Honey, I Shrunk The Mortgage

Rates are low, and seldom has there been a better time to refinance your mortgage. Here's how, step by step.

to cut the amount of interest you shell out over the duration of the loan? Keep in mind that whatever the amount of your original mortgage, you’ll likely pay two to three times that amount if you stay in the house for the entire life of a 30-year mortgage.

For example, for a $150,000 loan at 7.5%, you’ll pay a whopping $377,561 over 30 years-$150,000, the principal amount, plus another $227,561 in interest. If you’re worried primarily about interest charges, you might think about getting a shorter loan, say for 15 years, or doubling up on payments-instead of refinancing.

That’s exactly what William and Cheryl Brown did when they refinanced their four-bedroom custom-built home in Douglasville, Georgia, a suburb of Atlanta. They bought the house in early 1996 and originally had an adjustable rate mortgage (ARM) that fluctuated when interest rates changed. With the ARM, their rate went from a low of 8.5% to a high of just over 12%. They refinanced, however, in 1998 and obtained a 15-year mortgage at a fixed rate of 9%.

The Browns, who adopted their nephew Eric but are expecting their first baby in February, plan to live in their home for many years to come. They calculated that refinancing will save them more than $100,000 over the life of the loan. Cheryl, 34, who works in the healthcare field, says refinancing has given the Browns more money to do other things-like save for their new addition to the family. “We’ve made a nursery for the baby,” she says.

The couple’s mortgage payment, excluding taxes and insurance, ranged at first from $1,500 a month to as high as $1,800 a month. Now they pay $1,300 a month. “Our refinancing worked out very well,” says William, 38, a software engineer.

As the Browns’ experience illustrates, refinancing can save you a good chunk of money. But if you’re not careful, you can also wind up paying a hefty price-too hefty a price in some cases-when you go to refinance your home. How can you lose out if you’re getting a lower interest rate? By getting dinged with a ton of lesser-known fees.

Here are the most common costs associated with refinancing. Taken alone, many of these items aren’t that costly. But together, they quickly add up:

  • Application fee: A payment to the lender for processing the loan. Cost: varies and may be waived when refinancing with the lender who holds the current mortgage.
  • Appraisal: An appraisal of the home is required by the lender to establish the property’s value. Cost: $200 and up.
  • Credit report: A lender will examine your finances and charge a credit report fee. Cost: $30-$45.
  • Legal: New financing requires a new title search, document preparation, and other legal and paralegal services. Cost: plan on paying for specific services according to local regulations and the requirements of your lender.
  • Loan origination fee: This is a charge the lender levies to grant the loan. The cost is usually 1% of the loan.
  • Points: A point is equal to 1% of the value of a mortgage.
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