Are the interest rates low enough to save you
Talk to some lenders to determine the available
rates and the costs associated with refinancing. These costs include
appraisals, attorney's fees, and points. Then determine what your
new payment would be if you refinanced. You can estimate how long
it will take to recover the costs of refinancing by dividing your
closing costs by the difference between your new and old payments
(your monthly savings). However, the ultimate amount you may save
depends on many factors, including your total refinancing costs,
whether you sell your home in the near future, and the effects
of refinancing on your taxes.
Many lenders are now offering zero point loans
and low-cost refinancing. Therefore, even if your rate change
is less than one percentage point, you may be able to save some
money by refinancing.
What other settlement costs will the lender require
you to pay at closing?
Settlement costs typically include fees for the
title search, appraisal, loan origination, credit check, and lawyer's
services. You also may be required to pay recordation fees or
transfer taxes. If you are shopping for a lender, ask each one
for a list of charges and costs you must pay at closing. Some
lenders may require that some of these costs be paid at the time
of loan request form.
How would refinancing affect the taxes you owe?
With a lower interest rate on your home loan, you
will have less interest to deduct on your income tax return. That,
of course, may increase your tax payments and decrease the total
savings you might obtain from a new, lower-interest mortgage.
You should be aware of an Internal Revenue Service
ruling with respect to points paid solely for refinancing your
home mortgage. IRS regulations require that points paid up front
for refinancing must be deducted over the life of the loan --
not in the year you refinance -- unless the loan is for home improvements.
This means that if you paid a certain number of points, you would
have to spread the tax deduction for those points over the life
of the loan.
What do you look for when shopping for a home
If you decide to refinance your mortgage, shopping
around by calling several lending institutions to ask each one
what interest and fees they charge will help you get the best
deal available. Also ask each about their "annual percentage
rate" and compare them. The APR will inform you of the total
costs of the refinancing, including interest, points, and other
Keep in mind, you do not have to refinance your
loan with the same lender that provided your original mortgage.
However, to keep your business, some lenders will offer their
original mortgage customers the incentive of lower mortgage interest
rates, sometimes with reduced closing costs.
What disclosure must the lender give you?
For a refinancing, the lender must give you a written
statement of the costs and terms of the financing before you become
legally obligated for the loan, as required by the Truth in Lending
Act. You usually will receive the information around the time
of settlement, although some lenders provide it earlier. You will
want to review this statement carefully before you sign the loan.
The disclosure tells you the APR, finance charge, amount financed,
payment schedule, and other important credit terms. If you refinance
with a different lender, or if you borrow beyond your unpaid balance
with your current lender, you also must be given the right to
rescind the loan. In these loans, you have the right to rescind
or cancel the transaction within three business days following
settlement, receipt of your Truth in Lending disclosures, or receipt
of your cancellation notice, whichever occurs last.
How long will I have to repay the loan?
Some second mortgage loans may extend for as long
as 15 or 20 years; others may require repayment in one year. You
will need to discuss the repayment terms with the lenders and
select one who offers terms that best suit your needs. For example,
if you need to borrow $20,000 to make repairs on your home, you
may not want a loan that requires you to repay the entire amount
in one or two years because the monthly payments may be too high.
Will my interest rate change?
If you have a fixed-rate loan, the interest
rate is set for the life of the loan. However, many lenders offer
variable rate mortgages, also known as adjustable rate mortgages
or ARMs. These provide for periodic interest-rate adjustments.
If your loan contract allows the lender to adjust or change the
interest rate, be sure you understand when the lender has the
right to change the interest rate, whether there are any limits
on how much the interest or payments can change, and how often
the lender can change the rate. You also should know what basis
the lender will use to determine a new rate of interest.