Increased competition among mortgage companies,
and streamlined application and approval processes. Some mortgage
companies are offering competitive deals on points and closing
costs, and advances in underwriting procedures have made the
application process more efficient.
Here are some factors
to consider
before deciding to refinance:
Q
People used to say that it was time to refinance if there was
a 2 percentage point spread between your mortgage rate and current
rates. What's the rule?
A
''My rule of thumb is that it's dangerous to use rules of thumb,"
said Peter Boyle, vice president at First Residential Mortgage
Corp. in Burnsville.
Boyle said that for a $50,000 mortgage a 2 percent
difference might make sense but for a $300,000 mortgage it might
take only 3/4 of a percent difference to justify refinancing.
He and other mortgage lenders said that every
situation is different and borrowers must consider several factors,
including the interest rate and loan amount, before deciding
whether to refinance.
Initially, borrowers should do a "break-even"
analysis to determine if the monthly savings they'd receive
from refinancing is worth the cost of refinancing.
That break-even analysis depends on how long you've
been paying the mortgage, the amount you would save each month
and how long you plan to live in the house.
For example, if you refinance
your house and it costs $3,600 in closing costs and you save
$125 a month, then you'd need to live in the house for at least
30 months to justify the refinancing cost, said Kris Wilson
of Summit Mortgage in Bloomington.
Wilson tells clients that it
often makes sense to refinance if they can recoup the costs
within 2 to 2 1/2 years.
Roger Harrington of Harrington Mortgage Advisors
said that borrowers must also consider how much time and energy
it takes to refinance and then decide whether the savings are
worth it.
"People look at a great low rate, but, when they
talk to me, at least a third to half [of them] never go into
the [application] interview because I tell them 'is saving $15
a month worth it to you?'"
Q
Is refinancing a house easier than buying a house?
A
Generally speaking, yes, said Boyle of First Residential Mortgage.
That's because mortgage underwriters -- the people who approve
mortgages -- are more likely to view a borrower as a better
risk if he or she already owns a house and has a current payment
history. That often means less paperwork and a faster approval
process, usually a matter of just a few days.
Q
How much does it cost to refinance a mortgage?
A
That depends mostly on the mortgage amount, but regardless there
are standard costs such as appraisals and filing fees. Generally,
closing costs rise with the mortgage amount, but most cost between
$3,000 and $4,500.
Wilson, for example, recently helped a customer
refinance a $150,000 conventional loan. The closing costs on
that loan is between $3,600 and $3,750.
Q
If I decide to refinance twice in the same year will I have
to pay closing costs twice?
A
Yes. Most costs associated with refinancing are fixed costs
that the mortgage company must incur again. Appraisals are an
exception. For conventional loans, an appraisal is good for
one year, but the FHA requires a new appraisal for every mortgage.
Even before you commit to refinancing, your lender
must provide you with a detailed good-faith estimate of closing
costs. Wilson said closing costs probably will vary among lenders.
Q
Can I refinance with no out-of-pocket costs?
A
Yes, by rolling the cost of refinancing into your mortgage.
Q
If I just refinanced a year or two ago, does it make sense to
refinance again?
A
That depends on the mortgage amount, interest rates and how
long you plan to stay in the house. In addition, you also should
decide whether you have a use for the equity in your house that's
worth paying closing costs.
Q
If I've had a 30-year mortgage for more than 15 years does it
make sense to refinance?
A
Maybe not. During the early years of a mortgage you're paying
mostly interest, but the closer you get to the end of a mortgage
the more principal you pay.
If you get a new mortgage, you're starting all
over again. If you need cash, one option is to take out a home
equity loan.
If you do choose to refinance, it makes sense
to get a mortgage with a shorter term. Mortgage terms are not
limited to 15 or 30 years.
Q
Does it make sense to refinance a fixed-rate mortgage
in favor of an adjustable rate mortgage?
A
Because interest rates on adjustable-rate mortgages fluctuate,
it depends on how long you plan to stay in the house and how
much you're willing to risk a rate increase.
