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Posted: 3:51 p.m. Wednesday, Nov. 27, 2013

Mortgage Refinance Guide

Clark's guide to refinancing your mortgage

By Clark Howard

ClarkHoward.com


Are you wondering how to refinance, when to refinance, and what all of the terms really mean? We've put together answers to some of the most Frequently Asked Questions regarding refinancing: 
   
Should I refinance? 
As a general rule, if you can shave at least a half point off your current interest rate, it is a good idea to refinance. If you currently have a home mortgage above 7%, the time is now to make a change. However, your decision should also depend on how long you plan to stay in your home. If you are only going to stay 2 to 5 years, you should figure out the cost of the refinance. Will you pay more in closing costs than you will save on your monthly payment? For those who plan to move after a few years, a "no-cost" loan, which drops your mortgage payment a significant amount, would probably make sense.  
 
What is a "no cost" or "zero cost" loan? 
A "zero cost" loan means that you pay no closing costs for the loan. A "zero cost" loan is different than a "zero point" loan. You will probably have to take a higher rate to get a zero cost loan, but that is okay. Closing costs include appraisal, credit report, processing fee, underwriter fee, attorney fee, notary fee, title insurance and any other fees the lender may make up. Closing costs typically cost between $2,000 and $2,500. 
   
How do I find good rates? 
Clark likes using Bankrate.com for quotes. It gives you the option of selecting the number of points you want to pay. Remember to call and verify the loan rate, and make sure the loan officer you speak to adheres to that published rate. Choose the lender that offers the lowest total cost for the first 30 months of the loan.

The data is so stark right now that the big banks are not a place you want to go for a refi. Try looking at mortgage brokers, credit unions, small local community banks, or even online banks for a rate quote.

When you're shopping, use a form like the American Enterprise Institute's mortgage cheat sheet (and definition of terms) to get plain-English disclosure about the terms of your desired loan.
 
What are points? 
A point represents 1% of the total amount of money borrowed. There are two types of points. Borrowed points are a profit paid to a lender. Discount points are a fee paid in advance to lower the interest rate over the life of a loan.   
 
Do I have to stay with my existing mortgage company when I refinance? 
No. You are under no obligation to remain with your current lender. But it is a good idea to let them know what you're planning to do so they'll offer you their best rate. 
   
Should I change from a 30-year to a 15-year loan when I refinance? 
If you can afford to pay a bit more each month to pay off your loan, this is a smart move. Clark's previous producer Teresa was in this situation. The balance on her home was $118,000. She had been offered a 15-year "zero cost" loan at 6.5 percent. Her monthly payment would go up to about $1,300. That's $200 more than the $1,107 she would pay on a 30-year loan. But, over the life of the loan, the 15-year loan would save her $8,795. For help calculating your costs, go to hsh.com
   
What is a "good faith estimate?" Do I need one? 
Yes. Every lender you talk to should mail or fax you a good faith estimate of all charges when you discuss a refinance with them. The estimate will include such things as a list of fees, including closing costs, calculated taxes and your estimated monthly payment. The estimate gives you documentation to refer to at the closing of the loan, as well.  

You still may qualify for a refinance as part of the federal Making Home Affordable program -- even if you're upside-down in your home. To determine if you're eligible, starting by finding out if your loan is held by Fannie Mae or Freddie Mac. Contact Fannie at 1-800-7-FANNIE and Freddie at 1-800-FREDDIE from 8 a.m. to 8 p.m. ET. Start with Fannie Mae -- they're the larger of the two.

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