mortgage

Answers to 6 key refinance questions

Refinancing example
Original loan: $150,000
Refinancing amount: $148,638
Loan maturity (years):283030303030
Interest rate:8%7.5%7%6.5%6%5.5%
Monthly payment:$1,100.65$1,039.30$988.89$939.49$891.16$843.95
 
Total payments:$369,818$374,147$356,001$338,217$320,817$320,817
Total interest expense:$221,180$225,509$207,363$189,580$172,180$155,184
Estimated closing costs:0$2,500$2,500$2,500$2,500$2,500
Payment savings:0$61.35$111.75$161.15$209.49$256.70
Months to recoup:04123161210

Don't worry about the points you paid at closing on your current loan when you're considering a refinancing. (See "IRS Topic 504 -- Home Mortgage Points" for tax implications.) They aren't relevant to the analysis because they're sunk costs.

Look instead at what you can save going forward. Compare APRs when deciding between loans. You may be able to refinance with your current lender and pay less in closing costs, but you need to be sure that its rate is competitive.

As always, you can shop rates in your market on Bankrate. (Bankrate even provides an APR estimate.)

You'd rather refinance once and lower your interest rate by a point or more than do multiple refinancings for smaller interest rate savings. Keep your pulse on where rates are and where they're going by reading the Mortgage Rate Trend Index every Thursday on Bankrate.

2. Is it cheaper to refinance with my current lender? 
It just seems logical that it would be easier and less expensive for your existing lender to refinance your home. After all, the lender knows both your payment history and the property.

The lender may not need a new property appraisal, a title search or other items that would normally be required on a new loan. The lender should also be willing to offer a better price because it's easier to keep a good customer than it is to find a new one.

The holy grail of refinancing is when the lender just reduces your interest rate and doesn't require you to close on a new loan. This can only happen if you are just rolling your existing balance and aren't looking for a cash-out refinancing.

So, why doesn't it happen more often? The problem is that the mortgage market is divided into three lines of business: mortgage origination, mortgage servicing and mortgage lending.

If the firm that originated your existing mortgage didn't retain the servicing, you aren't a current customer. If the firm servicing the mortgage doesn't do originations in your market, then they may not be interested in your business.

Finally, mortgage investors are looking for packaged or securitized mortgages that are part of a pool of mortgages, so they aren't interested in your stand-alone business.

Ask your current servicing provider what cost savings they offer to current customers who refinance with them. You also need to find out what terms competing lenders offer.

Saving a few hundred dollars in closing costs doesn't mean much if you can get a lower interest rate from another lender. Shop rates on Bankrate.com before talking to your current servicing provider, so you will be able to recognize a good deal and use Bankrate's refinancing calculator to determine your refinancing savings.

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If you are going to apply at several lenders, you should do it within a 30-day period. Your credit score won't be hurt by comparison shopping for a mortgage if you concentrate your applications within this time frame.

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