Mortgage refinancing basics
Weigh the costs and benefits of mortgage refinancing to determine if you’ll come out ahead.

Your mortgage may have a 30-year term, but not many homeowners stay with the same loan for that long. In fact, the average American refinances his or her mortgage every four years, according to the Mortgage Bankers Association. That’s because paying off your present mortgage and taking out a new one can mean big savings over several years. However, mortgage refinancing comes with a price in the short term, so it’s important to consider both the costs and benefits before making your decision.

Why refinance?
Here are some reasons to consider mortgage refinancing:

• To obtain a lower fixed rate. If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably. A $150,000 mortgage with a 30-year term and a rate of 8 percent, for example, carries a monthly payment of $1,100. The same mortgage at 6 percent will have a payment of less than $900 a month.
• To switch to a fixed rate or an adjustable rate mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates initially, but some homeowners find the fluctuations stressful. If rates are on the way up, you might consider locking in at a fixed rate and consistent monthly payment. On the other hand, if you want to reduce your monthly payments and are comfortable with the interest rate changes of an ARM, it could save you money to refinance to an ARM.
• To improve the features of your ARM. Mortgages with adjustable rates have protective caps that limit how much your payments can increase in any given year and over the full term of the loan. You may be dissatisfied with the caps on your current ARM and feel you can negotiate more favorable features if you refinance.
• To build your home equity faster. If a recent change in your financial situation has made it possible for you increase your monthly payments, you might want to refinance your mortgage with a shorter term. The higher payments will enable you to pay off your home more quickly and to save substantially on long-term interest charges. However, if you are disciplined you can also opt not to refinance and simply pay more towards your principal each month.
• To reduce your monthly payments. Refinancing for a longer term will lower the amount you have to pay each month. You will end up paying more in interest charges over the life of your loan, but if you’re having difficulty making your current payments, this strategy could provide some relief.
• To turn home equity into cash. You may want to take out a new mortgage with a larger principal, in order to turn some of your home equity into cash for a major expense. This is called cash-out refinancing. The advantage of taking out a loan secured by your home is that you can get a lower rate of interest than you can with an unsecured loan or credit card. However, if the interest rate offered for your refinanced mortgage is higher than your current rate, a home equity loan or line of credit might be a better choice.

Is mortgage refinancing right for you?
If you’re refinancing in order to pay less interest, you won’t usually see the savings right away. That’s because lenders typically charge fees when you take out a new mortgage, and you may also have to pay a penalty for getting out of your old one. To determine whether refinancing makes financial sense for you, consider these issues:

• How long you plan to be in your home. If you expect to move in a year or two, you may never realize the potential savings you’d get from refinancing. As a rule of thumb, the longer you plan to stay in your current home, the more sense it makes to refinance.
• The prepayment penalty on your current mortgage. Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months’ worth of interest payments.
• The costs of the new mortgage. When you take out a new loan, your lender may charge a number of fees including application, appraisal, origination and insurance fees, plus title search, insurance and legal costs that can add up to thousands of dollars. Lenders may also charge discount points, which are paid upfront to secure a lower interest rate. As a guideline, expect fees to eat up any potential savings unless your new interest rate is at least a half a percentage point lower than your current one.
• The true difference in borrowing costs. When you’re considering refinancing, remember that the posted interest rate doesn’t reflect the entire cost of the mortgage. The amount you pay over the life of the loan will also be affected by the length of the term, whether your rate is adjustable or fixed, whether you paid discount points, and what upfront and ongoing fees you incur. One way to compare mortgage costs is to look at the annual percentage rate (APR), which takes into account not only the base interest rate, but also points and other charges. All lenders must follow the same rules when calculating the APR, so it’s a good basis for comparison.
• Your reduced tax savings. If you claim mortgage interest on your tax return, refinancing to a lower rate will mean that you’ll have less mortgage interest to deduct. You will still save money overall, but your real savings from refinancing may not be as large as you first believed. Consult a tax advisor who can help you understand the tax implications of refinancing.

The break-even point
In the end, deciding whether the cost of mortgage refinancing is worth it comes down to a simple question: “How long will it take before I start to save money?” In theory, this is a simple calculation. You start with the amount you will save by lowering your monthly payment. Then you add up all the costs associated with refinancing and divide the total by your monthly savings. This will reveal the number of months it will take to reach the break-even point.

