Closing Costs of Refinancing
Since the point of refinancing is to save money, try to keep closing costs as low as possible. You should be prepared to pay 3 percent to 6 percent of the outstanding principal. This will include the usual closing costs for title search, title insurance, application fee, appraisal fee, a loan origination fee and discount points.
But before you take out your wallet, try a few cost-reducing strategies. No-cost and low-cost refinances are obviously your best bet. But don't let the term fool you-the closing costs are just tacked onto the back end or paid out in a higher interest rate. Still, you may come out on top if interest rates are substantially lower than when you originally financed your home.
You may also be able to lower your closing costs by applying for the new mortgage with your original lender. The bank may waive various fees in recognition of your prior relationship. And don't be afraid to negotiate interest rates and points with a new lender. You may, for example, be able to get a reissue on your title search and title insurance. This could save you up to 70 percent over a new policy.
Typically it's not worth refinancing unless you can get at least a 2 percent reduction on your interest rate. It's also important to project how long you plan to remain in your home. You have to give yourself time to gain back enough equity to offset the points and closing costs of your new mortgage.
Before you decide to refinance, take a look at the payment charts available on the Mortgage Bankers Association of America Web site, or submit a refinance form to Homeowners.com. Once you've made up your mind to refinance, you'll have to go through much the same search process that you did for your first mortgage. Start with your current lender, then compare its rates, points and fees with at least four other lenders. Remember that service counts. If your current lender didn't attend to your needs, go elsewhere to refinance.
Keep in mind that refinancing is like walking a tightrope. "Don't keep waiting for interest rates to drop to 6 percent," says Glink. "That's insane because they're not going there. If you can get a no-cost refinance at 7 percent, you're doing great."
Since your potential savings are closely tied to interest rates, you may be tempted to hold out for ever-lower rates. Don't wait so long that you miss the bottom.
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| REFINANCING GUIDE |
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STEP 1 - Refinancing
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STEP 2 - Closing costs
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STEP 3 - Top 10 mistakes |
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