Mortgage Refinancing: Is it Right for You?

Mortgage refinancing basics

If you are a homeowner who was lucky enough to buy when mortgage rates were low, you may have no interest in mortgage refinancing. But if you bought your home when rates were higher or you have an adjustable-rate loan and would like to obtain different terms, home refinancing is an option for you.

If you decide that the mortgage refinancing process is worth pursuing, you’ll be reminded of what you went through to obtain the original mortgage. That’s because mortgage refinancing 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.

Would home refinancing be worth it?

Mortgage refinancing can be worthwhile, but it does not make good financial sense for everyone. A general rule of thumb is that home refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing refinancing rates. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings.

There are other considerations to take into account when thinking about mortgage refinancing. One example would be how long you plan to stay in the house. Most sources say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs associated with home refinancing.

Mortgage refinancing can be beneficial for homeowners who:

• Want to get out of a high interest rate loan to take advantage of lower rates
• Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing the exact amount of the mortgage payments for the life of the loan
• Want to convert an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM they currently have
• Want to build up equity more quickly by converting to a loan with a shorter term
• Want to draw on the equity built up in their house to get cash for a major purchase/investment (such as a child’s education)

If you decide that home refinancing is not worth the costs, ask your lender whether you maybe eligible to obtain all or some of the new terms you want by agreeing to a modification of your existing loan rather than refinancing.

What are the costs associated with mortgage refinancing?

The fees described below are the charges commonly associated with home refinancing:

• Application fee - this charge covers the initial costs of processing your loan request and checking your credit report
• Title search and title insurance - this charge covers the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy insuring the policy holder in a specific amount for any loss caused by discrepancies in the title to the property

Because costs may vary significantly by area and lender, the following are estimates only. Your actually closing costs may be higher or lower than the ranges indicated below:

One way of saving on some of these mortgage refinancing 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 bottom line on mortgage refinancing

A homeowner should plan on paying an average of 3 to 6 percent of the outstanding principal in home refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.