Is the interest
rate low enough to save you money?
Talk
to some lenders to determine the available rates and the
costs associated with refinancing. These costs include appraisals,
attorney's fees, and points. Then determine what your new
payment would be if you refinanced. You can estimate how
long it will take to recover the costs of refinancing by
dividing your closing costs by the difference between your
new and old
payments (your monthly savings). However, the ultimate amount
you may save depends on many factors, including your total
refinancing costs, whether you sell your home in the near
future, and the effects of refinancing on your taxes.
The
old rule of thumb used to be that you shouldn't refinance
unless the new interest rate is at least two percentage
points lower. However, many lenders are now offering zero
point loans and low-cost online refinancing. Therefore,
even if your rate change is less than one percentage point,
you may be able to save some money by online refinancing.
How many "points" must
you pay to the lender to obtain the loan?
In refinancing,
lenders usually offer a range of interest rates at different
amounts of points. A point equals one percent of the loan
amount. For example, three points on a $100,000 mortgage
loan would add $3,000 to the refinancing charges.
Shopping
for points as well as interest rates 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 lender
is offering.
Generally,
the lower the interest rate on the loan, the more points
the lending institution will charge. Some lenders 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
lenders 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.
What other settlement costs will
the lender require you to pay at closing?
Settlement
costs typically include fees for the loan application, titlesearch,
appraisal, loan origination, credit check, and lawyer's
services. You also may be required to pay recordation fees
or transfer taxes. If you are shopping for a lender, ask
each one for a list of charges and costs you must pay at
closing. Some lendersmay require that some of these costs
be paid at the time of application.
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