Should I Refinance My ARM Loan? In deciding whether to refinance an ARM there are some questions you might want to consider in order to determine if refinancing is right for you. 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 ARMs? 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? What Are The Costs? Application fee, title search, title insurance, loan origination fees and points, appraisal fee, prepayment penalty and miscellaneous. Depending on the type of loan you have and other factors, there are a few other closing costs in addition to these. Estimate Your Expenses Loan Fees and Points The origination fee is charged for the lenders work in evaluating and preparing your 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. 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 property. 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. Total Closing Costs 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 web site 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 mortgages and your own interests before you commit to any specific loan.
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