Home Refinancing- Getting It Right

Ten days ago, Laura was watching local news round up, when she became aware of the Federal Reserve’s decision to up the interest rates. Laura lunged for the telephone and the next moment she was having a discussion with her mortgage lender.

Laura is a guest lecturer at The Boston Conservatory of Music. Six years ago, she had financed the purchase of her house with a home mortgage. She had opted for an ARM [Adjustable Rate Mortgage] over FRM [Fixed Rate Mortgage] as the rate for an ARM home mortgage stood at 5% and that of a FRM mortgage stood at 7%.

After the Fed’s recent announcement, Laura realized that the ARM would carry an interest of 10%, whereas FRM will be available at 9%. Hence, Laura decided to go in for a home refinancing. However, her elder son, who studies finance at the Boston University, vetoed Laura’s decision as he felt that home refinancing might turn out to be a costly decision.

Home refinancing is not a new concept to us Americans. It is a popular option used to either consolidate one’s debt or to take advantage of a lower interest rate. However, you should not approach home refinancing with a blindfold on your eyes. You should carefully weigh the pros and cons of your decision before finally going in for home refinancing.

According to Amy, a Boston based architect, it is always a good idea to contact various mortgage lenders and obtain quotes from them. When Amy decided to go in for home refinancing, she approached the mortgage bankers; mortgage brokers, local banks and S&L direct lenders and obtained quotes from each of them.

However, Cathy, a librarian working with the University of Massachusetts in Boston warns against choosing a mortgage lender just because he is offering a low interest. When she decided to go in for home refinancing, she located a Boston based mortgage dealer who was offering low interest rate and was not charging an application cost. The mortgage lender gave her a bad deal and she ended up with an even higher repayment amount. Not only that, Cathy ended up with a lot of junk costs, which were not previously disclosed to her by her mortgage lender.

While going in for home refinancing, you need to place an equal emphasis on interest as well as points. The Federal Reserve Bank of New York defines points as ‘Points (a point equals one percent of the mortgage loan amount) are fees that the mortgage lender charges for making the loan. In a sense, points are prepaid interest, or interest that is due when the loan is taken out.’

Hence, if you have to pay a higher point, you will be paying a lower rate of interest when servicing the loan. However, if you are able to go in for a home refinancing loan that carries no points, then you will have to pay a slightly higher rate of interest. Experts state that one should opt for a home refinancing loan with points if he or she intends to continue staying in the house for a very long time. The money paid for points is tax-deductible and thus, you save on your taxes.

While going for home refinancing, do not forget to check out your FICO score [Fair Issac Corporation]. A score of 620 or above can help you to get a low interest rate. However, if your score falls below the 620 mark, then home refinancing can prove to be costly.

When Kerry, a freelance reporter with the Boston Globe decided to go in home refinancing, he paid a close attention to the small charges and fees that often escape the attention of people. Paying these costs can seriously dent the savings made by you due to home refinancing. Some mortgage lenders charge a pre-payment penalty or early payoff penalty if you attempt to go in for home refinancing and thereby close the current mortgage amount. You also need to factor in the offering and closing costs while calculating the gains made by you due to home refinancing.

Experts state that one should ask the lenders of home refinancing loans to provide a GFE [Good Faith Estimates] that can give you an insight into the costs that you are likely to incur when you opt for a home refinance loan. You can ask your lender to provide some discount on the lender fees or the third-party fees that are quoted by him.

And if you are not happy with the deal made by you, then you can reject the same. However, you should provide a written intimation regarding the same to your mortgage lender. Once he receives your intimation, it becomes legally binding on him to return the fees to you within twenty days.

Thus, home refinancing can prove to be a financially prudent decision, if you arrive at the decision after considering all the pros and cons associated with it.

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