If you are a homeowner who was lucky enough to buy when mortgage rates
were low, you may have no interest in refinancing your present loan. But
perhaps you bought your home when rates were higher. Or perhaps you have
an adjustable-rate loan and would like to obtain different terms.
Should you refinance? This brochure will answer some questions that may
help you decide. If you do refinance, the process will remind you of
what you went through in obtaining the original mortgage. That's
because, in reality, refinancing a mortgage is simply taking out a new
mortgage. You will encounter many of the same procedures-and the same
types of costs-the second time around.
Refinancing can be worthwhile, but it does not make good financial sense
for everyone. A general role of thumb is that refinancing becomes worth
your while if the current interest rate on your mortgage is at least 2
percentage points higher than the prevailing market rate. This figure is
generally accepted as the safe margin when balancing the costs of
refinancing a mortgage against the savings.
There are other considerations, too, such as how long you plan to stay
in the house. Most sources say that it takes at least three years to
realize fully the savings from a lower interest rate, given the costs of
the refinancing. (Depending on your loan amount and the particular
circumstances, however, you might choose to refinance a loan that is
only 1.5 percentage points higher than the current rate. You may even
find you could recoup the refinancing costs in a shorter time.)
Refinancing can be a good idea for homeowners who:
- want to get out of a high interest rate loan to take advantage of
lower rates. This is a good idea only if they intend to stay in the
house long enough to make the additional fees worthwhile.
- have an adjustable-rate mortgage (ARM) and want a fixed-rate loan
to have the certainty of knowing exactly what the mortgage payment
will be for the life of the loan.
- want to convert to an ARM with a lower interest rate or more
protective features (such as a better rate and payment caps) than
the ARM they currently have.
- want to build up equity more quickly by converting to a loan with a
- want to draw on the equity built up in their house to get cash for
a major purchase or for their children's education.
If you decide that refinancing is not worth the costs, ask your lender
whether you may be able to obtain all or some of the new terms you want
by agreeing to a modification of your existing loan instead of a
In deciding whether to refinance an ARM you should consider these
- Is the next interest rate adjustment on your existing loan likely
to increase your monthly payments substantially? Will the new
interest rate be two or three percentage points higher than the
prevailing rates being offered for either fixed-rate loans or other
- If the current mortgage sets a cap on your monthly payments, are
those payments large enough to pay off your loan by the end of the
original term? Will refinancing to a new ARM or a fixed-rate loan
enable you to pay your loan in full by the end of the term?
The fees described below are the charges that you are most likely to
encounter in a refinancing.
- Application Fee. This charge imposed by your lender covers the
initial costs of processing your loan request and checking your
- Title Search and Title Insurance. This charge will cover the cost
of examining the public record to confirm ownership of the real
estate. It also covers the cost of a policy, usually issued by a
title insurance company, that insures the policy holder in a
specific amount for any loss caused by discrepancies in the title
to the property. Be sure to ask the company carrying the present policy if it can
re-issue your policy at a re-issue rate. You could save up to 70
percent of what it would cost you for a new policy.
Because costs may vary significantly from area to area and from lender
to lender, the following are estimates only. Your actual closing costs
may be higher or lower than the ranges indicated below.
- Application Fee $75 to $300
- Appraisal Fee $150 to $400
- Survey Costs $125 to $300
- Homeowner's Hazard Insurance $300 to $600
- Lender's Attorney's
- Review Fees $75 to $200
- Title Search and Title Insurance $450 to $600
- Home Inspection Fees $175 to $350
- Loan Origination Fees 1% of loan
- Mortgage Insurance 0.5% to 1.0%
- Points 1% to 3%
- Lender's Attorney's Review Fees. The lender will usually charge you
for fees paid to the lawyer or company that conducts the closing
for the lender. Settlements are conducted by lending institutions,
title insurance companies, escrow companies, real estate brokers,
and attorneys for the buyer and seller. In most situations, the
person conducting the settlement is providing a service to the
lender. You may also be required to pay for other legal services
relating to your loan which are provided to the lender. You may
want to retain your own attorney to represent you at all stages of
the transaction including settlement.
