How to Refinance Your Home

[Anonymous]

How do you decide if refinancing makes sense? The answer depends on many factors, including tax bracket, the length of time you plan to stay in your home, and refinancing costs.

Difficulty Level: Hard Time Required: Indefinite

Here's How:
With a new loan, you may be charged a penalty for paying off your original loan early. So check this first.
The total expense for refinancing depends on settlement costs, interest rate, points, and other costs required to obtain a loan.
Talk to some lenders to determine the available rates and the costs associated with refinancing (appraisals, attorney's fees, 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).
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.
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 staying in your home for a long time, it may be worthwhile to pay additional points to obtain a lower interest rate.
Some lenders offer to finance the points so that you do not have to pay them up front. Points are added to the balance, and you pay a finance charge on them meaning increased monthly payments.
Settlement costs typically include fees for the loan application, title search, appraisal, loan origination, credit check, and lawyer's services. You also may be required to pay recordation fees or transfer taxes.
With a lower interest, you will have less to deduct on your income tax return. That may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.
You might consider a 15-year, fixed-rate mortgage. Payments are higher, but you pay substantially less interest over the life of the loan and build equity more quickly.
You do not have to refinance your mortgage with the same lender that provided your original loan. However, to keep your business, some lenders may offer customers incentives of lower interest.
If you decide on a particular lender, and do not want to let the interest rate "float" until closing, get a written statement guaranteeing the interest rate and points that you will pay at closing.
The lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan, as required by the Truth in Lending Act.

Tips:
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 don't refinance unless saving 2% on interest. Zero points and low-cost refinancing can negate that theory.
When you apply for a mortgage, some lenders require you to pay a special non-refundable charge ($100-$200) to cover the costs of processing your application.