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Refinancing Considerations


Factors About Refinancing

Costs associated with refinancing
 
How interest rates affect the cost of a loan
 
How points affect the cost of a loan
 
Types of mortgages:
     Fixed Rate and Adjustable Rate
 
Building equity in your home

Click any of the above topics about refinancing your mortgage or current home loan 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 one-time fee added by the lender (i.e., two points)
 
The application fee charged by the lender which may cover credit report and home appraisal expenses and other fees.
 
Closing costs, including transfer taxes, title insurance, escrow, inspection, notary, and so on.
 
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How Interest Rates Affect the Cost of a Loan

Compare the short-term and long-term 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!
 

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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  
$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.
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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 fixed-rate loan.

 

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Fixed Rate Mortgages

The term, or length of the loan, is usually 30 or 15 years.

30-year term

This is the most conventional loan term. It allows you to repay slowly, with moderate monthly payments

15-year term

This term allows you to repay twice as fast. Although your monthly payments are higher than a 30-year term (albeit not twice as high), a larger percentage of your payments is applied to principal.

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Adjustable Rate Mortgages

Term

1) Usually calculated on a 30-year basis

2) Starts with a fixed-rate 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.

 

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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.

 

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