- Loan Origination Fees and Points. The origination fee is charged
for the lenders work in evaluating and preparing your mortgage
loan. Points are prepaid finance charges imposed by the lender at
closing to increase the lender's yield beyond the stated interest
rate on the mortgage note. One point equals one percent of the loan
amount. For example, one point on a $75,000 loan would be $750. In
some cases, the points you pay can be financed by adding them to
the loan amount. The total number of points a lender charges will
depend on market conditions and the interest rate to be charged.
- Appraisal Fee. This fee pays for an appraisal which is a
supportable and defensible estimate or opinion of the value of the
- Prepayment Penalty. A prepayment penalty on your present mortgage
could be the greatest deterrent to refinancing. The practice of
charging money for an early pay-off of the existing mortgage loan
varies by state, type of lender, and type of loan. Prepayment
penalties are forbidden on various loans including loans from
federally chartered credit unions, FHA and VA loans, and some other
home-purchase loans. The mortgage documents for your existing loan
will state if there is a penalty for prepayment. In some loans, you
may be charged interest for the full month in which you prepay your
- Miscellaneous. Depending on the type of loan you have and other
factors, another major expense you might face is the fee for a VA
loan guarantee, FHA mortgage insurance, or private mortgage
insurance. There are a few other closing costs in addition to
In conclusion, a homeowner should plan on paying an average of 3 to 6
percent of the outstanding principal in refinancing costs, plus any
prepayment penalties and the costs of paying off any second mortgages
that may exist.
One way of saving on some of these costs is to check first with the
lender who holds your current mortgage. The lender may be willing to
waive some of them, especially if the work relating to the mortgage
closing is still current. This could include the fees for the title
search, surveys, inspections, and so on.
The information contained in this brochure is intended to help you ask
the right questions when considering a possible refinancing of your
loan. It is not a replacement for professional advice. Talk with
mortgage lenders, real estate agents, attorneys, and other advisors
about lending practices, mortgage instruments, and your own interests
before you commit to any specific loan.
Click here to learn more about mortgage rates in your state: Mortgage Rates
HUD Online Glossary (Source: http://www.hud.gov - July 2006)
HUD Common Questions (Source: http://www.hud.gov - July 2006)
How can I buy a HUD Home?
How do members of the housing industry access the full knowledge base?
How can FHA help me buy a home?
What are the basic eligibility requirements for FHA financing?
What impact does the recent IRS ruling have on certain down payment assistance providers?
What is the American Dream Down Payment Initiative?
How can a homebuyer get down payment or closing cost assistance?
How can FHA assist me in lowering my energy costs?
Where can I obtain a list of HUD Homes for sale?
Can an individual purchase a HUD Home for a dollar?
When can I stop paying my monthly FHA mortgage insurance premium?
How do I find non-profits who operate down payment programs?
How does HUD define a first time homebuyer?
What is the Streamlined k program?
Does HUD/FHA have grant programs available for home repair?
How can I finance the purchase of a HUD Home?
Am I eligible for a mortgage insurance refund?
How do lenders document gifts given in the form of cash?
How do I become a mortgage insurance refund tracer?
How can a police officer obtain a HUD Home at a discount?
Where can I obtain FHA forms and publications?
What FHA programs are available to purchase a manufactured or mobile home?
What is the primary FHA mortgage insurance program?
How much can a lender charge on an FHA loan?
(En Espanol) Where can I obtain a list of HUD Homes for sale?
Can I use an FHA mortgage to purchase a condominium?
Is a borrower eligible for FHA financing if they have participated in consumer credit counseling?
Can gift funds come from the seller, lender or other interested party?
Can I make major improvements to my home without getting prior approval from FHA?
What is the FHA mortgage limit in my area?
Are there age requirements for borrowers using FHA financing?
If I am listed in the Credit Alert or CAIVRS system, what does that mean?
Can I rent a HUD home?
What is the Low/Moderate Income Families Program?
Are there FHA programs available for single parents?
Do the loan limits include the Upfront MIP?
Where can I obtain copies of FHA policy documents?
What can I do if my manufactured home has defects that need to be repaired?
Can I do a FHA refinance if I own the property, but am not named on the existing loan?
How do I obtain information about the payoff or servicing of a HUD Nehemiah Housing Opportunity Grant?
What is the primary FHA program for home repair?
Where can I find FHA's policy on gift funds?
Can investors assume FHA loans?
