Before you refinance, compare different lender rates and points. Usually, a lower rate indicates more points. For example, a lender may charge six and three quarter percent interest with one point. Generally, each point that you pay will reduce the interest rate offered by the lender by about one-eighth to one-quarter of one percent.

When to Use Points

If you plan to move within two years of refinancing, paying points might not be a good idea. It takes about 5 to 7 years to recover the cost of points paid at closing. James Morgan has a 30-year fixed mortgage loan for $100,000. James has an interest rate of 6 3/4% with one point and his monthly payment is $645. If he did not pay the point, his interest rate would be 7% and his monthly payment would be $661.17. So the point saves him $16.17/month. In five years, James will have recouped the point he paid to get the lower rate. Because he will continue to pay lower payments each month after that, James will benefit from lower monthly payments. But if he moves after two years, he will not recover his costs.

Tax Tips

Note: The following includes an overview of tax laws that is not intended as legal advice. You should consult a tax advisor to get answers to your specific tax s.

If you itemize on your tax return, you should be able to deduct the points you pay either upfront in the year you pay them or each year during the life of the mortgage. You may be able to deduct points paid at closing and in the year they are paid by meeting the following requirements:

• Cash Accounting - You report income yearly and deduct expenses you've paid for that year.
• Permanent Address - Your loan is secured by your primary address
• Status Quo - Points are a standard practice where you live
• Origination points - The points were not lender fees (i.e. amounts paid to originate and process your loan)

Homeowners who will claim itemized deductions on their tax returns and who purchased last year should be eligible to deduct all the points paid at closing, even if the seller paid the points. If the points on your loan are not deductible in the first year, you can generally deduct them over the life of the loan. In addition, the IRS has ruled that you can deduct the points on future returns even if you are claiming a standard deduction.

Is Now The Time To Refinance?

With mortgage interest rates at their lowest point in years, the time may be right for you to refinance your existing mortgage. What is involved in the process? Will your monthly mortgage payment be lower? Will it be worth the cost of refinancing? With possible rate increases on the horizon, the time to consider refinancing is now.

The Refinance Process: Is It Right for Me?

To determine whether a refinance might be right for you, you should begin to think about the following s:

• What are your reasons for refinancing?
• How long you plan to stay in your home?
• How much equity you have built up in your home?
• What is the interest rate of the existing mortgage?
• What is the interest rate of the new mortgage?
• What costs are associated with refinancing?
• What is your current income and credit status?

To be eligible to refinance, a lender usually requires that you have at least 10 percent equity accumulated in your property.

Why Refinance?

A refinance of your current loan may make sense for several reasons:

• You may want to get a mortgage with a lower interest rate to reduce your monthly payment.
• You may want to borrow additional funds for home improvements, education bills, or other needs. This is often referred to as a "cash-out" refinance.
• You may want to switch from one type of loan product to another: for example, from an adjustable-rate loan (ARM) to a fixed-rate loan. This may make sense if interest rates have fallen since you took out your ARM and you now want the assurance that your mortgage payment will remain the same for the life of your loan.
• One common type of refinance is when you have an adjustable-rate mortgage and you refinance to a fixed-rate mortgage. Your mortgage payments with an ARM adjust with changes in market rates; so when interest rates go up, your monthly payments likely go up at the next rate adjustment period. But with a fixed-rate mortgage, your interest rate stays the same for the entire term of your loan. The predictability that comes with locking in the same interest rate for as long as you live in your home is one reason why changing from an adjustable-rate mortgage to a fixed-rate loan is one of the more popular refinancing choices -- especially when interest rates are falling.
• Here is another scenario. You might want to change from one type of ARM to another ARM to get a better combination of rate and term: for example, from a one-year ARM to a 5/1 ARM (in which the new rate remains fixed for the first five years and then adjusts annually). You should compare the financial index, margin, and any rate caps in your existing ARM with current market rates before you decide to refinance to another type of ARM. It is important to understand how often your mortgage will adjust and how much your payment can change with each adjustment and over the life of the loan. Also, be sure to ask whether any conversion terms apply or if there are costs to convert to another type of mortgage.
• Another reason to refinance is to use the equity in your home, perhaps for a major purchase, a child's education, or even debt consolidation. You have been building equity in your home since you first started making monthly mortgage payments. A portion of your payments is used to pay principal -- helping you build equity -- and the rest is used to pay interest, taxes, and insurance. With this type of refinance -- often referred to as a "cash-out" refinance -- your new loan lets you draw on the equity in your home and provides an easy way to get cash you may need for other purposes.

