A Guide For Consumer's
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.
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.
Deciding If Refinancing Is Worth It?
Refinancing can be worthwhile, but it does not make good financial sense for
everyone. A general role of thumb is that refinancing becomes worth your
while if the current interest rate on your
mortgage is at least 2 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 than the current rate. You
may even find you could recoup the refinancing costs in a shorter time.)
Refinancing - a good idea for homeowners who:
- want to get out of a high interest rate loan to
take advantage of lower rates. This is a good idea only if they intend to
stay in the house long enough to make the additional fees worthwhile.
- have an adjustable-rate mortgage (ARM) and want a
fixed-rate loan to have the certainty of knowing exactly what the mortgage
payment will be for the life of the loan.
- want to convert to 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 or for their children's education.
If you decide that 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.
Should Your ARM Be Refinanced?
In deciding whether
to refinance an ARM you
should consider these questions:
- Is the next interest rate
adjustment on your existing loan likely to increase your monthly payments
substantially?
- Will the new interest rate be two or three
percentage points higher than the prevailing rates being offered for
either fixed-rate loans or
other ARMs?
- If the current mortgage sets a
cap on your monthly payments, are those payments large enough to pay
off your loan by the end of the original term?
- Will refinancing to a new ARM or a fixed-rate loan enable you to
pay your loan in full by the end of the term?
Refinancing Is Not Without Cost
The fees described below are the
charges that you are most likely to encounter in a refinancing.
- Application Fee. This charge imposed by your lender covers the
initial costs of processing your loan request and checking your credit
report.
- Title Search and Title Insurance. This charge will cover the
cost of examining the public record to confirm ownership of the real
estate. It also covers the cost of a policy, usually issued by a title
insurance company, that insures the policy holder in a specific amount for
any loss caused by discrepancies in the title to the property. 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.
- Lender's Attorney's Review Fees. The lender will usually charge
you for fees paid to the lawyer or company that conducts the
closing for the lender.
Settlements are conducted by
lending institutions, title insurance
companies, escrow companies, real estate brokers,
and attorneys for the buyer and seller. In most situations, the person
conducting the settlement is providing a service to the lender. You may
also be required to pay for other legal services relating to your loan
which are provided to the lender. You may want to retain your own attorney
to represent you at all stages of the transaction including settlement.
- Loan Origination Fees and Points. The origination fee is charged
for the lenders work in evaluating and preparing your mortgage loan.
Points are prepaid finance charges
imposed by the lender at closing to increase the lender's yield beyond the
stated interest rate on the
mortgage note. One point equals one
percent of the loan amount. For example, one point on a $75,000 loan would
be $750. In some cases, the points you pay can be financed by adding them
to the loan amount. The total number of points a lender charges will
depend on market conditions and the interest rate to be charged.
- Appraisal Fee. This fee pays for an appraisal which is a
supportable and defensible estimate or opinion of the value of the
property
- Prepayment Penalty. A prepayment penalty on your
present mortgage could be the greatest deterrent to refinancing. The
practice of charging money for an early pay-off of the existing mortgage
loan varies by state, type of lender, and type of loan. Prepayment
penalties are forbidden on various loans including loans from federally
chartered credit unions, FHA and
VA loans,
and some other home-purchase loans. The mortgage documents for your
existing loan will state if there is a penalty for prepayment. In some
loans, you may be charged interest for the full month in which you prepay
your loan
- Miscellaneous. Depending on the type of loan you have and other
factors, another major expense you might face is the fee for a
VA loan
guarantee, FHA
mortgage insurance, or
private mortgage insurance. There are a few other closing costs in
addition to these.
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 a possible refinancing of 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.
Ask your lender or real estate
agent for the following related pamphlets:
This booklet was prepared in consultation with the following
organizations:
American Bankers Association
Appraisal Institute
Comptroller of the Currency
Consumer Federation of America
Credit Union National
Association, Inc.
Federal Deposit Insurance
Corporation
Federal Home Loan Mortgage
Corporation
Federal National Mortgage
Association
Federal
Reserve Board's Consumer Advisory Council
Federal Trade Commission
Independent Bankers Association of America
Mortgage Bankers Association of
America
Mortgage
Insurance Companies of America
National Association of
Federal Credit Unions
National Association of Home
Builders
National Association of Realtors
National Credit Union
Administration
Office of Special Adviser to the President for Consumer Affairs
Savings and Community Bankers of America
The Consumer Bankers Association
U.S. Department of Housing and
Urban Development
Veterans
Administration
