Guide to New Rules of Refinancing

Just when you thought mortgage rates could go no lower, they sank lower still. In late January, according to data from Freddie Mac, 30-year fixed-rate loans had dropped to about 4 percent. Meanwhile, the average 15-year fixed rate was hovering around an even more mouthwatering 3.2 percent.

Which means that even if you’ve already refinanced your mortgage once to capture the benefits of falling rates, it may make sense to do so again. Your savings can be substantial. For example, someone with a $200,000 30-year mortgage at 4 percent would pay about $43,000 less in interest over the life of the loan than someone with the same mortgage at 5 percent. To learn more about new rules of refinancing please visit site.

But the decision is more complicated than you might think. The old rule was that if the difference between the rate on your existing loan and current rates was one percentage point or more, it paid to refinance (providing you had no plans to move).

Factor in higher fees. Unexpected payments can sometimes chip away at any potential savings, warns. For instance, when lenders issue a new loan, most will require you to pay for private mortgage insurance (PMI) if the equity in your home is below 20 percent. With housing prices still down considerably, you may find that refinancing triggers the need for PMI (its cost depends on your credit score and the amount of your equity). To determine whether your upfront and PMI expenses would undermine any refinancing savings, go to

Take a look at HARP. The federal government’s Home Affordable Refinance Program gives advantageous refi terms, such as no requirement for PMI even if your equity is less than 20 percent. The program applies to house and condo mortgages dated May 2009 or earlier, as long as the loan is owned or guaranteed by Fannie Mae or Freddie Mac.

Size up your credit. Just because you see an enticing rate advertised doesn’t mean that you will get it. In the wake of the housing bust, lenders are giving their best rates to people who have excellent credit scores—typically 740 or above. If your score is even a little lower, you will probably be charged more, which can add thousands of dollars to your costs over time.

Shoot for a shorter term. If you’re already several years into a 30-year loan, for example, refinancing to another 30-year extends the time before you are debt-free—not a great idea. Refinance to a 15-year instead and you will save $77,000 in interest on a $200,000 loan versus a comparable 30-year. The snag, of course, is that your monthly payments will rise—from $954 to $1,479 in our example. Not up for that?

Most Common Reasons for Refinancing Your Home Loan

You want to lower your monthly mortgage payment by refinancing into a new, lower-rate home loan — whether a fixed rate loan, an adjustable rate mortgage, or a fixed-ARM combination loan. You may even wish to have the option to make “interest-only” monthly payments on your new loan.

You purchased a home recently with a 1st and 2nd mortgage and want to refinance your loan to consolidate both loans into one new loan at your home’s current value. To learn more about refinancing home loan please visit site.

You have an adjustable rate mortgage now, but want consistent payments in the future by refinancing your loan into a new fixed rate loan

You want to refinance your loan to get cash from your home’s equity for debt consolidation, home improvements, investments, or other purposes

You want to build up your equity quicker and pay off your loan sooner by refinancing your loan to an accelerated mortgage (i.e. 30-year to a 20-year, 15-year, or 10-year mortgage).

Is Home Loan Refinancing Right for You?

If you’re refinancing in order to pay less interest, you won’t usually see the savings right away. That’s because lenders typically charge fees when you take out a new mortgage, and you may also have to pay a penalty for getting out of your old one. To determine whether refinancing makes financial sense for you, consider these issues:

How long you plan to be in your home. If you expect to move in a year or two, you may never realize the potential savings you’d get from refinancing. As a rule of thumb, the longer you plan to stay in your current home, the more sense it makes to refinance. To know more about refinance please visit site.

The prepayment penalty on your current mortgage. Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months’ worth of interest payments.

The costs of the new mortgage. When you take out a new loan, your lender may charge a number of fees including application, appraisal, origination and insurance fees, plus title search, insurance and legal costs that can add up to thousands of dollars. Lenders may also charge discount points, which are paid upfront to secure a lower interest rate. As a guideline, expect fees to eat up any potential savings unless your new interest rate is at least a half a percentage point lower than your current one.

The true difference in borrowing costs. When you’re considering refinancing, remember that the posted interest rate doesn’t reflect the entire cost of the mortgage. The amount you pay over the life of the loan will also be affected by the length of the term, whether your rate is adjustable or fixed, whether you paid discount points, and what upfront and ongoing fees you incur. One way to compare mortgage costs is to look at the annual percentage rate (APR), which takes into account not only the base interest rate, but also points and other charges. All lenders must follow the same rules when calculating the APR, so it’s a good basis for comparison.

Your reduced tax savings. Consult a tax advisor who can help you understand the tax implications of refinancing.