How can a teacher obtain a HUD Home at a discount?
Is there a quick and inexpensive option to refinance my FHA mortgage?
Can I receive a loan from a family member instead of a gift?
What foreclosure prevention options are available on non-FHA insured mortgages?
How can a firefighter or EMT purchase a HUD Home at a discount?
How do I find an FHA approved lender?
Can borrowers who do their own repairs under Section 203(k) receive cash reimbursement for their labor?
Can I use FHA financing to acquire a second home?
Is it acceptable to get a loan for the downpayment?
What is the Section 235 Assistance program?
What are the penalties for a HUD Home owner-occupant purchaser that does not occupy the property?
How do I use a bridal registry account for my downpayment?
Who is eligible for a HECM loan?
When should case numbers be canceled?
What rate do borrowers qualify at when using an ARM loan?
When can I stop paying my monthly private mortgage insurance?
What is the Housing Voucher homeownership program?
Can I use the Streamline K program to purchase a HUD home?
Is there a special HUD program that allows hurricane evacuees to purchase HUD homes?
What is a HUD revitalization area?
Does FHA allow unsecured loans to be used toward the downpayment?
What FHA program allows me to lower my initial monthly mortgage payments?
What FHA program allows for a reduction of interest rates?
Can I "rent to own" a HUD home?
What property improvement programs are available through FHA?
How do lenders document cash assets?
How can FHA help me if I am behind in my mortgage payments?
Can FHA clear the CAIVRS if I have evidence supporting the debt is paid off?
Must premium pricing be disclosed to the buyer?
What are the requirements for a teacher to purchase under the Teacher Next Door Program?
What is the Good Faith Estimate?
What is the primary FHA rehabilitation mortgage insurance program?
How does HUD determine the sales price of a HUD Home?
Why is a HUD Home not listed for sale?
Does FHA have special programs for Veterans?
Does FHA allow investor participation in the 203(k) or Streamline K programs?
Where can I obtain a list of government properties for sale?
Where can I find free housing counseling services?
What if I am behind in my mortgage payments and my lender won't talk to me?
Are there restrictions on when I can pre-pay or payoff my FHA mortgage?
(En Espanol) What are the basic eligibility requirements for FHA financing?
Where can I find information about a lenders' responsibility under RESPA?
What does FHA offer to military veterans?
Do I have to pay a fee to collect my mortgage insurance refund?
Can I get my HUD Home earnest money back when my loan is denied?
How do I figure how much money the lender is allowed to require in my escrow account?
Can I still obtain a FHA reverse mortgage if I lost a home through divorce?
Who gets the MIP refund if a home is sold by assumption?
How do I make my rental property available for Section 8 tenants?
Are lenders restricted from originating FHA loans for their employees?
How does HUD determine the winning bidder on HUD Home sales?
(En Espanol) How can FHA help me buy a home?
Can an investor bid on a HUD Home?
How can I obtain a copy of the appraisal on a HUD Home?
How much is counted for the borrower's labor when calculating sweat equity?
Do FHA mortgage limits automatically increase after Freddie Mac's annual mortgage limit adjustment?
What FHA program allows me to pay my mortgage off early?
Will FHA allow a Streamline Refinance of a loan by an investor?
Will HUD contribute to seller-funded down payment assistance programs on the purchase of a HUD Home?
As a senior citizen how can I convert the equity in my home into income?
What is a self-help agreement?
Can lenders collect a fee for originating a streamline refinance that gets transferred to another lender prior to closing?
How do I place a bid on a HUD Home?
What is the FHA Urban Renewal Program?
How do I lodge a complaint about the condition of a new home?
Can a lender process a 203(k) rehabilitation mortgage for an investor?
What are the counseling requirements on an FHA reverse mortgage?
For an existing property, what are the minimum distances allowed by FHA between a well and a septic tank?
Must FHA be notified when an FHA reverse mortgage borrower dies?
How do I lodge a complaint about the condition of an existing home?
How can I file a complaint about a settlement or closing issue?
How can I obtain a rental assistance voucher that can be used anywhere?
Where can I obtain information on prepayment penalties for FHA mortgages?
How does a real estate agent register to sell HUD Homes?
How do I document the value of personal property sold for funds to close?
