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Refinancing: Questions & Answers

Q. Should I refinance?
Sometimes it makes sense to refinance. Sometimes it does not. It depends greatly on what your financial goals are. For instance, wanting to lower your interest rate and/or payment are good reasons to refinance, but there are other factors to consider. Here are a few things to think about:

  • How long do you expect to be in the home?
  • How much equity do you have in the home?
  • How much will your closing costs be?
  • To get that low rate, will you have to pay points?
  • Will your lower payments more than make up for the closing costs, fees and points if any?
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Q. Should I refinance from an adjustable-rate to a fixed-rate mortgage?

It depends on your situation. Generally, it's a good idea to get the lowest fixed-rate possible. However, if you're in the first year of a five-year adjustable rate mortgage (ARM) and you plan on moving in three years, it may not make sense for you to refinance. However, if the rate on your ARM is about to adjust and you think the rate will go up, then it may make sense to get a fixed-rate mortgage.

Q. Are interest rates higher for a cash-out refinance?

The interest rate you pay on a cash-out refinance loan will generally be the same that you pay on a non-cash-out loan. There may be an incremental fee associated with a cash-out refinance loan depending on the specific loan program you choose and the loan-to-value ratio. Using the equity in your home to pay off other bills can be a smart thing. Consider taking some money out to pay off credit cards bills, auto loans and any debt that has interest that is not tax-deductible. You may be able to deduct the interest on the money you take out to pay off that debt. Please consult your tax advisor.

Q. When should I "lock in" an interest rate?

Nobody can predict what interest rates will do. But historically, rates go up much faster than they come down. So if you're thinking about buying a home or refinancing your mortgage, get the good rate now---you can always refinance later if rates drop again. Any near-future drop in interest rates may not be drastic enough to impact your monthly mortgage payment. Of course, every situation is different, so it's important to consider all of your options.

Q. Should I pay points to get a lower rate

If you're refinancing your mortgage, paying points may not be your best option. Points paid on a refinance can be deducted from your taxes only in small increments---1/30th a year for a 30-year mortgage. This means it could be several years before your lower rate makes up for the points you pay. However, if you're buying a home, points paid are a tax-deductible expense for that year. Please consult your tax advisor.

Q. Are there really loans with "no closing costs"?

There are few loans that truly have no closing costs. Sometimes lenders will not charge application fees and agree to pay the appraisal and title fees, but they may increase the interest rate. Lenders can also roll the costs into the amount of your loan. So, because you're not paying costs up front, it's called a "no closing cost" loan. While slightly increasing your mortgage might be acceptable to you, keep in mind that it's not really a cost-free loan.

Q. How long does it take to refinance?

Do you have a recent home appraisal?
Are you in an area that appraisers can get to easily?
Are there plenty of comparables in your neighborhood?

Often times the home appraisal is what takes the longest to obtain. During refinancing booms, appraisers can be difficult to schedule. Also, being prepared helps tremendously to speed the process---have your paperwork ready.

Q. How much money will I need to bring to closing?

A general guideline is that you'll need two percent of the purchase price of the home for pre-paid interest to cover the time between the date you close and your first mortgage payment. Some states may also require pre-payment of property taxes. When refinancing however, your old mortgage will most likely have money in escrow that can cover there costs. Some borrowers get short-term loans while this escrow transfers back to them, but most pay the money at the closing knowing they'll get it back when their escrow is returned.

Q. How can I reduce my closing costs?

A. If you're refinancing, you may be able to eliminate some costs by talking to your lender. For instance, your lender might reuse your last home appraisal or your credit report if they're recent enough. Another option may be to have your mortgage lender re-certify some documents (appraisal, title, etc.) for less than the cost of getting new ones.

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