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Questions Homeowners Should Ask Before Refinancing
The refinance boom is continuing to implode,
according to the Mortgage Bankers Association. Nearly two-thirds
of mortgage applications in the last half of 2002 were to
refinance existing mortgages. In fact, burst of financing activity
set a new record by the end of last year.
With the boom showing only a slight slowdown
in 2003, Charles J. Kovaleski, president of Attorneys’ Title
Insurance Fund Inc., offers some advice to homeowners considering
refinancing.
Kovaleski suggests homeowners shop for a
fixed-rate loan on a 15-year mortgage with the ability to lock in
current rates for at least 30 days. The trend among those who
refinance is to cash out at least some equity from their homes –
an average of about $31,000 – to spend on consumer purchases,
consolidate debt or make home improvements, he says.
According to Kavaleski, before committing to
a refinance, every homeowner should ask the following questions:
1.
Do you plan to stay in your current home a while? The rule
of thumb is that your refinancing savings should pay for your
initial costs within two years. If you plan to be in the house
longer than that, consider paying points to lower your rate.
Depending on how long you plan to stay in your home, you’ll also
want to choose between a fixed-rate loan (longer stays) or an
adjustable-rate loan (shorter stays), and whether or not you
should agree to a prepayment penalty (longer stays).
2.
What is the total cost to refinance the loan? Every loan
applicant should receive a Good Faith Estimate of Closing Costs,
which lists the various fees you will be charged to refinance. Pay
special attention to what you will be expected to pay in cash at
Closing, versus fees that can be rolled over for the life of the
loan. In general, you can expect to pay an application fee of
between $250 and $350 and an origination fee (typically 1 percent
of the loan amount) in addition to the same costs you paid with
your current home loan (title search, title insurance,
miscellaneous lender fees, etc.). The sum of these fees could cost
you up to 2-3 percent of the total loan amount.
3.
How long will it take to recoup your out-of-pocket money
and any expenses which are added to your principal balance? Divide
the up-front cost by the monthly savings you will receive with
your new mortgage to determine how many months it will take you to
break even. If it will take you four years to break even and you
plan to sell the house in two years, re-think your decision to
refinance.
4.
If you are cashing out equity, what do you plan to do with
the money? People choose to cash out for a number of reasons, but
make sure they are the right reasons. Consolidating or paying off
debt and making home improvements are fine places to spend the
money, but financial planners warn against borrowing money to pay
off credit card debt that might be run up again. And always
remember that when you tap into the equity built up in your house,
your home is at some risk.
5.
Are you dealing with a reputable finance company? There
isn’t a homebuyer out there who hasn’t been deluged by offers of
refinancing through telemarketers or direct mail, but buyer
beware. In many cases, these offers might look great, but many can
be misleading and dishonest, promising low monthly rates that
eventually balloon into exorbitant amounts. Do business with
reputable lending institutions. There are a number of individuals
who can help you through this process, including a real estate
agent, settlement agent and mortgage broker.
6.
Are all our expenses covered in the monthly mortgage
payment? Some mortgages are set up to include costs for private
mortgage insurance, property taxes and homeowners insurance;
others aren’t. Your lender can walk you through the terms of the
loan to ensure you know exactly what your monthly payment covers
before agreeing to the terms, and will advise you to set aside
funds for regular maintenance and repairs, as well.
7.
Have you checked your credit report lately? If your credit
is any less than flawless, you probably won’t get the lender’s
advertised lowest rate. You won’t get turned down for a loan, but
you probably won’t be offered the best deal if you’ve been late
with your mortgage even once in the last three years. Before
applying for any refinancing, check your credit reports to make
sure they are accurate.
--The Title Report (4/9/03)
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