Refinancing: Beneath the Surface

Refinancing can do a lot for you. From lowering your mortgage and interest rate, to getting a shorter loan term, to absolving your spouse from the deed, to trading an ARM for a fixed rate, to protecting yourself in case of a job layoff, refinancing can be used as a serious strategy for long term savings.

Strategy #1 - Don't Wait to get Lower Rates

Refinancing generally becomes cost effective when current interest rates are lower than your current mortgage rate. This strategy may lower your monthly payments as well as the interest over the life of the loan. For example, say you have a $300,000 30-year loan at a fixed rate of 7%. You refinance at 6.5% which will save you approximately $100.00 a month, and about $35,000 in interest over the life of the loan.

Strategy #2 - Less is More

By reducing your loan term from 30 years to a 10, 15 or 20- year loan, not only can you speed up the equity process, but you can lower the total interest rates and pay more towards the principle. Robert Benson moved into his house 6 years ago with a salary of $23,000. Robert now owns his own business and makes $60,000. By shortening his loan term, he will pay a slightly higher mortgage, but he can afford it. He will also be able to pay off his home loan before he retires.

Stragegy #3 - Separate When You Separate

If you are divorced, you can remove your ex-spouses name from the deed by refinancing, because, in a refinancing, the old loan is paid off and you get a new one. Consider Gretchen and Byron Martin, who divorced 6 months ago. Byron leaves the house to Gretchen, who is able to afford the mortgage by herself. Now Gretchen can refinance and change her interest rate from 7.5% to 6%. Refinancing will also make her solely responsible for the property.

Strategy #4 - Take the Surprise out of an ARM and get it FIXED

When interest rates run high, many owners take advantage of an Adjustable Rate Mortgage (ARM) which tend to offer great introductory interest rates. However, the key word is "adjust". Your interest rate could change considerably after a specific time period. Trading in your ARM for a fixed rate is another effective refinance strategy. Jason and Renee moved in their house 5 years ago. They were offered a loan with a fixed interest rate of 8%. Instead, they opted for a five-year arm of 5.59%, which was due to adjust in five years. After their initial 5-year rate period expires, their mortgage rate, which resets based on the one-year Treasury rate, could increase by two points a year or more. Since they plan to stay in their house, it makes sense for them to refinance now to get a new loan with a fixed rate of 6%.

Stragegy #5 - Don't Let A Layoff Force You to Layoff Mortgage Payments

With such a volatile economy, layoffs and pay reductions have become common. One of the ways you can protect your home after being laid off, is to refinance for more than the balance and put the difference in a safe place. This strategy is called "cashing out". Linda, who works in Human Resources for her company, found out they were going to lay off 70 people. She wondered if she would be one of them. With no children and no car note, Linda only worried about her mortgage. She pays $1,538 a month on a $200,000 30 year-fixed loan at an 8.5% interest rate. She refinanced at 7.5%, and is able to borrow an extra $20,000 to put aside just in case she's one out of 70.

Refinancing: Myths vs. Facts

There are times in the mortgage industry when the market dictates certain advantages: Whether it's a good time to buy or sell a home for instance. You may have several reasons for wanting to pay off your old loan and secure a new loan through refinancing. Listed below are a few popular myths/misperceptions about refinancing.

Myths and Facts

1. Myth: Refinancing simply means making a few changes to my mortgage.
   Fact: Refinancing is the process of acquiring a brand new mortgage, and using the money to pay off or close your old mortgage.
2. Myth: When the Federal Reserve cut the rates again, I'll get a super deal.
   Fact: Federal rate cuts don't always mean mortgage rates will be lower. Generally, Fed rate reductions are figured into mortgage rates weeks before an anticipated rate cut occurs through Treasury yields.
3. Myth: It's going to cost me too much to refinance.
   Fact: Probably not. Because this is such a competitive environment for refinancing, you may be able to convince a mortgage company to waive some of the application, appraisal and legal fees, which can run you up to $3,000. Also, work with your lender to figure out how much you can save each month. With a good deal, you will be able to recover your refinance costs in a couple of years and save thousands of dollars in interest over the life of the loan.
4. Myth: There are always penalties for paying off my loan early.
   Fact: Some states prohibit penalty points for paying off an original loan before amortization. The cost of a refinance depends on the number of points, interest rates and other costs for securing the loan.
5. Myth: The only time to refinance is if current interest rates drop a full 2% below my rate.
   Fact: As the amount of loans increase, and the cost of refinancing stays relatively stable, a mortgage rate ranging from 3/8 to 1/2 a percentage point may make sense to refinance, and save you thousands of dollars. For example, a fixed 30 - year $200,000 loan, borrowed at 7% compared to 7.5%, will save more than $24,000 throughout the life of the loan.
6. Myth: It's ok for me to refinance with less than perfect credit.
   Fact: Although you may be eligible for a refinance due to the amount of equity in your home, where you stand with your credit could make a substantial difference in the rate you will be offered.

