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 a home re finance using a new ARM or a fixed-rate enable you
to pay your loan in full by the end of the term?
The fees described below are the charges that you'll most likely
encounter in refinancing.
Title Search and Title Insurance
This charge will cover the cost of examining the public record to
confirm ownership of the property. 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.
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 want to retain your own
attorney to represent you at all stages of the transaction,
including settlement.
Loan Origination Fees and Discount Points
The origination fee is charged for the lender's work in evaluating
and preparing your mortgage loan. Discount points are prepaid
finance charges imposed by the lender at closing to increase the
lender's yield beyond the stated refinance interest rate on the mortgage note.
One point equals one percent of the loan amount. For example, one
point on a $100,000 loan would be $1,000. 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
determent to refinancing. The practice of charging money for an
early pay-off of the existing mortgage loan varies be 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 your 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 costs of paying off any second mortgage 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 page is intended to help you ask
the right questions when considering a mortgage re finance of your loan. This 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.
