Facts for Consumers from the Federal Trade Commission

Refinancing Your Home -- September 1993

Should you refinance your home mortgage? That's a question many 
homeowners are asking, given the lower mortgage rates that are 
currently available.

But, how do you decide if refinancing makes sense in your 
particular case? The answer depends on many factors, including 
your tax bracket, the length of time you plan to stay in your 
home, and the additional costs and charges you must pay for the 
refinancing.

What follows is information to help you decide whether to 
refinance your home mortgage and how to go about doing it. You 
may want to refer to the charts on pages 9 and 10 to see how much 
money you might save if you refinanced your mortgage. (We 
apologize that the charts are not available on-line. To obtain a 
copy of the charts, please request a free copy of the brochure by 
contacting: Public Reference, Federal Trade Commission, 
Washington, D.C. 20580; (202) 326-2222. TDD call (202) 326-2502.)

How Much Will It Cost To Refinance Your Mortgage?

When you refinance your mortgage, you usually pay off your 
original mortgage and sign a new loan. With a new loan, you again 
pay most of the same costs you paid to get your original 
mortgage.  These can include settlement costs, discount points, 
and other fees. You also may be charged a penalty for paying off 
your original loan early, although some states prohibit this.

The total expense for refinancing a mortgage depends on the 
interest rate, number of points, and other costs required to 
obtain a loan. To obtain the lowest rate offered by the lender, 
most lenders will charge several points, and the total cost can 
run between three and six percent of the total amount you borrow. 

So, for example, on a $100,000 mortgage, the lender might charge 
you between $3,000 and $6,000. However, some lenders may offer 
zero points at a higher interest rate, which may significantly 
reduce your initial costs, although your payments may be somewhat 
higher.  

Is The Interest Rate Low Enough To Save You Money?

Talk to some lenders to determine the available rates and the 
costs associated with refinancing. These costs include 
appraisals, attorney's fees, and points. Then determine what your 
new payment would be if you refinanced. You can estimate how long 
it will take to recover the costs of refinancing by dividing your 
closing costs by the difference between your new and old payments 
(your monthly savings). However, the ultimate amount you may save 
depends on many factors, including your total refinancing costs, 
whether you sell your home in the near future, and the effects of 
refinancing on your taxes. 

The old rule of thumb used to be that you shouldn't refinance 
unless the new interest rate is at least two percentage points 
lower. However, many lenders are now offering zero point loans 
and low-cost refinancing. Therefore, even if your rate change is 
less than one percentage point, you may be able to save some 
money by refinancing.

How Many "Points" Must You Pay To The Lender To Obtain The Loan?
In refinancing, lenders usually offer a range of interest rates 
at different amounts of points. A point equals one percent of the 
loan amount. For example, three points on a $100,000 mortgage 
loan would add $3,000 to the refinancing charges.

Shopping for points as well as interest rates may save you money. 
As a rule of thumb, each point adds about one-eighth to 
one-quarter of one percent to the interest rate the lender is 
offering.

Generally, the lower the interest rate on the loan, the more 
points the lending institution will charge. Some lenders offer 
refinancing with no points, but generally charge higher interest 
rates. 

To decide what combination of rate and points is best for you, 
balance the amount you can pay up front with the amount you can 
pay monthly. The less time that you keep the loan, the more 
expensive points become. If you plan to stay in your house for a 
long time, then it may be worthwhile to pay additional points to 
obtain a lower interest rate.

Some lenders may offer to finance the points so that you do not 
have to pay them up front. This means that the points will be 
added to your loan balance, and you will pay a finance charge on 
them. Although this may enable you to get the financing, it also 
will increase the amount of your monthly payments. 

What Other Settlement Costs Will The Lender Require You To Pay At 
Closing?

Settlement costs typically include fees for the loan application, 
title search, appraisal, loan origination, credit check, and 
lawyer's services. You also may be required to pay recordation 
fees or transfer taxes. If you are shopping for a lender, ask 
each one for a list of charges and costs you must pay at closing. 
Some lenders may require that some of these costs be paid at the 
time of application.

How Would Refinancing Affect The Taxes You Owe?

