Refinancing Considerations

	Costs associated with refinancing
	How interest rates affect the cost of a loan
	How points affect the cost of a loan
	Types of mortgages:      Fixed Rate and Adjustable Rate
	Building equity in your home

	The rate, or percentage, at which the money is lent to you (i.e., 8%)
	The points, a one-time fee added by the lender (i.e., two points)
	The application fee charged by the lender which may cover credit report and home appraisal expenses and other fees.
	Closing costs, including transfer taxes, title insurance, escrow, inspection, notary, and so on.

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Compare the short-term and long-term impact of a 1% variance on a $200,000 loan:

As you can see, a lower interest rate makes a big difference!
 

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	1 point = 1% of the amount borrowed
	Although points are a fee paid to your lender, they also let you "buy" a lower interest rate
	As a rule, the more points you pay, the lower your interest rate
	One point can "buy" you a 0.25% +/- discount on your rate
	Most lenders require you to pay your points up front

A Savings Comparison

Mortgage	Interest	Points
$200,000	7.5%	0
$200,000	7.0%	2	2 points    = $4,000
Paying 2% of your loan amount could lower your interest rate by as much as 0.5%. This amounts to considerable savings over the life of your loan.

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Fixed Rate

The most straight forward type of loan. Because the interest rate never changes, you pay the same amount every month until the loan is paid off.
 

Adjustable Rate

Because this interest rate fluctuates at predetermined intervals (i.e., every month, every 6 months, every year), it is more complex than a fixed-rate loan.

 

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The term, or length of the loan, is usually 30 or 15 years.

30-year term

This is the most conventional loan term. It allows you to repay slowly, with moderate monthly payments

15-year term

This term allows you to repay twice as fast. Although your monthly payments are higher than a 30-year term (albeit not twice as high), a larger percentage of your payments is applied to principal.

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Term

1) Usually calculated on a 30-year basis

2) Starts with a fixed-rate period, then adjusts thereafter, i.e., Fixed for 3 years, then adjusts every year after

Rate

1) Adjusts at scheduled intervals

2) Adjusts according to an index, i.e., Treasury Bills, LIBOR, 11th District Cost of Funds (COF), CDs, and so on.

Margin

1) Percentage added by the lender to the index interest rate

2) The sum of the rate and margin is the rate you pay, called the fully indexed rate

Other ARM info

1) As interest rates fluctuate, your ARM payments will vary.

2) To minimize the risk of extreme fluctuations, caps are imposed on your rate. Caps protect you by limiting the percentage by which your rate can go up.

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Equity is the portion of your home that actually belongs to you.

Each time you pay your mortgage, your equity increases.

The rate you build equity depends on how much is applied to principal and how much is applied to interest each month.

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