Know These Facts Before You Make Your Move
The U.S. housing market is perking up—and so are the mortgage rates. As home values rebound, homeowners are looking at options for refinancing their existing mortgages.
Your home is your most valuable asset, so it’s smart to consider refinancing periodically. In the short term, you may be able to reduce your payment. But the real benefit may be in the long term with a lower interest rate.
There are many reasons people consider refinancing their homes, say the experts from the Pennsylvania Institute of Certified Public Accountants (PICPA). Interest rates may have fallen or maybe they’re going up and homeowners have an adjustable rate mortgage they want to get out of. Maybe their credit scores have improved enough and they might be eligible for a lower-rate mortgage. Regardless of why you want to refinance, educating yourself about available options is always a good idea.
What Will It Cost?
For a typical refinance, you could pay anywhere from 1 percent to 5 percent of your outstanding principal in refinancing fees.The fees vary depending on the state, the lender, and how much of a mortgage is outstanding at the time of the refinance. Fees may include the following:
- Application fee. This charge covers the initial cost of processing your loan request and checking your credit report.
- Loan origination fee. The lender or broker charges this fee to evaluate and prepare your mortgage loan.
- Points. A point is equal to 1 percent of the amount of your mortgage loan. Loan-discount points are a one-time charge paid to reduce the interest rate of your loan. Some lenders and brokers also charge points to earn money on the loan. The number of points you are charged can be negotiated with the lender.
- Appraisal fee. This fee pays for an appraisal of your home to assure the lender that the property is worth at least as much as the loan amount.
- Inspection fee. The lender may require a termite inspection and an analysis of the structural condition by a property inspector, engineer, or consultant.
- Attorney review/closing fee. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender.
- Homeowner’s insurance. Your lender will require that you have a homeowner’s insurance policy in effect at settlement.
- FHA, RDS, or VA fees or PMI. These fees may be required for loans insured by federal government housing programs, such as the Federal Housing Administration (FHA), the Rural Development Services (RDS), or the Department of Veterans Affairs (VA), as well as for conventional loans insured by private mortgage insurance (PMI).
- Title search and title insurance. This fee covers the cost of searching the property’s records to ensure that you are the rightful owner and to check for liens.
- Survey fee. Lenders require a survey to confirm the location of buildings and land improvements.
- Prepayment penalty. Some lenders charge a fee if you pay off your existing mortgage early.
Don’t forget, you can – and should – shop around for the best rates and terms.
Crunching the Numbers
One simple way to decide if it is beneficial to move ahead with a refinance is by calculating how long you’ll have to stay in your home to recover the closing costs through your lower monthly payment. For example, if your closing costs are $2,500 and the refinance will save you $250 per month, you will recoup your costs after 10 months.
However, the big picture view of refinancing is to look at what you’ll save over time with a lower interest rate. There are many free interest rate calculators available online that will help you tally up the savings in interest expense over time.
Sometimes it just doesn't pay to refinance. You might want to hold off on refinancing for some very good reasons:
- You've had your current mortgage for a long time. By refinancing late in your mortgage, you’ll restart the amortization process, and most of your monthly payment will once again be credited to paying interest and not building equity.
- Your current mortgage has a prepayment penalty.
- You plan to move from your home in the next few years. The savings gained from lower monthly payments may not exceed the costs of refinancing because you won’t have enough time to realize the benefit.
Are You Eligible?
Ultimately, it may come down to whether you’re eligible to refinance. The approval process will be similar to what you experienced with your first mortgage. Your lender will look at your income and assets, credit score, debt ratio, the current value of your property, and the amount you want to borrow. If your credit score has gone up, that may work in your favor for a lower rate.
In the wake of the economic crisis, many homeowners are finding the values of their homes are lower than what they owe on their mortgages. If this is the case, it may be difficult to refinance.
A CPA Can Help
If you’re considering refinancing your current mortgage, work with a CPA. A CPA can help you analyze your current situation and determine the best course of action with regard to your personal financial plan.
If you have questions about your personal financial planning or need help finding someone to assist you, talk to your CPA. To find a CPA in Pennsylvania by location or area of expertise, use the CPA Locator.