So mortgage rates at near-30-year lows have finally pushed you off the refinancing fence. You're going for it. That is, as soon as you can figure out the answers to a few other troubling questions: Points or no points? Do you need mortgage insurance? And what about that home-equity credit line you're carrying?
Most refinancers choose a no-points loan -- partly because the prepaid interest on a refinance is not immediately tax-deductible as it is on a home-purchase loan. You have to deduct the points over the life of the loan.But a no-points loan doesn't mean no cost.
"If it's a zero-point loan, we usually tell them to expect $2,600 in fees," Lore Cook, a mortgage broker in Pleasanton, Calif., says.
Most refinancers simply add the fees to their new loan balance and pay the loan off over time. Some lenders do offer a no-cost loan, but you pay a slightly higher interest rate. Fees cover such services as document preparation and notarization, title insurance and paying off the old loan.
Make sure you're getting a refinancing rate on your title insurance -- which could be half the cost of a brand-new policy. You may be able to use an existing survey and save on that cost, too.
You stand to save big if you're able to drop your private mortgage insurance when you refinance. If your home's value has appreciated since you bought it, either because of rising property values or because you boosted its value by remodeling, you may have equity worth 20 percent or more of the value. If so, you won't need private mortgage insurance on the new mortgage.
Dropping PMI could save you $120 or more each month on a $200,000 loan.
It's possible to keep a home-equity line of credit in place when you get a new first mortgage. But if your home-equity interest rate is prime (7.75 percent) or above, you'll save money rolling the balance on your home-equity line of credit into a new first mortgage under 7 percent.
Some lenders will balk if you don't have at least 25 percent equity left in the home after taking cash out (to pay off the home-equity line or another loan). But others will let you take cash out with only 20 percent equity, Cook says.
"You have to be a very well-qualified borrower," she says.