To get a good deal on a refinance, consumers need to do their research, shop around for a lender and ask questions before committing to a new mortgage.
Here are some basic options available now:
- A 15-year refinance loan. If you already have paid off a good portion of your current mortgage, a 15-year refinance may be a good option. The fixed-rate interest, while not always as low as a 30-year rate, can still be competitive. Remember that your monthly payment will be higher than that of a 30-year rate, but the long-term savings can be significant.
- A 30-year refinance loan. This may be the ideal choice if you prefer a low monthly payment and fixed-rate interest.
- Cash-out refinance loan. If you have equity in the property and your house is worth more than you owe, you can take out a loan that is larger than your existing mortgage. You can use the extra cash to pay large expenses, such as a renovation or college tuition, or to pay off loans and credit cards. Remember that the money is not free — you still must pay it back.
- Cash-in refinance loan. If your property is worth less than your mortgage and you have savings that aren’t earning much return, you may want to take advantage of low interest rates and pay down your principal and refinance the mortgage. Increasing your equity in the property may help you qualify for a better rate and may eliminate the need for private mortgage insurance on the refinance. The only caveat: If your home continues to lose value, you risk losing your cash investment.
- HARP. Under the Home Affordable Refinance Program (HARP), qualified borrowers can refinance up to 125 percent of the actual value their homes. To qualify, the mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac — two government-sponsored agencies — and refinancing must improve the stability and long-term affordability of the loan. You must be current on mortgage payments and not have been more than 30 days late making a payment within the past 12 months.
- HAMP. The Home Affordable Modification Program (HAMP) is designed for people in financial hardship who are in jeopardy of losing property, have an “underwater mortgage” and a not-so-perfect payment history. The government provides incentives of up to $1,500 to lenders to refinance a mortgage. To qualify, you must have received the mortgage on or before Jan. 1, 2009, and have a mortgage that is more than 31 percent of your gross (pre-tax) monthly income. This includes taxes, insurance and any homeowner’s association fees. Also, you must owe $729,750 or less on your first mortgage.
- Before the mortgage is permanently modified, homeowners on the HAMP program get a trial period of three to four months to prove they can make the new payments on time. The interest rate can be as low as 2 percent and the terms can be extended to up to 40 years.
Fixed-Rate Versus Adjustable-Rate Mortgages
A traditional choice for borrowers is a mortgage with a fixed interest rate that stays the same for the life of the loan. Homeowners get the peace of mind that comes from a principal that will not increase.
An adjustable-rate mortgage (ARM) does change periodically based on the economic index on which it is based. The initial rate is typically lower than a fixed rate but it can go up depending on circumstances specified in the loan. The interest rate also may decrease if economic index conditions change. Some ARMs include caps that limit the amounts they can go up or down.
Planning for Closing Costs
According to a government website, it’s not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees.
Here are some of the charges to expect:
- Application fee. Be prepared to pay an application fee, which covers the costs of processing the loan, as well as the credit report. You must pay this fee even if your loan is denied.
- Mortgage points. A point is a fee equal to 1 percent of the loan. For a $100,000 mortgage, each 1-point charge would equal $1,000. There are two types of points:
- Discount points. These are prepaid interest charges on the mortgage and typically reduce the interest rate on the loan. If you don’t plan to stay in the house a long time, however, you may not get the benefits of having paid down the interest rate.
- Origination Points: These fees are charged by the bank to cover the cost of making the loan and are usually tax-deductible if used to obtain the loan and not to pay other closing costs.
They range from 0 to 1.5 percent of the loan principal.
- Appraisal fee. In order to prove to lenders your property is worth at least as much as the loan, an appraisal must be completed. Sometimes the lender will waive this requirement for a new appraisal if you have a copy of a recent one.
- Inspection fee. To ensure the house is in good structural condition and free of termites, a lender may require a termite inspection and an analysis of the property by an inspector, engineer or consultant. Some lenders may require a septic system test and a water test (if you have a well).
- Attorney review/closing fee. This fee is paid to the lawyer or company that conducts the closing process for the lender.
- Homeowner’s insurance. Your lender will require that you have a homeowner’s insurance policy in effect at settlement, also known as hazard insurance.
- Title search and title insurance. In order to ensure you are the rightful owner of your property, property records will need to be searched. Title insurance covers the investment in your mortgage if a problem over ownership arises. When refinancing, ask the company currently carrying your title insurance what it would cost to simply reissue the policy.
- Survey fee. Lenders require a survey to verify the location of buildings and improvements on the land. If a survey has been completed recently, you may be able to forgo a new one.
Although these fees pile up, many of the requirements also protect you as a homeowner. Some lenders may advertise no-cost refinancing, when in fact they are offering no out-of-pocket fees. At some point all these fees need to be paid, and you will probably see them rolled into your new loan.