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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Home equity refinancing
Dr. Don,
I am looking to refinance my first and second mortgages. My second
was taken out on the house to do remodeling. I owe $12,100, and
the interest rate is a whopping 18 percent. Is this typical on second
mortgages?
I owe $53,400 with an interest rate of 8 percent
on my first mortgage (FHA). My house is now appraised at about $80,000.
What type of rate should I expect to get if my credit is OK but
not great? And about how much should I expect in closing costs with
no points?
Ken Kitchen
Dear Ken,
The national average for a home equity loan (up to $30,000) for
someone with excellent credit is 6.96 percent. Even with only an
OK credit history, 18 percent is way out of line.
Make refinancing your home equity loan your first
priority vs. refinancing your first mortgage. I say that because
the national average for 30-year fixed-rate mortgages is currently
just over 7 percent. The marginal improvement you can expect to
get by refinancing an 8 percent FHA mortgage with OK credit isn't
going to be worth paying the closing costs on that mortgage.
I think its worth spending $12.95 to get a copy of
your FICO score and Experian credit report to see exactly how OK
your credit is. (You can order them on Bankrate's Shop
& Save Channel.)
You can review your credit report for accuracy and
know how lenders will view your application for credit. If you think
you'll have trouble with getting a lender's best rate, then Bankrate's
problem
credit page can point you to lenders that specialize in lending
to people with so-so credit.
Try to focus your search for a loan within a short
period. If it's obvious that you're comparison-shopping for a mortgage
or home equity loan, multiple credit inquiries won't hurt your credit
score. Stringing loan applications out over more than a month will
hurt your credit score.
Closing costs for home equity loans are typically
lower than what they would be for a first mortgage. The Real
Estate Settlement Procedures Act requires the lender to provide
you with a Good Faith Estimate of settlement costs within three
days of you applying for a loan, but you can ask for ballpark information
before applying for the loan.
Bankrate has surveyed closing
costs for first mortgages, and while you won't be paying all
of the costs associated with a first mortgage, the average costs
for the items that you will be paying for will give you a point
of comparison with the lender's good faith estimate.
Make sure there's no prepayment penalty associated
with the early payment of your current home equity loan before you
start shopping for a replacement loan.
You can use Bankrate's Refinancing
Calculator to find the payback period on your loan.
To answer your question about points -- points come
in two flavors, discount and origination. Origination points compensate
the lender for pulling together your financial information and loan
documents to get the loan to closing.
You can't avoid origination costs; you just choose
how to pay them. You can pay them at closing, pay them by including
them in the loan, or pay them by paying a higher interest rate on
your loan.
Discount points are pre-paid interest. You buy down
the stated rate on your mortgage by paying interest upfront at closing.
You have a lower interest rate, but discount points are reflected
in the annual percentage rate quote for your mortgage.
Choosing a loan with no discount interest is an easy
thing to do. Bankrate always shows the discount and origination
points along with the loan's APR when you shop
mortgage rates.
-- Posted: March 28, 2002
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