Can a Section 203(k) loan be refinanced to a different loan type?
How do I obtain more information about Regulation Z?
What is the status of a particular HUD Home?
How do I obtain from HUD copies of documents related to my FHA insured loan?
How do I obtain a payoff or subordination of a second lien held by HUD?
How can I have the utilities turned on in a HUD Home prior to closing?
What is mortgage insurance for disaster victims (Section 203h)?
How can I find a list of non-profit agencies that are approved to do business with FHA?
Where can I find information about HUD's multifamily (5 or more housing units) housing programs?
(En Espanol) How can I buy a HUD home?
Are there exceptions to the loss of an earnest money deposit on a HUD Home?
When can interest rate adjustments be made on FHA adjustable rate mortgages?
Where can I find policy governing rent credit?
When is a HUD Homes sales contract ratified?
Who do I contact for support on Title I servicing issues?
How do I know if I won the bid on a HUD Home?
Is a hurricane evacuee who is presently renting a HUD home eligible to buy the home?
How do I file a complaint against a lender who is not FHA approved?
How can I get information about Rural Development programs?
How can I apply for a public housing unit?
How are bids on HUD Homes processed?
How do I report fraud related to a HUD/FHA transaction?
Can an investor participate in FHA's 203(k) Rehabilitation Program?
Where can I find general information about assistance for victims of hurricanes?
How can I find a real estate agent approved to sell HUD Homes?
How does the lender disburse the remaining 203(k) escrow?
Where can I find a list of HUD-approved non-profits?
Are there programs for experimental housing?
What programs are available for outlying areas?
How can a non-profit organization purchase a HUD Home at a discount?
What is the FHA Urban Renewal Rehabilitation Program?
What programs are available for Native Americans on tribal land?
Can the lender collect from the borrower amounts the lender advanced to HUD for a required principal reduction?
Where can I find information about renting or building apartments and other multifamily housing?
How do I request copies of documents from HUD?
What are my rights when obtaining an adjustable rate mortgage?
Are there special programs for home purchases near military bases?
What are Fair Market Rents?
How can my non-profit organization work with FHA programs?
Can a Section 235 loan be refinanced?
Can lenders process loans for HUD employees?
What disaster relief is available for public housing tenants?
How can I find a property that provides below market rents?
What is the mortgage insurance for service members program?
How do I pay rent on a HUD Home?
How does a real estate agent obtain a Name Address Identifier Number (NAID)?
Can a tenant occupy an FHA property through the conveyance process to HUD?
How do I submit my annual certification for my Next Door property?
What disaster relief is available for homes with FHA insurance?
What FHA program allows for purchases on Indian Reservations?
What if I have a problem with the servicing of my escrow account?
How can I get information on HUD's homeless programs?
How do I cancel a HUD Homes sales contract?
How do I request a payoff or subordination of my Next Door lien?
What contracting opportunities are available for HUD Homes?
How do I document assets that were acquired from the sale of a home?
What programs are available in older, declining areas?
How can I extend a HUD Homes sales contract?
Can I subordinate HUD's lien on a Next Door property?
Are funds saved through savings clubs eligible?
How do I deal with a servicing issue in which the loan is not FHA insured?
What disaster relief is available for homes not FHA insured?
How can I obtain mortgage account information from my lender?
What can I do if my servicing lender is handling my escrow account properly?
What rights do I have as a renter or tenant?
Who do I contact if a HUD Home was not properly winterized?
HUD or FHA is garnishing my tax return, how can I get more information?
How do I lodge a complaint about the company selling HUD Homes?
How can I get more information on consumer protection?
What is the status of my occupied conveyance request?
How can I file a housing discrimination complaint?
How do I obtain FHA or HUD information in Spanish?
How do I file a complaint against a national bank?
How do I file a complaint against a local housing program or provider?
(En Espanol) Am I eligible for a mortgage insurance refund?
How do I collect on a bill or lien attached to a HUD Home?
Where can I get assistance if my identify has been stolen?
How can I lodge a complaint involving a Veterans Administration loan?
Who do I contact to pay off my property improvement loan?
How do I file a complaint against a Federal Savings and Loan?
How do I file a complaint against a credit union?
How do I file a complaint against my public housing agency or landlord who receives rent subsidy from HUD?