With interest rates plunging, thousands of area homeowners have already refinanced their mortgages. If you haven't yet, financial planners say, you should think about it.
* Reducing the monthly mortgage payment and upfront costs.
This refinancing option costs less in the beginning, more over the long term.
If you move every few years, it may make sense, since you'll be able to pay a slightly higher rate but fewer upfront points.
Keith Stackhouse, president of Atlantic Residential Mortgage Co., said borrowers who paid three-eighths of point on a refinancing Tuesday could get a 15-year loan at 7 percent interest. Borrowers who paid 2 3/4 points qualified for 6.5 percent interest.
"We're offering nine different rates with various discount points," Mr. Stackhouse said, adding that most other lenders have as many options. He agrees that so many choices could be confusing to potential borrowers.
"Just lay out what payment you want to come out with the right plan," he said.
"If you have the option, you're better off taking a little higher interest rate in lieu of paying points," suggests Frank Hajek, a Bel Air certified public accountant. "That way you have flexibility if you have to move."
* Reducing the length and cost of the loan term. This option requires a higher initial outlay but lower long-term costs.
To reduce the lifetime cost of the loan, you have to pay it off faster. To do so, you have to pay more each month. If you're going to be in the house for the long term, and if you can afford to pay more points upfront, you'll probably qualify for a lower interest rate, saving you money over the long haul.
"If you think you'll move in the next three to five years, it's probably not going to benefit you in the long run," Mr. Hajek said. "You've got to be fairly committed for it to make sense."
The best financial strategy is to get a lower rate and shorten the life of the loan at the same time, mortgage experts say. If you can lower the monthly payment through refinancing but can't handle a shorter loan term, you can still come out ahead. Pay your old mortgage amount and specify that the extra money is to TC be applied toward the principal. That will reduce the cost of the loan considerably, and you'll own the home outright much sooner.
If you want to pay off the mortgage sooner and wouldn't have trouble making slightly higher payments than you're making now, check into swapping a 30-year loan for a 15- or 20-year loan. The interest rates may be lower on those loans, even though the monthly payments will be higher.
What will it cost?
A refinanced mortgage is not a second mortgage. It is a brand new loan, and lenders require borrowers to go through the entire application process, paying all or most of the fees.
Prepare to pay several thousand dollars in closing costs to refinance, most of which you'll be able to roll back into the loan. Costs will include:
* Points. Each point is 1 percent of the loan. Most lenders negotiate how many points you pay. Generally, the more points you pay upfront or attach to the loan, the lower the interest rate you'll get. If you don't want to pay any points at all, you may do that, too, but the interest rate will probably be higher.
Most lenders now require a good- faith deposit -- about a half to a full point -- in cash up front that they will later credit to your closing costs.
* Lock-in fee. This is optional, and you do have to ask for it. Mr. Stackhouse said it guarantees that the interest rate you ask for when you apply for the loan is the same rate you'll get when the loan is approved. Some lenders charge a fee, typically a half to a full point, to lock in. The fee is often refundable at closing.
* Application fee. This pays for the appraisal and credit report. Usually around $350, it is required in cash upfront.
* Other fees may include legal services, a title search to verify that you own the property, a termite report if required and recording fees.
* Escrow funds. You'll have to advance money for hazard insurance and property taxes to the new loan. If you're refinancing with the company that has your old loan, they may be able to simply transfer the escrow account from the old loan to the new.
If you refinance the loan through the company that originally wrote it, you may be able to save money on closing costs. Household Bank, for instance, offers its current mortgage customers a 25 percent discount on the origination fee of 1 point that new customers pay. They can also streamline other procedures to save you money.
Lenders say homeowners typically must pay to update the title and to get a new appraisal, though, even if the home was purchased less than a year ago.
"The title insurer wants confidence there are no intervening liens," said Jayne McGeehan, senior vice president of Household Bank.
Mr. Stackhouse said such liens could surface the day after the original title search.
Appraisals usually are good for six months. Other reports, such as termite inspections, may not be required unless the appraiser mentions it as possible problem.
Total closing costs may be 2 percent to 5 percent of the loan, or more. Make sure you'll be in the house for at least as long as it takes to recoup those expenses.
How long will it take for refinancing to pay off?
To figure out your break-even point, you'll need to do some quick calculations:
Determine the total cost of the new loan. Divide that by the monthly difference in payments to get the number of months it will take to pay for refinancing the loan.
For instance, if the cost to refinance a $100,000 loan is $5,000 including all points and fees, and the monthly reduction in the mortgage payment is $100, it will take 50 months to recoup the closing costs.
Tax professionals caution, however, that although you'll save money on the monthly payment, you'll also have less of a deduction at tax time, since you are paying less interest on the mortgage.
How else does refinancing affect my taxes?
Mr. Hajek said points paid upfront to refinance a loan are not deductible all at once, as they are in the year you first buy the home. They have to be spread over the life of the loan.
What are some of the pitfalls, and what if I want to back out?
Thousands of homeowners are looking for ways to rewrite their loans, but there are only so many lenders and only so many hours in each day to handle the paperwork.
A trade group says the loan processing time is now 50 days, up from 30 days before interest rates began to dive.
The delay may be frustrating, but it shouldn't cost you -- if you provide the lender with all the information needed when it's needed.
Say you have an interest "lock-in" agreement with a lender who guarantees to issue your mortgage at the current interest rate. You formally apply for the loan and pay the mortgage company in advance for a credit report, appraisal and points.
But processing of the loan hits a snag -- the information you provided to the lender was incomplete. Before the loan is approved, the lock-in agreement has expired, and you are no longer entitled to the interest rate that convinced you to refinance in the first place.
That's your fault, not the lender's. If you decide to cancel the new mortgage loan before you've been approved -- perhaps because interest rates have fallen even further -- you usually can, but you'll lose the report fees and the origination fee.
If you decide to back out the day after you formally applied and paid your fees, you may lose your money. Mr. Stackhouse said you'd probably be out the lock-in fee, but you may get the credit report and appraisal fee back if those reports hadn't been ordered yet.
What will I need to apply for a mortgage loan refinancing?
Most mortgage companies want to verify income and financial health with these documents:
* Two most recent years' W-2 tax forms and two years of tax returns. Some lenders may also ask for a current month's worth of pay stubs showing year-to-date earnings.
* Copies of the last three months' statements for all bank accounts.
* Information on the current mortgage.
You may also be asked to produce a list of creditors and their account numbers, plus canceled checks and verification of pensions or other income.
You'll also have to come prepared to part with a few hundred dollars to pay for the application fee and the good-faith deposit fee. The application fee isn't refundable. The deposit is refundable, if the transaction goes through but you are denied the loan because of credit problems, Ms. McGeehan said.
What questions should I be prepared to ask?
* Ask for a good-faith estimate that itemizes all costs of the loan.
* Find out how long the application process may take. Know what options you have if you've paid fees, the application is held up, and the interest rate begins to rise or fall.
* Know which fees are refundable if the loan is denied.
* Ask how long you have to back out of the loan application process without being penalized.
* Ask whether the lender will lock in the interest rate on the day you apply and guarantee you that rate if your loan is approved. Find out the fee for a lock-in agreement.