The Anatomy of a Refinance

January 8, 2013

Just when you think interest rates are the lowest they’ve ever been, they drop again. This past year has seen such low rates that people are increasingly considering refinancing their mortgages. Refinancing has many advantages, including lowering monthly payments, the possibility of paying off your mortgage earlier, and the potential to eliminate private mortgage insurance (PMI).

Suppose you owe $180,000 on your 30-year mortgage and your interest rate is 6.0%. By refinancing at 3.75%, your monthly principal and interest payments would drop from $1,079.19 to $833.61. Also, if you financed your home with a loan that required less than 20% down, you could eliminate your monthly PMI payment, depending on an appraisal and your principal balance. Refinancing in this situation would dramatically reduce your monthly mortgage payment.

The two biggest decisions you make when refinancing your home are choosing your bank and the title company. Banks’ underwriting fees can vary greatly, as can their interest rates. Many people will look solely at the monthly payments when making this decision; however, consider the amount of time it would take to make up the difference of a $25 monthly payment if the bank with a lower interest rate had an origination charge that was $2,000 higher than another (without considering the time value of money, that’s 80 months, or almost 7 years). Keep in mind that in addition to origination fees, there are the additional costs of the bank obtaining your credit report, an appraisal and tax certifications.

In addition to selecting a lender, you also have the ability to select a title company. Banks require title insurance to be obtained on their mortgages, and this requires a title company to issue the insurance. Many borrowers do not know they have the ability to choose their title company. While the price of the title insurance premium is set by the state and therefore will not vary between title companies, the service a borrower receives will. Some title companies offer the added benefit of a lawyer reviewing and explaining your loan documents and answering any questions you may have at closing.

If you are in the unfortunate position that your home has lost value since you purchased it, refinancing may not be an option, because cash would have to be brought to closing so that the bank’s loan is within a certain loan-to-value ratio, generally 80-90%. What this means is that the amount of the loan, divided by the home value, comes to one of these percentages. For example, if the bank requires 80% loan-to-value and your principal balance of your mortgage is $180,000, your home would need to appraise for $225,000. If it appraised for less, you would be required to pay the difference.  

For borrowers whose homes have lost value, there is the option to refinance through the Home Affordable Refinance Program (HARP). The eligibility requirements are provided on the government’s website, but generally a loan is available to cover 105% loan-to-value, which provides assistance to borrowers who purchased their homes right before the recession began. For more information on these type of refinances, visit Most local mortgage lenders can also assist you with these loans. 

Derek Dissinger is an attorney at Russell, Krafft & Gruber, LLP in Lancaster, Pennsylvania. He received his law degree from Duquesne University and practices in a variety of areas, including Real Estate and Business Law.