Refinancing your refinancing
5 Tips Home Edition: With the recent interest rate hikes by the Fed, refinancing just got a lot more expensive. Here's what you need to know.
NEW YORK (CNNMoney.com) - The fed raised short term rates for the 15th consecutive time earlier this week. And for millions of homeowners out there who have adjustable rate mortgages, that's very sobering news.
In today's Five Tips we're going to tell you what you need to know.
1. Calculate the impact
In 2006 about 10 percent of all residential mortgages will need to be re-priced, according to the Federal Reserve. And that means Americans are going to be paying a whole lot more. For instance, if you had a $200,000 loan with a 4.5 percent interest rate that was repriced at 6.5 percent, you'll be paying about $300 more a month.
To measure the impact this will have on your mortgage, check out the promissory note from your mortgage lender. The type of loan you have (whether it's a five year one Adjustable Rate Mortgage or a 7 year one ARM) should be indicated. You'll also find information on when your rate lock expires and how much your interest rate is allowed to go up.
For example, your interest rate can't increase more than 2 percentage points a year in most cases. But sometimes, that rate hike can be as high as 5 percent. You also should get information on what your lifetime interest cap is on your loan. For most loans, your rate can't increase more than 6 percent over its lifetime, according to Holden Lewis of Bankrate.com.
Remember, finding out your loan specifics should be easy. The government requires that this information not be in the fine print and that it is on one of the first few pages of your mortgage agreement.
2. Weigh the costs
Refinancing your home takes a lot of dough. You should do the math to figure out if it's even worth the upfront costs. If you have to pay $3,000 in closing costs, but you're only saving about $150 a month by refinancing, it would take you almost 2 years to make up the cost of refinancing.
And it's not just closing costs you should be calculating. You also may have to pay appraisal fees, loan and origination fees. And on top of all that, don't forget you may have to pay title insurance, which can be up to tens of thousands of dollars. To figure out if refinancing will be worth your while, check out the calculators at Bankrate.com.
3. Find the best lender
Fewer people are borrowing today so mortgage lenders are even more eager for your business. That means you'll have more leverage to cut some costs when it comes to negotiating with a lender.
If you've already used a lender for your current mortgage, you may want to consider using them again since you've an established history with them. And you may even be able to negotiate even more of a discount. Here are some places where you can begin your search: Bankrate.com and Yahoo! Finance to find lenders in your area.
4. Forget interest only
The people who have interest only loans are going to feel the biggest pinch. That's because many of those homeowners have not been paying down any of the principle. Once the rates are adjusted, people with interest only loans will have to pay back the principle that has been accruing plus a higher rate of interest.
If you're looking for at a seemingly attractive way to refinance, stay away from the payment option ARM. These are loans with a very low starting rate of 1.5 percent. The problem is that they adjust within one to 6 months. And many people are seduced by these loans because you basically choose what you want your payment to be each month. You could even decide to pay less than the interest on the loan.
Don't be a sucker. You would owe more on the loan at the end of the month than you did at the beginning of the month. That's because you're not including the interest you built up that month. It's called negative amortization.
5. The light at the end of the tunnel
If you've taken out a home equity line of credit, you're very familiar with how just how much your payments increase after a rate hike. In fact, if you took out a home equity line of credit in June of 2004, today you would be paying about double the amount of interest on that same loan.
The good news here is that some economists say the Fed may stop raising rates after another quarter point hike on May 10th. If you don't want to take your chances on the Fed, you may want to take out a home equity loan to pay off your home equity line of credit. Unlike HELOCs, home equity loans have a fixed rate.
Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. Send your questions, your comments and your own ideas to us at firstname.lastname@example.org.