Should you refinance now? Part #1 of 2.
Posted on October 2, 2011 by bob in MoneyWise
You will not be shocked if I say that many folks are in worse financial shape today than they were five years ago. However, there is one bright spot that might help you if you have not already taken advantage of the opportunity. With interest rates at historic lows, if you have a home mortgage that has been in place for more than a few years, refinancing now could save you some serious dollars.
This article is the first of two dealing with the subject of refinancing. This month we look at the costs typically associated with refinancing and how to keep them to a minimum. In the next issue we will consider guidelines for when refinancing makes sense.
Homebuyers typically pay a lot of fees and other charges when they buy a house. Many of these are unavoidable on a purchase, although it is always a wise practice to comparison shop on major outlays when you can take the time to do so. All lenders are not created equal and they do not all have the same financing charges, and when refinancing, you may be able to escape some costs that you paid when you bought your home. Like the line in the Miracles’ hit from 1960 says, “You better shop around.”
Closing costs that are probably unavoidable include:
– Checking your credit history and rating
– Escrow payments for part of your property taxes and homeowners insurance
– Fees for recording the new mortgage
– Research to confirm your title to the property is not in question
– The closing attorney’s fee, including document preparation
Depending on the lender you deal with, you may be able to avoid some or all of the following:
– Loan origination fee
– Loan processing fee
– Loan underwriting fee
– Points (probably not an issue in the current low rate environment)
– Property appraisal (if you are dealing with the same lender)
– Survey (if you are dealing with the same lender or can provide a copy)
Of the “avoidable” fees, loan origination is often the highest. Typically 1% of the mortgage balance, this item could cost you $100 for every $10,000 you refinance. The final closing cost I want to talk about, the title insurance premium, may be partially avoidable.
Title insurance protects the lender if someone unexpectedly shows up with a credible claim of ownership to the house you are financing. Since the property is your lender’s collateral, they want to make sure they get repaid if someone other than you turns out to own the house. While this scenario seems far-fetched, because title claims are expensive to defend and may result in the loss of the collateral, lenders require title insurance.
The good news is that many title companies will reissue your current policy at a much lower cost than you would incur for a new title policy. However, in my experience you will only get this consideration if you ask for it. The difference may be a few hundred dollars, so it is a worthwhile point to raise.
HUD (the U.S. Dept. of Housing and Urban Development) requires lenders to provide potential mortgage borrowers what is known as a “good faith estimate” of closing costs. In addition to getting one of these from each lender you consider, you should have a conversation with someone at each institution to see what else you can learn from the data you get on paper. Some lenders may use estimates at the low end of a reasonable range and others may be more accurate. It also does not hurt to Google the lender to research the experience of other borrowers.
In some cases you can shop for your own closing attorney instead of using someone connected to the lender. If you choose to go this route, try to find a person who specializes in real estate and has a good reputation. If an attorney knows that you will use him/her for your closing, he/she might be able to guide you a bit on the front end, saving you time, aggravation, money, or all three.
Next month we will talk about whether or not a lower rate will save you enough to justify the closing costs required for a new loan. Between now and then, you can start shopping to see what lenders have available.
Alan Wallace, CFA, ChFC, CLU is a Senior Financial Advisor for Ronald Blue & Co.’s Montgomery office, 334-270-5960, alan.wallace@ronblue.com.
