You have been paying out on your 9.0% mortgage for the past four or five years and it suddenly occurs to you that you are throwing away a lot of money each month since mortgage rates have dropped considerably. The differences in monthly payments can be dramatic. For example, a $100,000.00 mortgage that is currently at 10.5% costs $914.74 per month (principal and interest only — escrows for real estate taxes and hazard insurance are usually collected by your lender along with the principal and interest. The expression “PITI” means Principal, Interest, Taxes and Insurance.) If you could lower your rate to 8.5%, the monthly payment drops to $768.91, a monthly savings of $145.83. In fact, if you could lower your interest rate to an adjustable rate of 5.0%, your monthly payment in the first year would be only $536.82, a monthly savings of $377.92.
Factors that affect your rate include the number of points you are willing to pay for your loan as well as the maturity date of the loan. If you pay higher points, you will obtain a lower rate. If you pay no points, you will have a higher rate. The term is also critical. Fifteen year loans have lower rates than thirty year loans, however, the increased monthly payment to principal required to pay off the loan in half the time is always greater than the monthly difference in payment due to interest rate alone. However, using the same example of a 30 year $100,000.00 loan at 10.5% (payment of $914.74), if you could obtain a 15 year loan at 7.5%, your monthly payment would go up slightly (to $927.01), but you would pay off the loan in only fifteen years instead of thirty.
The issues to consider include the amount of time you expect to stay in your home, your ability or desire to deal with unexpected and unknowable changes in rates of interest in the future (if you choose an ARM or Balloon loan) and your availability of cash to cover the costs of the transaction. In fact, too often borrowers do not properly consider the total costs of refinancing when the decision is made. The costs generally fall into a few categories. The first is typically the up front costs of an appraisal ($250-400) and credit check ($50-125). In addition your lender will give you options for points and loan rates. Each point is one percent of the total loan ($1,000 on a $100,000 loan). Your lender will also normally have other processing charges that can cost from $200-800.
Once you have selected your lender and loan program, you will need to retain an attorney or title company to prepare for and conduct settlement on your loan. Typical charges include a survey of your property ($150-250), a title search ($150-250), title insurance for your lender ($500 for a $200,000 loan with a potential of saving about $200 of that amount if you have an existing owners title insurance policy), attorney fees (typically $250-400) and miscellaneous recording costs, messenger fees, Express mail and the like ranging from about $75 to as much as $400. In short, the minimum total expenses you can expect for a refinance transaction are about $1,400.00 (not including escrows and prepaid interest) and those costs can be many thousands higher depending on points or other lender requirements including mortgage insurance.
If you can save at least $125 month by refinancing, it is certainly worthwhile to do so if you plan on staying in your home for any significant period of time. It is important, however, to carefully review all costs of the transaction with your lender and to obtain a good faith written estimate. Then, when you select an attorney for settlement you should also find out all expected costs before you make your decision. Finally, do not procrastinate after you have applied for loan. Too often we get calls from individuals who want to know if we can do their settlement “the end of this week.” Unfortunately, it takes several weeks to complete all the preparations for a settlement and a loan commitment can expire because a borrower failed to make the arrangements for settlement. In short, look at all the numbers, shop around for a good loan and settlement agent and start saving in your monthly payments.
(The Law Firm of Bromberg Rosenthal LLC is offering a special discounted rate for settlement of $195.00 (instead of $295.00) with the coupon below to be presented at the time the title order is submitted.)