Should I refinance?
When interest rates fall, a homeowner should certainly explore the possible benefits of refinancing; however, you should discuss your financial situation and goals with your lender before making a final decision. Are you looking to lower your monthly payment? Consolidate debts? Get cash out for a large purchase? Change your interest deduction expense for your taxes? Ask your lender to provide you with a few refinancing scenarios that outline how your loan’s term, monthly payment, and total interest expense will change. After reviewing these scenarios, you’ll have a more clear picture as to whether or not the cost to refinance is worth it for you.
Is there a best time to refinance?
The old rule of thumb is that a person should refinance when mortgage rates drop 2% or more below their current interest rate. However, refinancing may be a viable option even if the difference is less. A modest reduction in the loan rate can still trim your monthly payment. For example, the monthly payment on a $100,000 loan at 8.5% is about $770 (excluding taxes and insurance). If the rate were lowered to 7.5%, the monthly payment would be about $700, or a savings of $70. Again, the significance of such savings is dependent upon your overall financial picture, how long you plan to stay in the home, etc.
Should I refinance if I plan to move soon?
This is an important factor to consider. Most lenders charge fees to refinance a loan. If you plan to stay in your home for less than a few years, there may not be enough time for your monthly savings to outweigh your upfront costs. For example, let’s say your refinance transaction lowered your monthly payment by $50 and the lender charged you $1,000. It will take 20 months ($1,000 divided by $50) for you to recoup the upfront cost before you will begin realizing your savings. Some lenders offer “no cost” loans which come with a slightly higher interest rate but no other costs. The attractiveness of these loans depends on the interest rate you are being charged on your current loan.
Is there anything I need to consider before refinancing?
One factor people don’t always consider is that saving mortgage interest dollars might not always be the best choice for everyone. You have to take a good look at your own “financial personality” here. Remember that mortgage interest is tax deductible. When you reduce your monthly payment, you reduce your tax deduction as well. Are you disciplined enough to invest your newfound monthly savings in such a way that your lessened tax benefit won’t be a problem?
What types of claims or risks covered by title insurance?
This depends but, in general, costs might include a lender application fee, an origination fee (typically 1% of the loan amount), administrative fees, title insurance company costs (settlement fee, title search, title insurance premium, handling/service fees, recording fees paid to the Clerk of the Court). Your new lender will disclose their fees to you on a Good Faith Estimate, which is usually done at the time of application or soon after.
The sum of all charges could amount to 2-3% of the loan amount. If you don’t have the available cash to cover the associated loan costs, you might want to look for lenders offering “no-cost” loans. There will be a slightly higher interest rate associated with such a loan, so discuss the pros and cons with your lender.
In addition, if you have a prior First American Owner’s Policy which is less than five years old, you qualify for a 40% discount on the title insurance. You will need to provide us with a copy of the policy.
What are points?
Points are costs that need to be paid to a lender in order to receive mortgage financing under specified terms. One point is equal to one percent of the loan amount. In other words, one point on a $100,000 loan would be $1,000. Discount points are fees that are used to lower the interest rate on a mortgage loan. Some people may choose to pay one or more points to the lender upfront in exchange for a lower interest rate. The choice is personal and dependent upon one’s financial situation, how long one plans to be in the home, etc.
Do I need an attorney?
No. In this area (DC/Maryland/Virginia), you are not required to have a closing conducted by an attorney. A title company can usually assist you adequately in most real estate transactions.
When should I contact the title company to arrange my closing?
Contact them as soon as you are reasonably sure of loan approval and agreement of terms with your lender. You should inform your lender at the time of application (or shortly thereafter) who you have chosen to conduct your closing. You may be required to place a nonrefundable deposit with the title company to cover expenses, which will be applied to costs at the time of closing. It is advisable to contact the title company at least two weeks prior to closing.
What will the title company need from me?
- Information about your property (address, etc.)
- Name, phone number, and account numbers for all open mortgages
- Social Security Numbers for all owners
- Name and phone number for the new lender
- Copy of prior First American Owner’s Policy, if less than five years old
Why do I need to have another title search done?
Each lender requires that a Commitment to Insure be issued in their favor prior to closing. The information in that Commitment can only be obtained from a review and evaluation of documents in the local land records. Therefore, the title company must research these records for each transaction. This gives them and the lender a proper picture of all existing liens and encumbrances as well as accurate ownership and real estate tax and assessment information.
I already have title insurance. Why do I have to buy it again?
When you purchased your home, you probably paid for Owner’s and Lender’s Title Insurance Policies. Your Owner’s Policy will remain in force and effect; however, when the existing loan is paid off at the time of refinancing, a new Lender’s Policy must be issued.
What will happen at the closing?
Normally, you will come to the title company’s office to sign all of the new loan papers. You will have to show proper identification since many of these are legal documents which require a Notary Public’s acknowledgment. The lender will have prepared and delivered to the title company all of the paperwork pertaining to your new loan. You will sign many of the same documents and forms that you signed when you originally purchased your home.