Unless you’re a serial refinancer — someone who refinances whenever rates drop 1/4 to 1/2 percent — you may not be aware of the mounds of documentation required to refinance a home. Get ready for a tedious process.
It may be worth the hassle if you can get a 30-year fixed-rate mortgage with an interest rate of less than 4 percent. During the week ending Nov. 21, rates on 30-year fixed-rate conforming mortgages fell to 3.31 percent — an all-time low in Freddie Mac records dating to 1971.
HOUSE HUNTING TIP: When a loan agent or mortgage broker quotes an interest rate, be sure to ask if there are any fees involved. If so, find out the amount and also the amount of the monthly mortgage payment on the new mortgage. Then subtract the amount of the new monthly mortgage payment from the one you are currently paying to determine how much you will save per month.
The next step is to determine the time it will take to recoup the cost of the loan origination fees. Divide the amount of the upfront fees by the amount you’ll save per month on the new mortgage to find out how many months it will take to break even. If it will take years and you plan to move next year, you’ll lose money by refinancing even though your monthly payment will be lower.
No-fee refinance mortgages are available, although at a higher interest rate. The fees are paid incrementally over time rather than all at once upfront.
Keep in mind that each time you refinance, you start over again paying down the principal. During the early years of a mortgage, most of the mortgage payment goes to interest.
However, if you refinance into a shorter-term loan, like a 15- or 20-year rather than a 30-year fixed-rate loan, you’ll start paying down principal sooner and pay less total interest. But monthly payments on loans that are amortized over a shorter period will be higher than they are on mortgages amortized over 30 years.
Your refinance can become more expensive if you have a prepayment penalty on your existing first mortgage. If you refinanced recently to a low-interest-rate loan with a prepayment penalty, the prepayment penalty may apply when you pay off that loan in order to substitute it for a new first mortgage.
Look at your existing mortgage promissory note, or call your lender and ask to have a copy of the note sent to you. The note should state whether the loan has a prepayment penalty, when it applies, when it will expire, and how much it would cost if you pay off the loan now.
It might not make sense to refinance if the prepayment penalty on your existing mortgage is high and the interest rate on the new mortgage isn’t much lower than the rate on your current loan. Prepayment penalties are not enforceable in all states.
Appraisals can be a hurdle for homeowners who want to refinance. Conventional lenders usually require 25 to 30 percent equity in the property to approve a refinance. This needs to be validated by an appraisal. A low appraisal can scuttle your plans.
If you think the appraisal of your property is unreasonably low, and you’re willing to pay for a second appraisal, ask the lender to order another one from an experienced local appraiser. Provide comparable sales information of recently sold homes in your neighborhood.
THE CLOSING: Homeowners with no equity in their property may be able to refinance using HARP (Home Affordable Refinance Program). Restrictions apply. For example, your loan must have been securitized before May 31, 2009; it must be owned by Freddie Mac or Fannie Mae; and you need to have been current on your loan payments for the previous six months.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."
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