Save Money on Refinancing

Refinancing your mortgage? Fine, but time it right. Getting your house reappraised so you can cancel private mortgage insurance? Good idea, but call the lender before calling an appraiser. If you don't attend to details and communicate with the lender, you could waste money, from a little to a lot.

Here are two little-known ways that you can trip up--and how to save money or avoid spending it needlessly.

When you refinance your mortgage with another lender, you almost always pay at least a day or two of overlapping interest on both loans. To keep the overlap from growing to three or four days, many lenders don't fund refinancing transactions on Fridays unless it's in the interest of the borrower.

"This is a relatively simple issue," says Dick Lepre, a loan officer at RPM Mortgage in San Francisco. "You have to look at it from the point of view of your old lender and your new lender."

Both lenders are entitled to earn interest from the day they lend the money until the day they receive final payment, Lepre says. In a refinancing transaction, the new lender funds the loan by wiring money to the bank of the escrow agent or attorney who is responsible for disbursing the money. As soon as the new lender sends that money, you pay interest.

The old lender doesn't get the payoff money immediately. Customarily, the escrow agent pays off the old loan by sending a cashier's check by overnight courier. The courier is cheaper and less of a hassle than wiring the money.

All the while, you're paying interest on both loans.

What if your loan is funded on a Friday? The old lender gets the check on Monday, and you have paid overlapping interest on Friday, Saturday and Sunday.

There are some cases in which you might not mind paying an extra two days of overlapping interest. Maybe you're receiving cash as part of your refinancing deal, and you want the cash quickly. Or maybe your rate lock expires on Friday or over the weekend, making it impractical to wait until Monday.

Another issue that trips up homeowners is cancellation of private mortgage insurance, or PMI. A reader named Ray complains about his unsuccessful effort to cancel PMI. His mistake: He didn't call his mortgage servicer first, so he wasted money on a useless appraisal.

Most lenders require PMI on a first mortgage when you borrow more than 80 percent of the home's value. You can ask to have PMI canceled after you have paid enough to have 20 percent equity in the house, based on the home's value on the day you closed the loan.

Some homeowners manage to cancel PMI early by getting their houses re-appraised. If the value has risen enough, they can add the appreciation to the equity they have paid and get above the 20 percent threshold for paying PMI.

But that tactic works only under some circumstances, Ray found out. He refinanced his loan in 2001, and in December hired an appraiser. The value had appreciated, so Ray submitted the appraisal to his lender and asked that the PMI be canceled.

"They responded with, 'It is their policy to keep PMI for at least two years,"' a disappointed Ray wrote in an e-mail.

It's not really the lender's policy to keep PMI for at least two years. It's the policy of Fannie Mae and Freddie Mac. If your mortgage is sold to Fannie Mae or Freddie Mac, you could be required to continue paying PMI for at least two to five years, even if your home's value skyrockets.

(Distributed by Scripps Howard News Service. E-mail Holden Lewis at hlewis@bankrate.com.)