Refinancing: Popular Questions

Buying a house is probably one of the largest purchases you'll ever make. Refinancing is probably one of the smartest strategies you can accomplish to save thousands of dollars in your investment. Although there's a lot of general information about refinancing, it's good to know the specifics. Here are answers to some commonly asked s:

• When does it make sense to refinance?
  People usually refinance for 3 basic reasons:
• To lower their interest rate - Will save thousands of dollars over the term of the loan.
• Extend/Change the term of their mortgage - Switch mortgage products (i.e. Adjustable Rate Mortgage to a Fixed Rate or change the term of the loan from 30 years to 15 years to save thousands of dollars in interest).
• To get cash out - Leverage the value in your home by using the cash received at closing for a large purchase, such as college tuition or renovation.
• What factors should I consider before refinancing?
  There are a few things to consider before you begin the process of refinancing:
• Your reasons for refinancing.
• Your current interest rate.
• The interest rate of the new mortgage (should be 1 to 2 points lower than current rate, say from 8% to 6%).
• The total cost of refinancing (includes title, appraisal, legal, inspection, origination, settlement fees, discount points, etc.).
• The equity you have in your home (at least 5% to qualify).
• The length of time you plan to stay in your home (is it worth it to refinance, when it's going to take 3 years to recover your costs and you plan to move in two?).
• Credit (in good standing).
• Current Income.
• Tax Benefits (know IRS refinance rules).
• Time it takes to recover your refinance costs (up to three years).
• What are the different types of refinancing?
  There are several refinance options available to suit your needs:
• Traditional - With this type of financing, you will pay off your existing loan and secure a new one at a lower interest rate. Refinancing is structured to save you thousands of dollars over the life, or term, of the loan.
• Accrue Equity more Quickly - In an attempt to build value (equity) faster, you can refinance a 30-year mortgage with a 15 or 10 year loan. This will lower your total interest and accelerate the equity in your home. Equity is defined as the value of your home minus what you have left to pay on your mortgage.
• Cash Out - With this refinancing option, you can leverage the equity in your home, and receive the cash when you close on your loan.
• Low Cost Refinancing - You may be able to get some of the fees and closing costs waived, which will reduce your up front fees. By negotiating with your original lender, you may be able to get a reprieve on point reduction, title search, application or credit check fees.
• No-cost Refinancing - This type of refinancing will save you out-of-pocket costs during closing. However, it's important to note that you may pay a slightly higher interest rate.
• Mortgage Product Change - You may be able to benefit from switching mortgage products. For instance, say you originally financed with an Adjustable Rate Mortgage (ARM) when rates were higher. Typically, ARMS have lower interest rates than fixed loans for the first few years. But, now that you've been in your home a while, you may prefer a mortgage that is more stable than an unpredictable ARM. Consider refinancing to a fixed rate loan, which will remain the same until you've paid off your mortgage.
• How many rate quotes should I get?
  It's important to remember, refinancing involves more than a good rate, there are several built-in costs and fees you should be aware of. You want to be able to compare the Annual Percentage Rate (APR), which indicates the total credit cost of the refinancing. Take a look at the fixed rate comparison chart to see the types of s you should ask every lender you call.
• How much will a refinance cost me?
  Your total expenses for a refinance depends on the number of points, interest rate, and associated costs of preparing the loan. In an effort to provide you with a low rate, a lender may charge discount points that average three to six percent of the borrowed amount. If you have a $100,000 mortgage, 3 to 6% will cost you $3,000 to $6,000 to close.
• Can I change my mind?
  Yes. You have three days to change your mind about the loan. Officially, it is called your right to recision. According to federal law, you are allowed to cancel the refinance process after settlement, receipt of your Truth In Lending (TIL) statement, or receipt of your cancellation notice. You are required to put your recision in writing.

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