Q: We bought our house when mortgage rates were at their highest. Now we read that rates may drop as low as 10 percent by the end of the year. Are we stuck with our original rate (which is unconscionably high) or can be renegotiate for a lower rate?
A: If you obtained your mortgage from a commercial lender -- a bank, savings and loan association or mortgage banker -- you should have no problem obtaining a lower rate, but it may cost you something.
Look at the terms of the mortgage documents you signed at closing. (If you do not have copies of the deed of trust and note, get them from your lender: They are important documents to keep in your files.)
These documents will tell you the answer to your question.
You have no doubt signed up for a 30-year mortgage. If you are interested in obtaining a lower rate, you will have to prepay the existing mortgage and obtain a new one. This is known as a refinance.
The documents you signed will spell out the terms of any prepayment penalty. In Maryland, for example, if your loan is for more than 8 percent, there should be no prepayment penalty. i
In the District, there may be a penalty, but it can only be imposed for three years. At the end of a three-year period, the lender cannot hit you with any penalty for early payment. In Virginia, lenders have the right to assess a prepayment penalty, and the exact terms of that penalty can be found on the face of the note.
Before you consider refinancing, ask yourselves how long you intend to live in your current home. If you plan to move in a year or two, it may not pay to go through the time and expense of a refinance.
Additionally, you should ask your title attorney or settlement company what the cost of refinancing will be.
If you refinance, for all practical purposes you will have to go through another settlement. This means you will be charged a new settlement fee, the cost of a new title insurance policy, lender's points, credit reports, appraisal fees and in some jurisdictions even another recordation (transfer) tax.
Thus, if you were to refinance, the out-of-pocket expenses you will incur may not be worth the lower interest rate.
Let me give you a concrete example.
You have an $80,000 mortgage at 15 percent. Your monthly payment (principal and interest) is $1,011.56. If you were to refinance at, for example, 11 1/2 percent, that same mortgage would cost you $792.24 a month -- a savings of $219.32 per month. However, your new settlement costs may be as high as $2,000 or $3,000, depending on your new lender and on the terms of any prepayment penalty. Thus, the savings on a new loan may be eaten up quickly.
If there is a possibility of refinancing at a lower rate but with a higher mortgage, you can pull out some of the equity from your property. Under this arrangement, the money you pull out is tax free, and you can reinvest it.