March 5, 2025
Gaithersburg, MD--As interest rates fluctuate, many homeowners are wondering if now is a good time to refinance. For many borrowers, the short answer is yes, you should certainly consider refinancing your existing loan. Now. There are many theories as to when a refinance is appropriate. The very old, somewhat obsolete two-part rule, which for some reason still rears its ugly head more than it should, was that you should only refinance if you could reduce your current interest rate by two (2) percentage points. This may have made sense when rates were in double digits and property values were substantially lower.
In addition, the second part of the old maxim was the perception that it only made sense to refinance if the borrower could, within approximately twenty-four (24) months from the date of the refinance settlement, save enough money from the reduced mortgage payments to cover all of the settlement costs. For example, if Susan Borrower’s total settlement costs are Two Thousand Four Hundred Dollars ($2,400.00) and Susan was able to reduce her payments by Two Hundred Dollars ($200.00) per month, then she would have made back all of her expenses in twelve (12) months.
However, it is important to understand that these were somewhat general rules and may well be seriously outdated. Again, if Susan Borrower’s interest rate was 11% and was dropping to 10% on her $50,000 loan, (because houses were much less expensive when the old 2% rate drop rule was created) then Susan would only save about $37.37 per month. But if Susan’s rate is now 7.5% and she can drop it to 6.5% on her $600,000 loan, then the 1% drop may result in a savings of $402.88 per month, which is a nice start on a college fund, or paying off other higher interest debt such as student loans or credit cards. The old theory just doesn’t work as well as it did thirty years ago.
In fact, many borrowers may be interested in solely reducing their monthly payment for cash flow purposes or converting an adjustable-rate loan to a fixed rate loan. Therefore, borrowers should not worry about any specific rules that are purportedly set in stone, but should, instead, do what best fits their personal financial situation. Now.
Regarding the settlement costs, while it varies by State, (and our parent company, Atlantic Closing and Escrow handles settlements in all 50 States and DC) most borrowers will find that the majority of the expenses incurred at a refinance settlement are significantly less than those incurred at a typical purchase settlement. For example, for a refinance, the borrower will not need a new Owner’s title insurance policy. Also, in many States, the Lender’s policy can be obtained at a discounted re-issue rate, and some States even have a less expensive Refinance Rate for the new lender’s title insurance policy.
In many States, lenders no longer require the borrower to obtain a house location survey, which is the drawing of the property lines, house location, fence, shed, deck, etc. In some States, if the borrower can provide a survey (from a prior settlement) and they have not made any changes to the property (such as installing a fence, deck, porch, or swimming pool), then the survey requirement may be waived. To obtain this waiver, the borrower must be prepared to sign an affidavit stating that no such changes have occurred.
Regarding transfer and recordation taxes, these fees vary by State, but in most jurisdictions, the charges are substantially less on a refinance than they would be on a purchase transaction. These transfer and recordation taxes, which are often a significant portion of the purchase closing costs, often disappear on a refinance. This alone will reduce the closing costs on a refinance versus a purchase settlement.
Regarding the settlement procedures, it is important that the borrower follows their loan officers instructions carefully because the borrower may be required to obtain certain documentation in advance of settlement, such as current loan payoff information, employment or income verification or proof of a homeowner’s insurance policy. The borrower will also want to verify with the new lender whether they will be required to pay money into escrow for taxes and insurance. While it is likely that they will have to place money in escrow with the new lender for taxes and insurance, the funds which have been paid to the current lender for taxes and insurance will be refunded within two (2) to four (4) weeks after the payoff of the existing loan. Therefore, when calculating the refinance settlement costs, it is important to remember that the old tax and insurance escrow account will be refunded shortly. Therefore, even if the borrower has to come up with some money at closing, a good portion of it will be refunded shortly after the settlement.
As a side note, if you are paying off an older FHA loan (pre-January 21, 2015), you should check with your existing lender to determine whether any notification rules or pre-payment penalties apply. On the older FHA loans, the lender could charge interest up until the last day of the month when the loan was paid off. There are very few of those loans still in existence, as most were refinanced out in the 2020 refinance boom, but it is still something worth looking into. The extra interest can be avoided by simply settling closer to the end of the month and thus avoiding a double payment of interest.
The decision to refinance should be based on many factors, including the reduced monthly payments, the term of the loan, the interest rate, and the overall expense of settlement. However, in most cases, borrowers will find that the benefit of receiving the lower interest rate or monthly payment will far exceed the initial outlay of settlement costs. Also, because of the increased prices of homes in the past few years, an interest rate drop of as little as ¾% could result in significant savings for the borrower.
David Parker is an attorney and the Managing Director of Village Settlements-an Atlantic Closing and Escrow Company. His columns have appeared regularly in local newspapers, magazines, and newsletters. He is the co-author of the book, “Real Estate Practice in DC, Maryland and Virginia.” If you have a topic that you would like him to write about, he can be reached at dparker@villagesettlements.com.
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