Refinancing Questions and Answers

When should a mortgage loan be refinanced?

It's often said that you should refinance when mortgage rates are 2% lower than the rate you currently have on your loan. However, refinancing may be a viable option even if the interest rate difference is less than 2%. A modest reduction in the loan rate can still cut your monthly payment appreciably. For example, the monthly principal and interest payment on a $100,000 loan at an 8½ percent rate would be around $770. If the rate were lowered by one percent to 7½, the monthly payment would drop to about $700, yielding a $70-per-month savings. Of course, the significance of such savings for any particular individual would depend upon that person's income, budget, and loan amount in addition to the change in interest rate.

Should you consider refinancing if a relocation is planned in the near future?

First, you have to keep in mind that most lenders charge fees to refinance a loan. If you intend to remain in the property for less than a two years (on average), your monthly savings from the refinance may not have enough time to accumulate and recoup those costs. For instance, assume that a lender charged $2,000 to refinance your mortgage, and it resulted in a monthly-payment savings of $80. It would take 25 months ($2,000 divided by $80) to recoup the transaction costs before you began to realize any actual 'net' savings. Some lenders may charge a slightly higher-than-average interest rate on refinance loans, but waive all costs associated with acquiring the loan. The attractiveness of these loans will largely depend on the interest rate that you're being charged on your current mortgage.

Should you pay as many discount points as possible in order to lower your new loan's interest rate?

If you plan to live in your home for at least a few years after the refinance, paying discount points to lower the loan's interest rate could be a good way to further lower your monthly payment (and possibly increase the loan amount that you can afford to borrow). However, as stated previously, if you intend to stay in the property for only a year or two afterwards, there may not be enough time for your monthly savings to recoup the cost of the discount points that you paid up-front. Use the calculations in the example above to help you determine your 'break-even' point: total refinance costs divided by monthly savings equals # of months required to recoup costs, or break even.

What does it mean to 'lock-in' a mortgage loan's interest rate?

Due to the nature of interest rate movements, mortgage rates can change dramatically from the day that you apply for a loan to the day that you close on the transaction. If interest rates rise sharply during the time of loan processing, it could drive the borrower's mortgage payment higher than initially quoted. To protect against this uncertainty, the lender can allow the borrower to 'lock-in' the loan's interest rate, guaranteeing the borrower the quoted rate for a specified period of time (typically from thirty to sixty days). The lender may or may not charge a fee for this service. If rates drop before the loan closes, a 'float-down' provision (which the lender also may or may not charge for) would afford the borrower the advantage of the prevailing lower rate.

Should you lock-in the rate when applying for a new or refinance loan?

No one knows for sure how interest rates will move at any given time, but your lender may be able to give you an opinion of the direction that he or she thinks mortgage rates are headed. If interest rates are expected to be volatile in the near future, it would be wise to consider locking the rate if a rise would no longer allow you to qualify for the loan. If your budget can sustain a higher loan payment or if the lender's lock fee seems excessive, you might consider allowing the interest rate to 'float' until the loan closing (assuming, of course, that there's also the possibility of interest rates moving downward, as well).

How do past credit problems impact your chances of getting a home loan?

Obtaining a home loan is possible even with extremely poor credit. If you've had past credit problems, a lender will certainly consider you to be more of a risk to lend to. As compensation for this added risk, the lender will charge you a higher interest rate and typically expect you to make a higher down payment if you're purchasing. The worse your credit is, the higher you can expect to pay in interest rate and down payment. Not all lenders will make loans to borrowers with bad credit, but many will. An efficient way to find a new loan or refinancing that will meet your needs is to visit a mortgage broker. They simultaneously work with numerous lenders, and can often match you with the best program available for your situation.

How can you determine which lender has the best mortgage financing deal?

When comparison-shopping, remember that a lender can structure financing for a borrower in several different ways. One lender may charge higher fees and offer a low interest rate while another may offer a slightly higher rate with lower fees. In order to make a legitimate direct comparison between lenders, ask each one their interest rate for a zero-discount-point loan. Also, be sure to ask how much they charge in origination fees and any other costs that are typically added on for making a loan. A reputable lender will be happy to answer your questions.

Should you automatically choose the lender that offers you the lowest interest rate and costs?

Not necessarily. There are primarily two things to consider when choosing one lender over another: the quality of service being provided and the cost of those services. When interviewing and comparing lenders, ask each one several questions. This should be accomplished before even touching any loan application. A good lender should be able to give you solid and authoritative answers, and also be legitimately concerned with your financial situation. If after a few questions you don't feel comfortable with the lender, simply move on to another candidate.

 

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