Home Mortgage Refinancing

Check that interest rates have dropped enough to make the cost of refinancing worthwhile.

Compare the total costs to refinance your home loan, as well as interest rates, to determine if refinancing will save you money. When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original home loan. These can include settlement costs, discount points, and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this.

Generally, the lower the interest rate, the more points the lending institution will charge. In home loan 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 home loan refinancing charges.

Shop around for a lender. Ask each for a list of charges and costs you must pay at closing. 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. If you are shopping for a lender, ask each one for a list of charges and costs you must pay at closing. Some lenders may require that some of these costs be paid at the time of home loan refinancing application.

A lower interest rate gives you less interest to deduct on your income tax, which may increase your tax payments and decrease the total savings from home loan refinancing.

If you are thinking about refinancing your mortgage, you might want to consider other types of home loans. For example, you might want to look into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. (Of course, this also means you have less interest to deduct on your income tax return.)

Most lenders place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, you may want to contact your home loan officer periodically to check on the progress of your loan approval and to see if additional information is needed.

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