With a lower interest rate on your home loan, you will have less 
interest to deduct on your income tax return. That, of course, 
may increase your tax payments and decrease the total savings you 
might obtain from a new, lower-interest mortgage.
You should be aware of an Internal Revenue Service (IRS) ruling 
with respect to points paid solely for refinancing your home 
mortgage. IRS regulations require that interest (points) paid up 
front for refinancing must be deducted over the life of the loan 
not in the year you refinance unless the loan is for home 
improvements. This means that if you paid a certain number of 
points, you would have to spread the tax deduction for those 
points over the life of the loan. If, however, the refinancing is 
for home improvements  or a portion of the loan is for this 
purpose you may be able to deduct the points or a portion of the 
points under certain circumstances. Check with the IRS regarding 
the current rulings on refinancing, particularly if you are using 
the new loan to make home improvements.

Should You Also Consider A Different Type Of Mortgage?

If you are thinking about refinancing your mortgage, you might 
want to consider other types of mortgages. For example, you might 
want to look into a 15-year, fixed-rate mortgage. In this plan, 
your mortgage payments are somewhat higher than a longer-term 
loan, but you pay substantially less interest over the life of 
the loan and build equity more quickly. (Of course, this also 
means you have less interest to deduct on your income tax 
return.)

You also might want to consider refinancing if you have an 
adjustable rate mortgage with high or no limits on interest rate 
increases. You might want to switch to a fixed-rate mortgage or 
to an adjustable rate mortgage that limits changes in the rate at 
each adjustment date as well as over the life of the loan.
If you decide to apply for refinancing with a particular lender, 
and if you do not want to let the interest rate "float" until 
closing, get a written statement guaranteeing the interest rate 
and the number of discount points that you will pay at closing. 

This binding commitment or "lock-in" ensures that the lender will 
not raise these costs even if rates increase before you settle on 
the new loan. You also may consider requesting an agreement where 
the interest rate can decrease but not increase before closing. 
If you cannot get the lender to put this information in writing, 
you may wish to choose one who will.

Most lenders place a limit on the length of time (say, 60 days) 
they will guarantee the interest rate. You must sign the loan 
during that time or lose the benefit of that particular rate. 
Because many people are refinancing their mortgages, there may be 
a delay in processing the papers. Therefore, you may want to 
contact your loan officer periodically to check on the progress 
of your loan approval and to see if additional information is 
needed. 

What Do You Look For When Shopping For A Home Mortgage?

If you decide to refinance your mortgage, shopping around by 
calling several lending institutions to ask each one what 
interest and fees they charge will help you get the best deal 
available. Also ask each about their "annual percentage rate" 
(APR) and compare them. The APR will tell you the total credit 
costs of the refinancing, including interest, points, and other 
charges. 

Remember, you do not have to refinance your mortgage with the 
same lender that provided your original mortgage. However, to 
keep your business, some lenders will offer their original 
mortgage customers the incentive of lower mortgage interest 
rates, sometimes with reduced closing costs.

What Disclosure Must The Lender Give You?

For a refinancing, the lender must give you a written statement 
of the costs and terms of the financing before you become legally 
obligated for the loan, as required by the Truth in Lending Act. 
You usually will receive the information around the time of 
settlement, although some lenders provide it earlier. You will 
want to review this statement carefully before you sign the loan. 
The disclosure tells you the APR, finance charge, amount 
financed, payment schedule, and other important credit terms. If 
you refinance with a different lender, or if you borrow beyond 
your unpaid balance with your current lender, you also must be 
given the right to rescind the loan. In these loans, you have the 
right to rescind or cancel the transaction within three business 
days following settlement, receipt of your Truth in Lending 
disclosures, or receipt of your cancellation notice, whichever 
occurs last.

Will The Lender Refund Your Application Fees If You Do Not Sign 
The Mortgage?

When you apply for a mortgage, some lenders require you to pay a 
special charge to cover the costs of processing your application. 
The amount of this fee varies, but it may be $100 to $200. 
Usually, you must pay this charge at the time you file the 
application.

Some lenders do not refund this application fee if you are not 
approved for the loan or if you decide not to take it. So, before 
you apply for a mortgage, ask lenders whether they charge an 
application fee. If they do, find out how much it is and under 
what circumstances and to what extent it is refundable. However, 
if you elect to cancel the transaction within three business days 
after you close the loan, as discussed above, you are entitled to 
a refund of all costs and charges imposed for the credit 
transaction.

Where Can You Go For More Information?

If you have further questions about refinancing or problems with 
financing companies, you may write to: Correspondence Branch, 
Federal Trade Commission, Washington, D.C. 20580.  While the FTC 
cannot resolve individual disputes, it can act when it sees a 
pattern of possible law violations. 

For a free copy of Best Sellers, a listing of all the FTC's 
consumer publications, write to: Public Reference, Federal Trade 
Commission, Washington, D.C. 20580.

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