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The Federal Reserve Board and the Office of Thrift Supervision
prepared this booklet on refinancing your mortgage in response
to a request from the House Committee on Banking, Finance and
Urban Affairs and in consultation with many other agencies and
trade and consumer groups. It is designed to help consumers
understand an important aspect of home financing.
We believe a fully informed consumer is in the best position
to make a sound financial choice. If you are considering refinancing
your home loan, this booklet will provide useful basic information
about refinancing. It cannot provide all the answers you will
need, but we believe it is a good starting point.
A Consumer's Guide to Mortgage Refinancing
If you are a homeowner who was lucky enough to buy when mortgage
rates were low, you may have no interest in refinancing your
present loan. But perhaps you bought your home when rates
were higher. Or perhaps you have an adjustable-rate loan and
would like to obtain different terms.
Should you refinance? This brochure will answer some questions
that may help you decide. If you do refinance, the process
will remind you of what you went through in obtaining the
original mortgage. That's because, in reality, refinancing
a mortgage is simply taking out a new mortgage. You will
encounter many of the same procedures-and the same types of
costs-the second time around
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make good
financial sense for everyone. A general role of thumb is that
refinancing becomes worth your while if the current
interest rate on your mortgage is at least 2 percentage
points higher than the prevailing market rate. This figure
is generally accepted as the safe margin when balancing the
costs of refinancing a mortgage against the savings.
There are other considerations, too, such as how long you
plan to stay in the house. Most sources say that it takes
at least three years to realize fully the savings from a lower
interest rate, given the costs of the refinancing. (Depending
on your loan amount and the particular circumstances, however,
you might choose to refinance a loan that is only 1.5 percentage
points higher than the current rate. You may even find you
could recoup the refinancing costs in a shorter time.)
Refinancing can be a good idea for homeowners who:
- want to get out of a high interest rate loan to take
advantage of lower rates. This is a good idea only if they
intend to stay in the
house long enough to make the additional fees worthwhile.
- have an adjustable-rate mortgage (ARM) and want a fixed-rate
loan to have the certainty of knowing exactly what the mortgage
payment will be for the life of the loan.
- want to convert to an ARM with a lower interest rate or
more protective features (such as a better rate and payment
caps) than
the ARM they currently have.
- want to build up equity more quickly by converting to
a loan with a shorter term.
- want to draw on the equity built up in their house to
get cash for a major purchase or for their children's education.
If you decide that refinancing is not worth the costs, ask
your lender whether you may be able to obtain all or some
of the new terms you want by agreeing to a modification of
your existing loan instead of a refinancing.
Should You Refinance Your ARM?
In deciding whether to refinance an ARM you should consider
these questions:
- Is the next interest rate adjustment on your existing
loan likely to increase your monthly payments substantially?
Will the new interest rate be two or three percentage points
higher than the prevailing rates being offered for either
fixed-rate loans or other ARMs?
- If the current mortgage sets a cap on your monthly payments,
are those payments large enough to pay off your loan by
the end of the original term? Will refinancing to a new
ARM or a fixed-rate loan enable you to pay your loan in
full by the end of the term?
What Are the Costs of Refinancing?
The fees described below are the charges that you are most
likely to encounter in a refinancing.
- Application Fee. This charge imposed by your lender
covers the initial costs of processing your loan request
and checking your credit report.
- Title Search and Title Insurance. This charge will
cover the cost of examining the public record to confirm
ownership of the real estate. It also covers the cost of
a policy, usually issued by a title insurance company, that
insures the policy holder in a
specific amount for any loss caused by discrepancies in
the title to the property.
Be sure to ask the company carrying the present policy if
it can re-issue your policy at a re-issue rate. You could
save up to 70
percent of what it would cost you for a new policy.
Because costs may vary significantly from area to area and
from lender to lender, the following are estimates only. Your
actual closing costs may be higher or lower than the ranges
indicated below.
| Application Fee |
$75 to $300 |
| Appraisal Fee |
$150 to $400 |
| Survey Costs |
$125 to $300 |
| Homeowner's Hazard Insurance |
$300 to $600 |
| Lender's Attorney's Review Fees |
$75 to $200 |
| Title Search and Title Insurance |
$450 to $600 |
| Home Inspection Fees |
$175 to $350 |
| Loan Origination Fees |
1% of loan |
| Mortgage Insurance |
0.5% to 1.0% |
| Points |
1% to 3% |
- Lender's Attorney's Review Fees. The lender will
usually charge you for fees paid to the lawyer or company
that conducts the closing for the lender. Settlements are
conducted by lending institutions, title insurance companies,
escrow companies, real estate brokers, and attorneys for
the buyer and seller. In most situations, the person conducting
the settlement is providing a service to the lender. You
may also be required to pay for other legal services relating
to your loan which are provided to the lender. You may want
to retain your own attorney to represent you at all stages
of the transaction including settlement.
- Loan Origination Fees and Points. The origination
fee is charged for the lenders work in evaluating and preparing
your mortgage loan. Points are prepaid finance charges imposed
by the lender at closing to increase the lender's yield
beyond the stated interest rate on the mortgage note. One
point equals one percent of the loan amount. For example,
one point on a $75,000 loan would be $750. In some cases,
the points you pay can be financed by adding them to the
loan amount. The total number of points a lender charges
will depend on market conditions and the interest rate to
be charged.
- Appraisal Fee. This fee pays for an appraisal
which is a supportable and defensible estimate or opinion
of the value of the
property.
- Prepayment Penalty. A prepayment penalty on your
present mortgage could be the greatest deterrent to refinancing.
The practice of charging money for an early pay-off of the
existing mortgage loan varies by state, type of lender,
and type of loan. Prepayment penalties are forbidden on
various loans including loans from federally chartered credit
unions, FHA and VA loans, and some other home-purchase loans.
The mortgage documents for your existing loan will state
if there is a penalty for prepayment. In some loans, you
may be charged interest for the full month in which you
prepay your loan.
- Miscellaneous. Depending on the type of loan you
have and other factors, another major expense you might
face is the fee for a VA loan guarantee, FHA mortgage insurance,
or private mortgage insurance. There are a few other closing
costs in addition to these.
In conclusion, a homeowner should plan on paying an average
of 3 to 6 percent of the outstanding principal in refinancing
costs, plus any prepayment penalties and the costs of paying
off any second mortgages that may exist.
One way of saving on some of these costs is to check first
with the lender who holds your current mortgage. The lender
may be willing to waive some of them, especially if the work
relating to the mortgage closing is still current. This could
include the fees for the title search, surveys, inspections,
and so on.
The information contained in this brochure is intended to
help you ask the right questions when considering a possible
refinancing of your loan. It is not a replacement for professional
advice. Talk with mortgage lenders, real estate agents, attorneys,
and other advisors about lending practices, mortgage instruments,
and your own interests before you commit to any specific loan.
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