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The Newsletter of DiGiacomo, Jaggers, & Perko, LLP, Attorneys

Volume 1, Number 6
Should You Refinance Your Home?
If you bought your home a few years back when annual interest rates hovered around 11 and 12 percent, refinancing now can save you a great deal of money over the term of the mortgage. Or you might be able to switch from a 30-year mortgage to a 15-year, so you can pay off your loan in half the time with roughly the same monthly payments.

Especially if your loan is fairly recent, you may be able to go back to the lender who wrote your original mortgage and sign a few papers. Savings and loans and small town banks, which often keep mortgage loans in their portfolios, are often willing to modify a recent existing loan rather than lose your business. Instead of refinancing, which means paying off the loan and replacing it with a new one, you can cut a deal with the lender to bring the existing loan in line with the market. The new rate might be slightly higher than what you could get if you refinanced, but the costs could be significantly lower because the lender knows your payment history. For loans originated within the past few years, some lenders require only a one-page loan modification form and a fee that might be under $1,000. Ask your lender if a loan modification is feasible.

Likewise, if you hold a VA or FHA mortgage you can probably renegotiate your loan rather than refinancing. Both agencies offer a process they call "streamlining", designed to provide more favorable financing for people who've made their payments on time and who don't want to increase the size of their loan. After all, homeowners with the wherewithal to make their existing mortgage payments would be perfectly capable of making lower ones. Ask your lender about streamlining your loan.

Refinancing's Legal Protections. If you do have to refinance, it often is essentially the same as starting over-with application fee, survey, title insurance, points and closing costs. The process is surprisingly complicated, may take two months and can cost nearly as much as getting a new loan. But the good news is that state and federal law protects you as a consumer and helps you make an informed choice.

In the case of mortgages, federal law requires that the lender reveal all costs of the loan, including such items as appraisal fees, escrow fees, fees for the lender's attorney, service charges, and, most importantly, the interest rate on the loan, shown as annual percentage rate of APR. This is calculated by including the interest to be paid along with other fees, such as any points paid to originate the loan. Comparing APRs from various lenders for refinanced loans gives you important information about what the best loan for you might be.

Most home purchases involve a "federally related mortgage loan", so the federal Real Estate Settlement Procedures Act (RESPA) applies. That means a settlement sheet developed by the Department of Housing and Urban Development (HUD) will be used. RESPA doesn't set prices for settlement services. Rather, the uniform settlement sheet is designed to take some of the mystery out of the process and let you see what you owe at the closing.

Should you Refinance? Generally you can refinance if your home is worth 10 percent more than the loan amount. If you buy private mortgage insurance (PMI), you might get away with 5 percent.

Even if you can refinance and it pencils out to significant monthly savings, be aware that starting over on your loan means you'll end up paying more in interest than you would otherwise-especially if you've been paying on your loan for quite a few years. Lenders allocate your month's payments first to pay whatever interest you owe for that month, then apply whatever's left to principal. Out of an initial payment of $1,800, maybe only $10 goes toward the principal of the loan; the rest is interest. It's several years before you start making significant payments toward the principal; at about year 12 of a 30-year mortgage, payments to principal and interest are roughly equal. Check your most recent statement to see how much of your latest payment went to principal and how much went to interest. If you're to the point where you're making significant inroads on the principal, starting over with a new loan means you'll be back to paying almost all interest.

Comparison Shopping. Be sure to shop at several banks, thrifts and mortgage companies to see what deals are available. (A mortgage broker can help you shop around, but get recommendations from people you trust before engaging one.)

Before settling on a refinancing deal, you might want to engage a lawyer to look out for your interests and make sure everything is filled out properly.

Ask plenty of questions and make sure you get straight answers. Beware of "bait and switch" tactics, where a mortgage broker gets your business with the promise of an especially good deal then claims he couldn't get it past the lender. Ask for a written list of all fees, then check the list at closing to make sure no extra charges have slipped in. Also check all the numbers twice at closing to make sure, for instance, that your latest mortgage payment has been credited.

If your old lender has some of your money in escrow for property taxes and insurance, don't expect to get that money back right away. Lenders often keep escrow funds up to 60 days to cover outstanding tax or insurance bills. When you do get the refund, make sure your premium or taxes weren't paid by both lenders.

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