For example, let’s assume that refinancing would lower your payment from $1,000 to $800 (for a savings of $200 per month) and your prepayment penalty, closing costs and points add up to $5,000. Divide $5,000 by $200 and you’ll see that it would take 25 months to realize the savings.

In reality, however, your break-even point also depends on other factors, including your tax situation and whether you pay closing costs upfront or add them to the principal of your new mortgage. If you are refinancing and your home has appreciated in value, you may also be able to save by canceling your private mortgage insurance.

For a more accurate estimate, use our refinancing calculator. Or consult a financial advisor who is familiar with your tax situation.

What is PITI?

Q: In many mortgage articles I see references made to “PITI.” Could you please explain what this is?

A: PITI is an acronym lenders use to describe the different components that make up your monthly mortgage payment. It stands for: principal, interest, taxes and insurance.

Principal: This is the actual amount of your loan. A portion of the principal is usually paid off with each mortgage payment thereby gradually reducing the outstanding balance you owe and increasing your home equity (the portion of the home you own). The principal component of each payment is typically very small in the first few months, but increases during the life of the mortgage as the mortgage balance drops. Some types of loans do not have principal payments, including interest-only mortgage, which does not include any principal repayment in the monthly calculation.

Interest: The interest is the amount a lender charges you for borrowing the money to buy the home. It consists of a percentage of the outstanding principal. Initially, the largest part of your mortgage payment goes toward paying off the interest. However, as time goes by and you begin to pay off your mortgage, more of your monthly payment goes toward paying down the principal and less toward paying off the interest. Your mortgage rate can change periodically if you have an adjustable-rate mortgage. It can also change if you renegotiate your mortgage or make a lump payment to lower the principal.

Taxes: Many homeowners also pay their real estate taxes as part of their mortgage payment. The lender passes these on to the local municipality to pay for community schools, roads, police and other municipal services. Taxes can be a significant part of your total mortgage payment, and tax rates can vary significantly from area to area. So it’s wise to find out the local tax rate before you purchase a home.

Insurance: The fourth component of your payment is homeowner’s insurance, which may be collected by your lender and paid to your insurance company. Typical homeowner’s insurance protects your home and property against fire or other damage. You may need supplemental coverage for other risks. For example, you may need flood insurance if your home is in an area with a high risk of flooding. If you buy your home with less than a 20 percent down payment, you may also be required to have private mortgage insurance (PMI) to protect the lender from default.

To calculate your total PITI:

• Enter your current mortgage balance and the term or amortization period of your mortgage into the LendingTree Mortgage Calculator to help you calculate the principal and interest components of your monthly payment.
• To calculate your property taxes, divide the assessed value of your home by 100 and multiply by the tax rate. For example, for a $100,000 home in an area with a tax rate of 2.40, you would divide $100,000 by 100 (= $1,000) and multiply by 2.40. Your annual taxes would be $2,400. Dividing by 12 gives you the monthly installment: $200. (Some municipalities have a tax structure that requires a home’s value be divided by 1,000 — you can check this with your local tax office.)
• To calculate your monthly insurance payments, divide your total yearly premiums by 12.

The combined sum of the above will equal your total PITI:

Adjustable rate mortgages: What you need to know
If you’re considering an adjustable rate mortgage (ARM), here’s what you need to know before you sign.

One of the attractive things about a fixed-rate mortgage is its simplicity: your interest rate never changes, and neither does your monthly payment. With an adjustable rate mortgage, however, your interest rate and payments can fluctuate, and this can cause confusion if you’re not prepared.

An ARM may be less expensive than a fixed-rate loan in the short-term and therefore can be an attractive alternative. But it’s important to understand the following before deciding if one is right for you:

1. How your rate is set
The interest rate on an ARM is calculated according to two figures: the index and the margin. The index is a published rate that changes according to overall market conditions. Lenders may use a number of different indexes including, for example, rates paid on U.S. Treasury securities. The margin is the number added to the index to determine the interest rate on your mortgage. It usually remains constant for the life of the loan. For example, let’s say your ARM’s index is the rate on three-year U.S. Treasury securities, which at the time of writing stands at 4.8 percent. If your margin were 2 percent, then the interest rate on your mortgage would be 6.8 percent. It may, however, be less than this at the start, as most lenders offer low introductory or start rates for a fixed period of time. Typically, the lower the start rate, the shorter the period is until the first adjustment.

