First, even a small rate cut can pay off quickly. Also, lower fees are a definite concern. Of course, in exchange for low or no up front costs, you'll have to be willing to accept a rate that's somewhat higher than the prevailing rock bottom.
Second, if you are planning to stay in your home for at least three to five years, it may make sense to pay "points" (a point equals 1% of the loan amount) and closing costs to get the lowest available rate.
And third, you can avoid laying out cash and still get a low rate by adding the points and closing costs to your new mortgage. Does that mean shouldering a lot of extra debt? Not necessarily. If you've had your current mortgage for at least three years, you've probably reduced your balance by several thousand dollars. So you may be able to tack your closing costs onto your new loan and still end up with a mortgage that's smaller than your original one -- plus, of course, a lower rate and lower monthly payment.
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To exploit continued decline in rates, the Barbos refinanced again in December. Their new 30-year fixed mortgage is at 7.375%, lopping another $55 off their monthly bill. Since the couple had chosen a no cost refinancing each time, their total out of pocket expenses came to just $400 in appraisal fees. So by the time you read this, they will already have recouped their up front costs. "Now we can use the savings to build up a cash emergency fund," says Bob.
If you are considering a second refinancing, don't overlook this potential tax write off: When you pay points to refinance, you must deduct the amount over the life of the loan, usually 30 years. But when you refinance a second time, all of the points that have not yet been deducted from the first refinancing can be written off in a lump sum. Say you refinanced to a 30-year mortgage in 1993 and paid $3,000 in points. By now, you would have written off roughly $500. If you refinance again this year, you could deduct the remaining $2,500 on your 1998 tax return. For a homeowner in the 28% tax bracket, that works out to a savings of $700 -- enough to offset some or all of your costs this time around.
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Consider Jim Neill, 48, a real estate broker and his wife Merrilyn, 55, a psychotherapist. Recently, the couple took out a 15-year fixed rate loan at 6.75% to replace an 8.13% ARM with a 30-year term. Their monthly payment jumped by $200, but now they will own their own home outright by the time they retire. In addition, the total interest on the 15-year loan will come to $95,447, vs. $222,234 on the remaining life of the ARM -- and that assumes their adjustable rate would have held steady at its current 8.13%. "This is forced savings," says Jim. "When we retire, we can scale down and take equity out of the house."
If you can't afford the payments on a 15-year mortgage, your next best means of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's term to match the years that are left on your old loan -- if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.
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The best use for the extra cash is to pay off any higher rate loans you may have. Let's say that you are carrying a $15,000 car loan at 10% and making minimum payments on a $10,000 credit card balance at 17%. Your monthly payments on those debts would total $680. Then assume you refinanced your mortgage, taking out an additional $25,000 to pay off your car and credit card loans. Result: At 7.5%, your additional monthly mortgage payment would total only $175, so you would come out $505 ahead ($680-$175=$505).
Of course, all the extra cash needn't go for paying off debts. When the Menards swapped their ARM for a fixed rate last December, they also increased their mortgage load by $34,000, from $106,000 to $140,000. They used $3,000 of the proceeds to pay their refinancing costs and another $17,000 to pay off a 10% home equity loan, which had been costing them $250 a month. Then they spent the remaining $14,000 to build a garage for Roger's antique car collection -- and they did all this for just another $19 a month.
To start the refinance process, simply complete our secure application form to get the process started. Application Form
In fact, while one year ARMs currently offer tempting introductory rates averaging 5.59%, most experts recommend avoiding them, because you could easily find yourself facing sharply higher payments in the near future, even if interest rates don't rise. Why? Well, after the introductory rate expires, ARMs are typically pegged to the one year Treasury rate (recently 5.25%) plus 2.75 percentage points, with increases of as much as two points a year. Assuming interest rates don't change, you would pay 7.59% in the second year (the full two point increase) and 8% in the third year.
There are certain cases, however, where an ARM makes sense. If you are fairly certain you'll be moving within five years, you can save some money -- and avoid rising payments -- with a five year ARM, recently averaging 6.62%. Such loans offer a fixed rate for five years and adjust annually thereafter.
To start the refinance process, simply complete our secure application form to get the process started. Application Form
Analyzing various interest rates and associated points may save you money. As a rule of thumb, each point adds about one eighth to one quarter of one percent to the interest rate the mortgage company is offering.
Generally, the lower the interest rate on the loan, the more points the lending institution will charge. Some companies offer refinancing with no points, but generally charge higher interest rates.
To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time that you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.
Some companies may offer to finance the points so that you do not have to pay them up front. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may enable you to get the financing, it also will increase the amount of your monthly payments.
To start the refinance process, simply complete our online application form to get the process started. Application Form
You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage. IRS regulations require that interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the loan or a portion of the loan is for home improvements, you may be able to deduct the points or a portion of the points. Check with the IRS regarding the current rulings on refinancing, particularly if you are using the new loan to make home improvements.
To start the refinance process, simply complete our secure application form to get the process started. Application Form
You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.
If you decide to apply for refinancing with a particular mortgage company, and if you do not want to let the interest rate "float" until closing, get a written statement to guarantee the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock in" ensures that the mortgage company will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the mortgage company to put this information in writing, you may wish to choose one that will provide this important information.
Most companies place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people refinance their mortgages when rates decline, there may be a delay in processing the papers. Therefore, you may want to contact the company periodically to check on the progress of your loan approval and to see if additional information is needed.
To start the refinance process, simply complete our secure application form to get the process started. Application Form
With traditional refinancing, the most often cited rule of thumb is that the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage for refinancing to make sense. However, with the newer low and no cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.
How long you expect to stay in your home is also a factor to consider. If you'll be moving in a few years, the month to month savings may never add up to the costs that are involved in a refinancing.
To start the refinance process, simply complete our secure application form to get the process started. Application Form