Overview
Cost/Benefit Analysis
Ownership Concerns
Impound Accounts
Prepaid Expenses
Summary

If you want to be contacted concerning possibly refinancing your home loan(s),
enter your information here. I will contact you when rates match your target.

Overview

Refinancing is an excellent way to reduce your interest rate if rates
have dropped since you last financed the home, to pay off a balloon
payment coming due, or to convert from an adjustable rate loan to a
fixed rate loan. You can also often extract some of the cash equity in
your home for other purposes, such as home improvement, creating an
education fund, paying off other borrowed money (consolidating debts),
or for other investment purposes or cash needs. Refinancing requires a
current appraisal, a current analysis and often verification of assets
and income, and most of the same paperwork required when you originally
purchased the home. Property insurance must be adequate, and new title
insurance must be obtained.

Equity in your home may be converted to cash with a "Home Equity" loan,
as an alternative to refinancing, if your existing home loan has a very
low rate compared to current interest rates or other reasons exist for
not refinancing your existing loan (such as a prepayment penalty).

Return to Top

Cost/Benefit Analysis

There are costs associated with refinancing which can vary from zero on
up to almost three or four percent of your loan amount, depending on
your loan amount, desired interest rate, property value, and credit
rating. Fixed costs, which always must be paid either by you or your
new lender, are the appraisal fee, title insurance and escrow fees,
payoff fees, and government recording fees. Loan related costs such as
points, processing, underwriting, and other fees are also often expenses
included in the transaction. Many or all of these fees may sometimes be
reduced or eliminated by accepting a higher interest rate than that
available if all of the fees are paid or included in the new loan. The
homeowner should analyze the costs involved and compare them to the
interest rate reduction to see if the transaction makes sense.

Return to Top

Ownership Concerns

Placing a new loan on your home requires that all owners of the home be
included in the refinancing process. All owners must be co-signers on
the new loan, and must have their credit, assets, and income analyzed.
If the title to the property is held by a trust, the property usually
must be deeded out of the trust for refinancing, then back into the
trust after the new loan is recorded. If the owners of the home named on
the most recent deed need to be changed, this can be done as part of
the refinancing process. Care must be taken to avoid reassessment for
property taxes.

Return to Top

Impound Accounts

Homeowners often have an "impound" or "escrow" account set up with the
existing lender for collection of monthly amounts for taxes, property
insurance, and mortgage insurance. When refinancing such a loan, the
existing lender will refund any unused amounts to you two or three weeks
after being paid off in full. If you want your new loan to include an
"impound" account for collection of any of these items, there will be an
additional amount collected to setup the account at the time of the
refinance. In California, an "impound" account cannot be required if
your cash equity is 10% or more of the value of your property and you
have been responsibly paying your property taxes and insurance.

Return to Top

Prepaid Expenses

When you refinance your home, you must pay the interest owed, property
taxes due now or soon in the future, and property insurance premiums due
now or soon in the future. Home loan interest is paid in arrears,
except for the partial month of interest owed when a new loan is taken
out. When you refinance, a partial month of interest must be paid on
both the loan being paid off and the new loan, resulting in one skipped
monthly house payment. For some refinance situations, over one month of
interest will be owed on the loan being paid off and a partial month of
interest will also be owed on the new loan, causing two usual monthly
house payments to be skipped. When you are refinancing, discuss the
timing of the completion of the refinance with your loan officer so you
will know when to make your normal monthly payments and when to skip
them. If you have automatic payments taken out of your bank account,
cancel this process as soon as your new loan is approved. The same
considerations hold true for payment of property taxes and homeowner’s
insurance. When you are in the throes of a refinance transaction,
coordinate payment of taxes and insurance with the escrow/title company
handling the paperwork for your refinance transaction.

Return to Top

Summary

House payments are usually the biggest check you write, and keeping this
expense manageable is an important aspect of home ownership. Borrowed
money is tax free, and refinancing does not affect your property taxes.
Lowering your interest rate or generating cash for other uses from the
equity in your home is often a wise choice. Interest paid on most home
loans is tax deductible. Contact The Loan Guy for best results.

Return to Top