2. When your monthly payments change
The index your ARM is based upon may change frequently, but the interest rate of your mortgage is only modified periodically at your adjustment period. Often the adjustment period is six months or a year, though your lender may specify other intervals. Some mortgages have a fixed rate for a number of years, followed by regular adjustment periods. With a 5/1 ARM, for example, your rate will not change during the first five years, after which it will be adjusted annually. Each time your rate is adjusted, your monthly payment will rise or fall accordingly, based on your index and margin.

3. What protection you have
ARMs always carry some inherent risk, but you can be protected from very large or rapid increases in your monthly payment. Virtually all adjustable-rate mortgages have an overall ceiling or cap that limits how high the rate can climb over the life of the loan. For example, say the index goes up to 7 percent and your margin is 2 percent. Without a rate cap, your mortgage would rise to 9 percent. However, if you had a rate cap of 8 percent, you would be protected from having your mortgage go above 8 percent. Most ARMs also have periodic caps that specify the maximum amount the rate or monthly payment can go up in a single adjustment period. Be aware that rate increases that are capped in one year can sometimes carry over to a future year when the index does not rise. Ask your lender if these carryovers apply to your loan.

4. The impact of interest rate swings
The best time to take out an ARM is when interest rates are falling. If your loan’s index declines, your monthly payment will drop at the next adjustment period. In an environment of rising interest rates, however, ARMs can be stressful, since your monthly payments may go up at each adjustment period. Even if these increases are capped, you may well find yourself paying more than homeowners with fixed-rate mortgages. Because it can be hard to predict where interest rates are headed, it’s important to understand these potential risks when considering an ARM. It’s also wise to conduct a “stress test” to ensure you can afford to pay the maximum you could be liable for at each adjustment. If you can’t, then an ARM is probably not right for your situation.

5. When it’s time to refinance
It usually does not make sense to refinance an adjustable-rate mortgage if interest rates are falling. If they’re heading upward, however, you may want to consider looking for a new ARM with a lower margin or better protective caps. Or, if you are uncomfortable with the swings in your monthly payment, refinancing to a fixed-rate mortgage can offer peace of mind.

Remember that refinancing always comes with upfront costs that you need to weigh against future savings. Use the LendingTree refinance calculator to help you crunch the numbers.

How to buy title insurance
What buyers and borrowers need to know about ownership protection.

Not surprisingly, home buyers are often unfamiliar with title insurance, which protects lenders and owners from claims against the “title” or ownership of real property. Some of that unfamiliarity concerns how this important type of insurance is bought and paid for.

Search is completed before title is insured
Title insurance companies issue title insurance after they complete a “title search,” in which they research the history of the property’s ownership to identify any “defects” or problems in the chain of title. Once that search is completed, an examiner reviews the findings and, if the examiner is satisfied, the insurance will be issued.

If the search turns up any problems, the issuance of title insurance may be delayed or denied. Common problems include outstanding tax liens or mortgages that presumably were paid off, but weren’t recorded as such. Few, if any, lenders will go forward with a borrower’s financing if the title can’t be insured.

In some states, title insurers issue a “commitment” while in other states they issue a “binder” or “preliminary” title report. “Prelims” are more common on the West Coast, while commitments and binders are more prevalent in other regions of the country. (The sale of title insurance in Iowa is prohibited by state law.)

Buyer or seller pays one-time premium
Title insurers typically handle both the search and the issuance of the lender’s and owner’s title policies. The premium is paid only once, when the policy is issued, not annually or monthly as is the case with other types of insurance.

When a home is sold, either the seller or buyer typically pays for the title insurance, or the seller and buyer may share the cost. Real estate customs and practices differ in different localities, and payment of closing costs is always subject to negotiation between the seller and buyer.

An owner’s title policy usually can be bought along with a lender’s policy for a relatively small additional cost. An owner’s policy also can be purchased separately, though the cost typically would be higher.

New title insurance needed to refinance
Homeowners who refinance an existing mortgage typically must purchase a new lender’s title policy even if the same lender originates the new loan. If the loan is refinanced within a few years, the insurer may discount the cost of the new policy since the search period will be relatively short.

Understanding the intricacies of title insurance may prove daunting for many home buyers, yet it’s still smart to ask questions and make sure you understand any issues that impact your ownership of your home.

It’s customary in most places for the insurer to send the title policy to the new homeowner by U.S. Mail after the transaction closes. Be sure to keep the policy in a safe and secure place with other important financial and legal documents.