Mortgage Refinancing

It has become increasingly common for homeowners to replace their
existing mortgage loan with a new mortgage.  This is known as mortgage refinancing.  Most homeowners refinance to take advantage of a current interest rate that is lower than the interest rate on their original loan, but refinancing also allows the homeowner the ability to restructure the type and term of their existing loan.  Options available to a homeowner who is considering refinancing include:

• Replacing a fixed-rate loan with another fixed-rate loan of
the same term but with a lower interest rate.  This will reduce the
monthly payment required by the homeowner.

• Replacing a fixed-rate loan with another fixed-rate loan of a
different term (for example, replacing a 30-year mortgage with a
15-year mortgage.)  In this case, the monthly payment may not change significantly, but the loan will be repaid much more quickly and will likely save the homeowner significant interest over the life of the loan.

• Replacing a fixed-rate loan with an ARM (adjustable rate
mortgage.)  This will likely result in lower monthly payments in the
short run, but it will expose the homeowner to potentially higher
payments in the future if interest rates increase. 

• Replacing an ARM (adjustable rate mortgage) with a fixed-rate
loan.  Generally, this will result in higher monthly payments, but
the payments will remain stable for the life of the loan.

A homeowner considering refinancing should keep in mind there can be significant costs associated with refinancing an existing loan.  The following costs need to be factored into any decision to refinance: mortgage application fee, appraisal fee, points, credit report fees, inspection fees, title search and title insurance premiums, mortgage recording fees, legal fees, mortgage prepayment penalty.  It is not
uncommon for the closing costs of the new loan to be as much as, if
not more than, the original loan. 

As a general rule of thumb, it is usually not beneficial to refinance
unless the new mortgage interest rate is at least two percentage points
below the original interest rate.