FAQ on refinancing
By Bankrate.com

Refinancing can be almost as confusing as your first mortgage application. Bankrate expert Dr. Don Taylor answers some of the more frequently asked questions.

Is it still true that the time to refinance is when the rate is 2 points lower than your current mortgage rate?

Is it cheaper to refinance with the same mortgage company?

Is it common for a mortgage broker to receive a "finder's fee" from a purchaser? If so, what is the normal percentage, and how negotiable is this percentage rate?

What is the difference between the rate and the APR? Which should I be looking at when comparing?

We'd like to refinance without increasing the mortgage amount. I've heard about no-cost refinancings if you pay one point above the interest rate. What can you tell us about this?

Is it still true that the time to refinance is when the rate is two points lower than your current mortgage rate?

Not true. You don't have to wait until mortgage interest rates drop by 2 percent before you consider refinancing your mortgage.

The decision to refinance your home is dependent on many things, including how long you plan to be in the house, how much lower the interest rate will be on your new loan, the closing costs for the new loan, your equity position in the home, and whether you plan to do a cash-out refinancing.

With a plain-vanilla refinancing, you're trying to take advantage of lower interest rates to lower your monthly payments. If you have enough equity in your home, you may even have a side benefit of being able to stop paying Private Mortgage Insurance (PMI).

To take advantage of a lower rate you'll have to close on a new loan and pay the closing costs associated with that loan. That's true even if you opt for a no-cash or low-cash closing. With a no-cash or low-cash closing, the costs still are there, they just are paid for either with a higher interest rate or are included in the principal balance of the loan. (There's truly no such thing as a free lunch.)

If you don't plan on being in the house very long, then the lower payments associated with the refinancing won't cover these closing costs. Bankrate's refinancing calculator will help you estimate your new mortgage payment, closing costs, and the months that it will take you to recoup those closing costs.

Bankrate's survey of closing costs can put a finer point on these numbers. The table below shows an example of why you may not want to refinance for a rate only half a percent lower, but how reducing your rate by a full percent or more has a fairly short payback period.

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.

Is it cheaper to refinance with the same mortgage company?

It just seems logical that it would be easier and less expensive for your existing lender to refinance your home. After all, they know your payment history, and they know 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. They 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, then 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.

This mortgage comparison worksheet from the FTC can help decide between lenders.

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.

That's because Fair Isaac & Co. Inc. (the company that works with the credit reporting agencies to provide your credit score to lenders) considers these multiple mortgage inquiries as one inquiry when calculating your credit score.

Is it common for a mortgage broker to receive a "finder's fee" from the purchaser? If so, what is the normal percentage, and how negotiable is this percentage rate?

A finder's fee, paid to the mortgage broker by the originating lender, is just one way that a mortgage broker can be compensated for arranging your refinancing.

A mortgage broker is an intermediary between you and the lender. Like most middlemen, they add a markup to the wholesale cost, and then you pay the retail rate.

There's nothing wrong with this arrangement as long as the mortgage broker doesn't cut corners to increase his profit margins and provided that he hasn't priced a huge markup in his services.

Bankrate's feature on using a mortgage broker can help you understand how to manage this process. A typical starting point for a mortgage broker is to charge you one point (1 percent of the loan amount) for his services. You may also have to pay an application fee.

Most mortgage brokers don't reveal their compensation until required to by law -- when the loan application has been submitted. The amount of fees and charges that you pay in connection with your loan will be provided on the Good Faith Estimate that the mortgage broker is required to provide you under the Real Estate Settlement Procedures Act.

This disclosure is only an estimate. The final amount will be disclosed on your HUD-1 or HUD-1A Settlement Statement. You are entitled under RESPA to request and receive a copy of the Settlement Statement, with actual closing costs, one day prior to closing.

This is helpful information, but it comes a little too late to help you in comparison shopping or negotiating with mortgage brokers or lenders. A better way to compare lending programs is to use the FTC's online brochure, Looking for the Best Mortgage.

The advantage to using a mortgage broker is that the broker can shop multiple lenders. He's not a miracle worker and can't make someone with a bad credit history magically qualify for a low interest loan. Think of him more as a personal shopper who is helping you find a loan that's right for you.

One good way of keeping your broker honest is to shop rates in your local market using Bankrate. Bankrate's mortgage search feature will provide you with mortgage rates, points and annual percentage rates on loans and can be invaluable in understanding the mortgage market in your community.

If you want to negotiate your best deal with a mortgage broker, you should spend the time and money to know your credit score, review your credit report for errors and correct any errors on your report.

To get a low interest rate, you will need to put your best foot forward. Knowing your credit score will help you understand whether or not you'll qualify for a lender's best rates. All three of the consumer reporting agencies can provide you with a credit score along with a credit report. I think the best choice of the three is to get your FICO score in conjunction with your Equifax credit report.

What is the difference between the rate and the APR? Which should I be looking at when comparing?

The annual percentage rate adjusts the mortgage interest rate to reflect estimated closing costs, including points paid at closing and mortgage insurance.

The Truth-in-Lending Act requires lenders to provide the APR when advertising a mortgage loan and provide prospective borrowers with the loan's APR upon request. APRs aren't perfect, since closing costs are estimated and the lender can round off by up to a quarter percent.

In general, neither the lender nor anyone else may charge you a fee until you have received this information. The Federal Trade Commission has a mortgage shopping worksheet that can help you lay out the costs associated with several loans and identify the loan that is best for you.

And take a look at this Bankrate special report on closing costs that should answer your questions.

Bankrate also provides you with an estimate of a loan's APR when you search for mortgage rates.

With so much refinancing taking place, you need to have confidence that your lender will be able to complete your loan origination in a timely and efficient manner. Ask the lender for references, and check them out with the Better Business Bureau.

We'd like to refinance without increasing the mortgage amount. I've heard about no-cost refinancing if you pay one point above the interest rate. What can you tell us about this?

The thing to remember is that one way or another, you'll be paying the closing costs and fees associated with the refinancing.

Bankrate's survey of closing costs shows the different fees you will face and how they range in value. If you chose a mortgage loan with no closing costs, the costs will either be added to the loan balance or added to the interest rate.

The no-cost loan, where the interest rate is marked up to cover costs, makes the most sense if you plan on being in the house for a short period, typically less than three years. If this is the house you plan on retiring in, then either capitalize the closing cost (add it into the loan balance) or pay it at closing.

Use Bankrate's refinancing calculator to determine how much you'll save in interest by taking the new loan.

-- Posted: Dec. 7, 2001