A re-financing of your primary home should be a simple thing, although in reality its often much more complicated than necessary.
The first thing you need to know is your Interest Rate. Is it fixed, variable, or a hybrid. If it is fixed, you will have a rate of 6.5% for example, meaning that is the rate you will always pay when you make your monthly payments. It is very important to understand the difference between your interest rate and your APR. The actual interest rate that you pay is the figure stated in your Note. Unless there are absolutely no closing costs, your APR is going to be higher than your interest rate. The APR, or Annual Percentage Rate, is your interest rate with the closing costs mixed in to give you an idea of what you are really paying. Two mortgage companies can offer to refinance your home for the same rate, say 5.25%. One of these two companies makes all its money charging exorbitant closing costs, and that is how they make their money, whereas the other company my have lower closing costs. If this is true, then you can compare the APRs and see which is a better deal.
Either way, the actual interest rate is the same. But if the company charges you $10,000 in closing costs than your APR will reflect this and may be as high as 8 or 9 %. The rate you pay is still the stated interest rate, but when you factor in the closing costs and settlement charges the APR may vary. The purpose is to keep consumers aware of the deal they are getting.
An adjustable interest rate varies according to the Index, which can be found in the Wall Street Journal. Instead of an interest rate, you have a margin, for example, 1.5%. To determine your interest, determine the current interest rate (the LIBOR) and add your margin to it. If the interest rate is 5.25% and your margin is 1.5% then your interest rate for that month will be 6.75%.
There are also hybrid rates in which you have a flat rate for a period of years which turns into an adjustable rate after a designated period, often five years.
The next vital piece of information is how much your monthly payment and how many payments you have. If it's a 30-year loan you will have 360 monthly payments to make before the house is yours. Even if you have a fixed rate if you pay an escrow account then the rate could vary. The escrow account pays your home insurance and local taxes, both are which are subject to change. After a year there is an annual accounting and if you have overpaid you should get some money back.
Now that you know how much each payment is for, when it is due, and when you will be out of debt, there are several other features to look at. Does you loan have a pre-payment penalty? In other words, if you win the lottery and are able to afford to purchase the home outright immediately, is there some kind of penalty you must pay to get rid of the lien, so that the mortgage company can still make money. This is also important if you plan to refinance an additional time. If you refinance and there is a pre-pay penalty, and the next year interest rates drop and you refinance again, you will have to pay the pre-payment penalty because the refinancing involves paying off completely the old mortgage.
Also important to note is what happens if you can't or don't make your payments. A mortgage is a lien on your house that gives the mortgage company an ownership interest in your home. If you violate the terms you can lose your home. This is the most important thing to remember when re-financing. Will you be able to make the payments and what is the company's policy regarding non-payment or late payment?
The day for the closing comes and you must sign and initial a huge stack of papers, often without being able to look at them carefully. If you are refinancing your personal home (i.e. its not an investment property) you are given a three day right to rescind the entire transaction. After you sign the papers you can look over them carefully and have a lawyer or friend look them over, and if you have any questions or problems now is the time to contact the mortgage company. If everything is fine then the period will end and the funding goes through. If you are waiting to get a refund check with your refinance remember they can't write it until after that three day period (business days, no Sundays or holidays) is over, and that is not a right that can be waived. If you need the money that day there is nothing you can do. The period must end and they must record the mortgage first.
If you can remember all of these things: your interest rate, monthly payment amount (including escrow), number of payments, pre-payment penalties and late fees, and the consequences of non-payment, your closing should be a smooth process that does not take up too much of your time.
Much of the paperwork is required disclosures about things like lead paint and flood insurance and so are not relevant to the terms of your new loan. Remember to make those payments and soon the house can be yours. And if you can make pre-payment penalties making just one extra payment a year can save you thousands in the long run.
By David L Tamarin
BIO: About the author: David L Tamarin is a licensed attorney who conducts residential refinance closings in the Commonwealth of Massachusetts, and writes articles relating to real estate as well as fiction short stories. His fiction recently appeared in Cyber-Pulp's 3.0 Halloween anthology from Lulu Press and will be in several anthologies to appear in 2005 including Vintage Moon and Mind Scraps, and some of his work is available on the Net.