARM
  • To take advantage of lower initial rates once again — Switch from your current ARM to another ARM

4.  Borrow money for other purposes

The equity that you have accumulated in your home can help you qualify for a loan of up to 75% of your home's value. You can use this money to make home improvements, pay down debts, finance your children's education, or expand your business.

FOR EXAMPLE:
If your home is worth $200,000 and your mortgage balance is $50,000, you could borrow $150,000 (75% of your current home's value). After refinancing your mortgage balance of $50,000, you would have $100,000 remaining to cash out.

5.  Costs associated with refinancing

  • The rate, or percentage, at which the money is lent to you (i.e., 8%) 
  • The points, a one-time fee added by the lender (i.e., two points)
  • The application fee charged by the lender to cover credit report and home appraisal expenses (i.e., $350)
  • Closing costs, including transfer taxes, title insurance, escrow, inspection, notary, and so on.

7.  How points affect the cost of a loan

  • 1 point = 1% of the amount borrowed
  • Although points are a fee paid to your lender, they also enable you to "buy" a lower interest rate.
  • As a rule, the more points you pay, the lower your interest rate.
  • One point can "buy" you a 0.25%+/- discount on your interest rate.
  • Most lenders require you to pay your points up front.

8.  The two most popular types of mortgages

  • Fixed Rate
    The most straight forward type of loan. Because the interest rate never changes, you pay the same amount every month until the loan is paid off.
     
  • Adjustable Rate
    Because this interest rate fluctuates at predetermined intervals (i.e., every month, every 6 months, every year), it is more complex than a fixed-rate loan.

9.  Fixed Rate Mortgages

The term, or length of the loan, is usually 30 or 15 years.

  • 30-year term
    This is the most conventinal loan term. It allows you to repay slowly, with moderate monthly payments.
  • 15-year term
    This term allows you to repay twice as fast. Although your monthly payments are higher than a 30-year term (albeit not twice as high), a larger percentage of your payments is applied to principal.

10.  Adjustable Rate Mortgages

  • Term
    Calculated on a 30-year basis
    Starts with a fixed-rate period, then adjusts thereafter, i.e., Fixed for 3 years, then adjusts every year after
  • Rate
    Adjusts at scheduled intervals
    Adjusts according to an index, i.e., Treasury Bills, LIBOR, 11th District Cost of Funds (COF), CDs, and so on.
  • Margin
    Percentage added by the lender to the index interest rate
    The sum of the rate and margin is the rate you pay, called the fully indexed rate
  • Other ARM info
    As interest rates fluctuate, your ARM payments will vary.
    To minimize the risk of extreme fluctuations, caps are imposed on your rate. Caps protect you by limiting the percentage by which your rate can go up.

11.  Building equity in your home

  • Equity is the portion of your home that actually belongs to you.
  • Each time you pay your mortgage, your equity increases.
  • The rate at which you build equity depends on how much of each payment is applied to principal and how much is applied to interest.
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