Ask the attorney


Recently the Federal Reserve Board lowered the discount rate and the federal funds rate.  Those key interest rates affect significantly not only the prime lending rate, but long-term mortgage interest rates as well.  Currently, mortgage interest rates are near 40-year lows. 

Now that long-term mortgage interest rates have fallen, scores of homeowners should find it beneficial to refinance their existing mortgages in order to take advantage of the lower rates. 

My real estate processors, my associate attorneys, my partners and I have received numerous phone calls from former and prospective clients regarding the process of refinancing and, in particular, the cost of refinancing. I will take this opportunity to detail the costs involved and to help you and others evaluate whether refinancing would be financially beneficial.

Let us assume that your mortgage balance is $200,000.00, that your interest rate is 8 percent per annum, and that your loan is being paid over 30 years. An amortization schedule will show that your present monthly payment of principal and interest is $1,467.53. If you were to refinance your mortgage to reduce your interest rate to 6.25 percent per annum, your new monthly payment of principal and interest would be $1,297.20, a difference of $170.33 per month.

The next step in evaluating whether to refinance is to determine the overall expenses of refinancing. Assuming that you are not seeking to borrow new money over and above the amount of your present loan, though you may choose to do so, your costs would fall into two categories: points and settlement costs.

Points are charged by the refinance lender and represent a percentage of the amount of the loan. Let us assume that you will be required to pay two points. Two percent of $200,000 is $4,000.

In addition to the points, you will be required to pay settlement costs consisting of attorneys fees of $250 to $300, abstract fees of $200, recording charges about $300, title insurance premiums of $450 to $600, survey charges of around $250, and miscellaneous lender charges and escrows for real estate taxes and hazard insurance. As a general rule of thumb, you can estimate that the total of all settlement costs, exclusive of points, will approximate 1 percent of the new loan. In our example, closing costs would be $2,000.

Added together, therefore, your costs to refinance would be about $6,000 that is, $4,000 in points and $2,000 in settlement costs.

At a monthly savings of $170.33, it would take about 35 months to recoup your refinance expenses. Thereafter, your monthly savings could be used as you see fit. 

On balance, and generally, therefore, if you intend to keep your residence for more that two or three years and the interest rate differential between your present loan and your refinance loan is 2 percent, it would pay to refinance now. It is also possible, by the way, to borrow the refinance expenses from the refinance lender and to add them to the new loan. It is not necessary to pay the points and settlement costs in cash. 

If any of my readers would like to explore the possibility of refinancing before the present window of opportunity provided by falling interest rates closes, my staff and I would be happy to discuss the matter with you.  You may phone us at 703-764-0600.

John Kent Kidwell lives in Herndon and is an attorney at the law firm of Kidwell, Kent & Curran in Fairfax City. Readers may write to him at Woodson Square, 9695 C Main St., Fairfax, VA 22031.