Should you refinance your home mortgage? That's a question many homeowners are asking, given the lower mortgage rates that are currently available.
But, how do you decide if refinancing makes sense in your particular case? The answer depends on many factors, including your tax bracket, the length of time you plan to stay in your home, and the additional costs and charges you must pay for the refinancing.
What follows is information to help you decide whether to refinance your home mortgage and how to go about doing it. You may want to refer to the charts on pages 9 and 10 to see how much money you might save if you refinanced your mortgage. (We apologize that the charts are not available on-line. To obtain a copy of the charts, please request a free copy of the brochure by contacting: Public Reference, Federal Trade Commission, Washington, D.C. 20580; (202) 326-2222. TDD call (202) 326-2502.)
How much will it cost to refinance your mortgage?
When you refinance your mortgage, you usually pay off your original
mortgage and sign a new loan. With a new loan, you again pay most of the
same costs you paid to get your original mortgage. These can include
settlement costs, discount points, and other fees. You also may be charged
a penalty for paying off your original loan early, although some states
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.
In refinancing, lenders usually offer a range of interest rates at
different amounts of points. A point equals one percent of the loan
amount. For example, three points on a $100,000 mortgage loan would add
$3,000 to the refinancing charges.
Settlement costs typically include fees for the loan application, 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 application.
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.
Should you also consider a different type of mortgage?
If you are thinking about refinancing your mortgage, you might want to
consider other types of mortgages. For example, you might want to look
into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments
are somewhat higher than a longer-term loan, but you pay substantially
less interest over the life of the loan and build equity more quickly. (Of
course, this also means you have less interest to deduct on your income
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" (APR) and compare them. The APR will tell
you the total credit costs of the refinancing, including interest, points,
and other charges.
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.
When you apply for a mortgage, some lenders require you to pay a
special charge to cover the costs of processing your application. The
amount of this fee varies, but it may be $100 to $200. Usually, you must
pay this charge at the time you file the application.