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A Consumer's Guide to Mortgage Refinancings
|Would Refinancing Be Worth It? || Should You Refinance Your ARM?|
|The Federal Reserve Board and the Office of Thrift Supervision prepared this 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.
We 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.
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 brochure 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.
Refinancing can be worth while, but it does not make good financial sense for everyone. A general rule is that refinancing becomes worth your while if the current interest rate on your mortgage is at least two 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 then 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:
If you decide that a 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.
In deciding whether to refinance an ARM you should consider these questions:
The fees described below are the charges that you most likely to encounter in a refinancing.
Title Search and Title Insurance
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.............1.0% of loan Mortgage Insurance................0.5% to 1.0% Points............................1.0% to 3.0%
Lender's Attorney's Review Fees
Loan Origination Fees and Discount Points
In conclusion, a homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist. One way of saving on some of these costs is to check first 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 mortgage closing is still current. This could include the fees for the title search, surveys, inspections, and so on.
The information contained in this brochure is intended to help you ask the right questions when considering refinancing 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.
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