
Frequently Asked Questions About Refinancing
Click above to learn more about each topic
Costs Associated with Refinancing
The rate, or percentage, at which the money is lent to you (i.e., 8%)
The points, a onetime fee added by the lender (i.e., two points)
The application fee charged by the lender to cover credit report and home
appraisal expenses (i.e., $350)
Closing costs, including transfer taxes, title insurance, escrow, inspection,
notary, and so on.
How Interest Rates Affect the Cost of a Loan
Compare the shortterm and longterm impact of a 1% variance on a $200,000 loan:
Interest Rate 
7% 
8% 
Difference 
Monthly Payment 
$1,330 
$1,468 
$138 
Total Payment
over 30 years 
$478,800 
$528,480 
$49,680 
*Example is monthly principal and interest only. It does not include taxes, insurance, and so on. 
As you can see, a lower interest rate makes a big difference!
How Points Affect the Cost of a Loan

1 point = 1% of the amount borrowed

Although points are a fee paid to your lender, they also let you "buy" a lower interest rate

As a rule, the more points you pay, the lower your interest rate

One point can "buy" you a 0.25% +/ discount on your rate

Most lenders require you to pay your points up front
A Savings Comparison
Mortgage 
Interest 
Points 
Cost 
$200,000 
7.5% 
0 

$200,000 
7.0% 
2 
2 points = $4,000 
Paying 2% of your loan amount could lower your interest rate by as much as 0.5%. This amounts to considerable savings over the life of your loan. 
The Two Most Popular Types of Mortgages
Fixed Rate
The most straight forward type of loan. Because the interest rate never changes, you pay the same amount every month until the loan is paid off.
Adjustable Rate
Because this interest rate fluctuates at predetermined intervals (i.e., every month, every 6 months, every year), it is more complex than a fixedrate loan.
Fixed Rate Mortgages
The term, or length of the loan, is
typically 30 or 15 years.
30year term
This is the most
conventional loan term. It allows you to repay slowly, with moderate monthly payments
15year term
This term allows you to repay twice as fast. Although your monthly payments are higher than a 30year term (albeit not twice as high), a larger percentage of your payments is applied to principal.
Adjustable Rate Mortgages

Term
1) Usually calculated on a 30year basis
2) Starts with a fixedrate period, then adjusts thereafter, i.e., Fixed for 3 years, then adjusts every year after

Rate
1) Adjusts at scheduled intervals
2) Adjusts according to an index, i.e., Treasury Bills, LIBOR, 11th District Cost of Funds (COF), CDs, and so on.

Margin
1) Percentage added by the lender to the index interest rate
2) The sum of the rate and margin is the rate you pay, called the fully indexed rate

Other ARM info
1) As interest rates fluctuate, your ARM payments will vary.
2) To minimize the risk of extreme fluctuations, caps are imposed on your rate. Caps protect you by limiting the percentage by which your rate can go up.
Building Equity in Your Home
Equity is the portion of your home that actually belongs to you.
Each time you pay your mortgage, your equity increases.
The rate you build equity depends on how much is applied to principal and how much is applied to interest each month.

