its portfolio and hasn’t sold it to another lender. It provides the benefit of a lower interest rate and lower monthly payment without having to extend the mortgage’s term, says Greg McBride, a financial analyst at Bankrate.com, which tracks rates nationally.
For example, mortgage modification could allow a borrower who has paid three years into a 30-year, fixed-rate $150,000 mortgage to refinance the remaining 27 years, not the entire 30 years. By refinancing over 27 years instead of 30 years you reduce the interest rate and lower the payment. This really benefits borrowers who paid into the loan for a short time and want the amenities that refinancing brings but can’t afford the higher monthly payments of refinancing from a 30-year, fixed-rate mortgage to a 15-year, fixed-rate mortgage.
Another perk with this option is that borrowers can often avoid out-of-pocket expenses since lenders already have their origination documents. But borrowers should be aware that “[mortgage modification] is good if you don’t want to take extra cash out of the loan or tap into the equity,” McBride says. “It would not work for those wanting to take out equity or extra cash to pay off bills or make home improvements…then you’re looking at refinancing into a new loan.”
For conventional refinances, be sure to do comparison shopping among lenders to find the best terms. Visit several local lenders to determine which offer the most competitive rates. You can also check rates locally and nationally over the Internet by clicking on Bankrate.com, Mortgage Select.com, Mortgage.com, and Mortgage101.com.
EXAMINE HOMEREFINANCING COSTS
The old adage that says you should only refinance to a new rate that is at least two full percentage points below your current rate may no longer apply. Refinancing costs have come down considerably,
courtesy of greater competition among lenders, more refinancing options for consumers, and new mortgage-financing technology. Consumers can often reap solid benefits from refinancing if the new rate is three-quarters of a percentage point below the current rate. Depending on your finances, experts say, consumers might want to finance out-of-pocket expenses into the new rate, thereby avoiding having to pay cash upfront to cover closing costs. In most cases, out-of-pocket costs, which include appraisals, home inspections, and legal fees, may equal about 2.5% of the mortgage amount, depending on where you live.
If you shop around, you can find many lenders that provide zero-cost financing to consumers, although they then charge a slightly higher interest rate on the loan. For example, a borrower refinancing a $150,000, 30-year, fixed-rate mortgage at 6% would have a monthly payment of about $899.33, with out-of-pocket expenses of roughly $3,000. But by increasing the rate by 0.25%, the lender could agree to pay 75% of the closing costs. That would leave the borrower with a monthly payment of $923.58, says McBride.
Perhaps the important thing to consider, if you’re planning on living in the home for a long period, might be to pay cash for out-of-pocket expenses to get a lower rate and monthly payment. That way you can enjoy