Refinance Questions & Answers

Q. Should I refinance?
The answer depends on your financial goals. A desire to lower your interest rate and/or payment is good reason to refinance, but there are other things to take into account:

• How long do you expect to be in the home?
• How much equity do you have in the home?
• How much will your closing costs be?
• To get that low rate, will you have to pay points?
• Will your lower payments make up for the closing costs, fees and points (if any)?

Q. Should I refinance from an adjustable-rate to a fixed-rate mortgage?
It’s generally a good idea to get the lowest fixed-rate possible. However, if you're in the first year of a five-year adjustable rate mortgage (ARM) and you plan on moving in three years, it may not make sense to refinance. But if the rate on your ARM is about to adjust and you think the rate will go up, it may make sense to get a fixed-rate mortgage.

Q. Are interest rates higher for a cash-out refinance?
The interest rate you pay on a cash-out refinance loan will generally be the same rate that you pay on a non-cash-out loan. There may be an incremental fee associated with a cash-out refinance loan. This depends on the specific loan program you choose and the loan-to-value ratio. Using the equity in your home to pay off other bills can be a wise strategy. You might want to consider taking some money out to pay off credit cards bills, auto loans and any debt that has interest that is not tax-deductible. Your tax advisor will be able to tell you if you can deduct the interest on the money you take out to pay off that debt.

Q. When should I “lock in” an interest rate?
This depends on which way interest rates will go, and no one can be certain of that. Historically, rates go up much faster than they come down. If you're thinking about buying a home or refinancing your mortgage, get the good rate now—you can always refinance later if rates drop again. Any near-future drop in interest rates may not be drastic enough to impact your monthly mortgage payment. Of course, every situation is different, so it's important to consider all of your options.

Q. Should I pay points to get a lower rate?
If you are refinancing your mortgage, paying points may not be your best option. Points paid on a refinance can be deducted from your taxes only in small increments—1/30th a year for a 30-year mortgage. This means it could be several years before your lower rate makes up for the points you pay. If you are buying a home, however, points paid are a tax-deductible expense for that year. Please consult your tax advisor.

Q. Are there loans that have no closing costs?
There are few loans that truly have no closing costs. Sometimes lenders will not charge application fees and agree to pay the appraisal and title fees, but they may increase the interest rate. Lenders can also roll the costs into the amount of your loan. Therefore, because you're paying no costs up front, it's called a "no closing cost" loan. Slightly increasing your mortgage might be acceptable to you. Bear in mind, however, that this is not really a cost-free loan.

Q. How long does refinancing take?
Refinancing normally takes two to four weeks. The length of time depends on several factors:

• Has your home recently been appraised?
• How accessible is your home to appraisers?
• Are there comparable properties in your neighborhood?

Getting an appraisal can be the longest part of the process. For one thing, it can be difficult to schedule an appraiser during periods in which appraisers are performing a large number of appraisals. This might be the case during a refinance boom, for instance. You can do your part to move the process forward by making sure your paperwork is prepared.

Q. How much money will I need to bring to a closing?
Generally, you need two percent of the purchase price of the home for pre-paid interest to cover the time between the date you close and your first mortgage payment. Some states may also require pre-payment of property taxes. When refinancing, however, your old mortgage will most likely have money in escrow that can cover costs. Some borrowers get short-term loans while this escrow transfers back to them. Most pay the money at the closing. They know they'll get it back when their escrow is returned.

Q. Is there a way to reduce closing costs?
If you're refinancing, you may be able to eliminate some costs by talking to your lender. Your lender might reuse your last home appraisal or your credit report if they are recent enough. Another possible option? Have your mortgage lender re-certify some documents, such as the appraisal and the title, for less than the cost of getting new documents.