Refinancing

WHEN DOES REFINANCING MAKE SENSE?
Though individual factors may differ, the following are a few times when refinancing makes a good deal of sense.

If rates drop
In general, when rates drop roughly one percent or more, refinancing your mortgage can save you money. Refinancing can lower your monthly payments, and, in certain cases, may waive mortgage insurance.

If you want extra cash
Refinancing your mortgage may reduce your monthly payments, and free up some equity for other things. If you are seeking additional money, but a straight refinance isn't equitable, you may consider a Home Equity Line of Credit (HELOC). This program lets you borrow against the equity in your home with a credit account, checking account and/or direct payment.

If you want to consolidate debts
If you have equity in your home, you can consolidate all your debts into one payment by refinancing. Generally, your overall monthly payment can be significantly reduced plus all the interest you pay on your mortgage is tax deductible (whereas, interest on credit cards, car loans, student loans, etc. is not). However, if interest rates have not dropped considerably, you may consider consolidating your debts with a home equity loan.

If you plan to stay in your home for a period of time
The longer you plan to stay in your home, the more you can benefit from a lower interest rate. Refinancing may not be as beneficial if you plan to sell your home in the near future.

If you want to reduce the term of your mortgage
Refinancing from say a 30-year loan to a 15 year loan means you will build equity and pay off your mortgage quicker. Though your monthly payments will be larger, you will save on the total interest paid over the life of your loan as rates are generally lower on shorter-term programs. Even if you do not keep your home (or at least the loan) through the entire length of the new term at any point in time you will find that your principle balance (or payoff amount) and the amount of cumulative interest paid will both be less on the shorter-term, lower interest mortgage.

WHEN DOES REFINANCING NOT MAKE SENSE?
Follow these tips to help avoid common refinancing pitfalls.

When your interest rate is not lowering much
Generally, refinancing costs about 1 to 1.5 percent of the loan amount. So to be equitable, your interest rate must be bettered by about one percent or more (when paying full closing costs). There are "no cost" rates available where all of the closing costs are built into the rate. In these cases only a slight lowering of the rate is necessary for refinancing to make sense; however, the long-term benefit of a lower interest and corresponding payment will be reduced.

In order to remove Mortgage Insurance (on conventional loans)
Mortgage insurance can be dropped by refinancing. However, if rates have not dropped enough to make refinancing beneficial, there are other ways to drop the insurance. On conventional loans, mortgage insurance can usually be removed by requesting an appraisal. Most banks require that you have at least 20% equity in your home with the new appraisal to remove mortgage insurance, but each investor is different. It is often best to contact your servicer for their guidelines. Generally, the cost of an appraisal is $350, which is much cheaper then refinancing.

To eliminate a borrower from title
If you would like to remove a borrower from title, simply have the borrower complete a "Quit Claim" Deed. It is a very simple process and may be much more cost effective than refinancing. Keep in mind, this does not remove such borrower's obligation to repay the loan. If you would like them removed from the loan obligation, you must refinance and qualify for the loan on your own merit.

REFINANCING Q & A:
Understandably, we receive lots of questions about the specifics of refinancing. Here are the answers.

When will my monthly payments change?
Your monthly payment generally will start on the first day of the second month following the closing of your mortgage. For example, if you close January 25th, your first payment will be due March 1st. There are cases when you can receive an interest credit if you close just after the first of a given month. In these limited circumstances your first payment will be due on the first day of the month immediately following your closing.

What if I change my mind about refinancing?
As a result of the Truth in Lending Act, throughout the United States, a mortgage refinance of a primary residence only requires a 3 day Right-of-Rescission. This is a 3-business day period (including Saturdays, but not Sundays or holidays) after you have signed your closing documents in which you can change your mind and back out of the loan. It does not apply to second, or vacation, homes or investment properties.

How much does refinancing cost?
Typically, refinancing costs about 1 to 1.5 percent of the loan amount. If you currently have your taxes and insurance in your monthly mortgage payment then you have an escrow or reserve account. When you refinance, this money will be refunded on your old loan, generally within 30 days of funding your new loan and paying off the old one. A prorated number of months worth of reserves will be collected on your new loan to ensure there is sufficient funds in your account when your insurance premium and taxes become due.

When will my closing payments be due?
A mortgage payment generally covers the previous month's interest since interest can not be collected until the end of the month. For example, your September 1st payment is actually paying for August 's interest. Therefore, when you close your refinance, you will have a prorated month's worth of interest due, but you will not have a payment in the immediate month following. Carrying the above example further, let's say you have closed, waited the required 3 days and your loan funds July 15th. You would owe interest from July 1st (providing you already made the payment due on July 1st) until July 15th on your old loan. You would also pay interest from July 15th to July 31st on your new loan. Since interest is collected after the month, there would be no payment due in August as you already paid the July interest at closing. Your first payment on the new loan would be due on September 1st.