Refinancing (Part I)
Refinancing your mortgage means basically that you stop your current mortgage and take a new one in its stead on better terms. The goal is to save money by getting a better deal on the home mortgage loan. People tend to refinance when mortgage market interest rates drop below the lowest rate they can have on their current mortgage. In many cases it does make sense and profit, but there are so many components and parameters involved, that the lower rate of the new loan solely does not secure a profit. Every case is unique and has to be treated as such and calculated and estimated taking into account all the parameters relevant to the situation.
The first hint that may bring you to thinking about refinancing your mortgage at all, especially if you still have a long term to go with your current mortgage, is the drop in interest rates on the mortgage market. A lower rate means that the overall cost of your mortgage will be smaller, but will it save you enough to return the cash paid for the refinancing procedure?
Important! Always use a special refinancing calculator, never trust flat straightforward calculations of the type “the cost of the new loan divided by the reduction in the monthly mortgage payment” to estimate the break-even period, it can be dramatically misleading and confusing. The break-even period in refinancing is the period of time after which the money invested into the refinancing starts paying off. If this period happens to be 17 years, though, it is not very likely that you will find a lender willing to sell you a 17 year mortgage. It’s a lot more likely, that you will have to choose between the standard lengths of mortgage loans (such as 15, 30 or 50 years). This calculator allows you to compare the parameters of several mortgage plans available to you and estimate the merits and the drawbacks of each of them.
To really get a better deal on your new mortgage, you have to shop as many lenders as your patience will allow you, and investigate as many alternatives as possible before you come to the final decision. The conditions of refinancing may vary quite a lot from lender to lender, and your current one will not necessarily have the best offer. In fact, I would recommend you to look for a loan to refinance into elsewhere first, and go to your lender only after you have seen many other offers.
It is not very likely that your present lender will be happy to see you (and your money) leave. It’s even less likely that it will let you go easily. Many lenders have developed special retention programs that you will probably be introduced to the day next after you call your lender to find out about the exact balance of your loan. Calling for balance information usually triggers the lender’s concern about your possible wish to refinance; but do not expect them to be immediately scared enough to present you with free of charge refinancing to the lowest rate on the market. They do want to keep you as their customer, no question about that, but they will not be willing to pay the highest price for it right away. So you can listen to whatever they have to offer, make a note of it all and continue your inquiry for other options. Printouts of these other offers as well as calculations based on them may inspire your lender to be more creative in the aspiration to keep you as their customer.
Creativity does not always mean an open heart, though. If they offer you a new loan at 2% instead of the 7% rate of your current loan – do NOT agree to anything, no matter how hard they push, before you receive and study a complete description of the deal! It may well be that the 2% rate will hold only for one month and it will be very painful to find out about what happens next only when it really happens.
The big advantage of refinancing with the present lender occurs in the case, when this lender is the one who originated the loan and still owns it. Only in this case the lender may (but it is not obliged to) credit your good payment record and forgo a new credit report, property appraisal, title search and other risk control procedures that are otherwise mandatory on new loans. Even if this deal gets you an interest rate a little bit higher than the lowest option from another lender, the savings on the settlement costs in this case can compensate for the savings you otherwise would have made on a lower interest rate of the new mortgage. It is a subtle balance and is not always the best deal. Use the calculator to compare.
In all other cases, the lender will probably lack the discretion to forego any settlement procedures. It will have to follow the guidelines of the real owner of your loan.
The biggest objective disadvantage of refinancing with your existing lender is that you will not have a right to rescind within three days of closing, as you do in all other refinances. Under the Federal Truth in Lending Act (§ 226.23 Right of rescission), borrowers who refinance a loan on their primary residence with a lender other than their current lender, can cancel the deal at no cost to themselves within 3 days of closing. The right is supposed to protect borrowers and give them a chance to back out in case they discover queer items in their contract.
