Mortgage Refinance

Studies have shown than more then half of American property owners either pay more than they need to for their mortgage or they are locked into unsuitable mortgages. You should at least take a good look at your current mortgage even if you have no notion of refinancing. Perhaps you have already thought about a mortgage refinance. Or perhaps after a good look at your current mortgage, you will think it’s time to take a closer look at your options.

Regardless of why you are looking for a mortgage refinance, there are some things that will help you make the right choices. Just in case you were wondering, the top five reasons for a mortgage refinance are:

1. To get cash out of your home’s equity
2. To consolidate your debts
3. To get a line of credit with the equity
4. To lower your payments
5. To lock into a new rate before your current mortgage’s term is over

It’s comforting to know that your reasons are likely shared by a number of other people in the same situation. This means that you can learn from the experience of others by considering the following tips.

Tip #1. To qualify for a mortgage refinance, you need one of these three: good income, good credit or a good equity in your home.

Tip #2: The easier mortgage refinance loans to apply for are the fixed rate, the closed, and the long term mortgage refinance loan. You can also apply for a combination of these three types.

Tip #3: The easiest of the above type of mortgage refinance loans to qualify for is the long term loan (long term is considered to be at least six years.) While these long term mortgage loans can be as long as 25 years, 6-10 years is more typical. The rate might be a little higher than a short term mortgage refinance but they are easier to qualify for.

Tip #4: A mortgage refinance is better than a second mortgage loan if you have an open mortgage. This means that you don’t have to pay a penalty for ending your current mortgage. If you have a closed mortgage loan, you pay a penalty to your lender. If the penalty is high enough, you are better off getting a second mortgage rather than paying closing costs to mortgage refinance.

Tip #5: Paying points can pay off if you plan to have the loan for more than four years. Points are prepaid interest fees that are paid upfront on a mortgage loan to with the goal of reducing the mortgage’s interest rate. Basically you pay now for lower mortgage payments later.

Tip #6: Be careful with any low initial interest rate deals where the payments balloon on you in a few years.

Tip #7: Avoid private mortgage insurance by leaving at least 20 percent equity in your home. It can add an easy $1,000 a year or more on your mortgage without adding any equity.

Tip #8: Read the fine print. Analyze lender fees. If you check with the Department of Housing and Urban Development they can give you a list of standard fees.

Tip #9: Shop around for the best deal. Check with a mortgage broker, your current lender, and online.

Tip #10: When you finally decide who to do your mortgage refinance with, get the lender to put your interest rate, closing costs, and any special features (such as a penalty for early payout of the mortgage) in writing.

It’s a matter of trust and research. A mortgage refinance can be a real benefit to you. The important thing is to not get carried away with the excitement of a better deal and not pay attention to all the fine points.

Bookmark It

Hide Sites

Perhaps you have read or heard that the appropriate time to obtain a mortgage refinance is when an interest rate reduction of at least 2 percent is attainable. While this may be the ideal objective, there is no quick answer as to when the best time is to obtain a mortgage refinance. Times have changed; you should not fall too easily into the rate game.

You may want to ask yourself the following questions before you consider getting a mortgage refinance:

1. How many years do you intend to stay in your home?
2. How much can you save on your monthly payment with the new interest rate of the mortgage refinance?
3. How much will mortgage refinance cost?

In order for mortgage refinance to make sense, you must be able to analyze the breakeven period in your particular circumstances.

Achieving Breakeven on Mortgage Refinance Costs

Breakeven period is the length of time to recover all mortgage refinance costs after your loan takes effect. If you plan to move in the next few years, a mortgage refinance may be counterproductive. As a general rule, the bigger interest rate you can reduce on your mortgage, the quicker you recover your costs. Conversely, the greater the cost of mortgage refinance, the longer you reach breakeven. The ideal breakeven period would be less than a couple of years.

To help you estimate the breakeven period and to evaluate your mortgage refinance options, try using the mortgage refinance calculators on the Web. Look for calculators that take into account a number of factors such as mortgage refinance costs, your tax bracket, the speed of paying down principal, the time-value of money, and the rate of return on your money if you invested it elsewhere instead of paying for a mortgage refinance.

Replacing a 25- or 30-Year with a 15-Year Mortgage Refinance

Negotiating shorter maturity for your loan is a good way to lower your rate and save thousands of dollars in total interest payments. Again, you need to calculate breakeven periods. If you can get a big enough difference in interest rates, you may be able to reduce the term without increasing the monthly payment too much.

But if a significant rise in monthly payment will ensue, be careful to avoid overextending your resources. If your job is unstable, or you think you cannot handle a larger payment if suddenly you become unemployed, then it’s better to put off plans of taking out a mortgage refinance.

Changing from Adjustable-Rate Mortgage to Fixed Rate Mortgage Refinance

This is a tough call, requiring some forecast about the direction of interest rates. Also, you need to consider planned duration of your stay in the house, new mortgage refinance costs, and the comparative trends in today’s rates vis-à-vis historical rates. Ultimately, you will have to decide.

If there is a real opportunity to cut monthly costs or to improve monthly cash flow, and achieve breakeven within a desired period, then a mortgage refinance may be in order. If it is part of a long-term strategy, such as monetizing equity for reinvestment in another earning asset, then it would be appropriate to get a mortgage refinance. Otherwise, mortgage refinance will have to stay on hold.

Bookmark It

Hide Sites

As you shop for mortgage refinance loans, you will find that they come in two basic types: a rate/term mortgage refinance and, a cash-out mortgage refinance.

Rate/Term - Mortgage Refinancing:

A rate/term mortgage refinance replaces your existing mortgage and comes with lower interest rate or a shorter term. With a rate/term mortgage refinance, you will be able to lower the amount of monthly payment or to reduce the life of the loan. Thus, if you have a 30-year mortgage, you can use a rate/term mortgage refinance to change it to a 15-year mortgage loan. A shorter loan term allows you to get rid of your debt quicker.

Lenders would often allow you to get a mortgage refinance to lower monthly payments if there are only a few more years before your existing mortgage matures. The new mortgage refinance contract lengthens the term resulting in a lower monthly payment. You may find this type of mortgage refinance useful if you have difficulty making your monthly mortgage payment because, say, there is an unforeseen drop in your income.

Cash-Out - Mortgage Refinancing:

Cash-out mortgage refinance replaces your existing mortgage and comes with an additional amount of mortgage loan which effectively releases (monetizes) a portion of your equity in the property. For example, you refinance your 10 percent rate on a $120,000 loan to 8.75 percent. But instead of just taking out a mortgage refinance worth $125,000 you increase the loan amount to $150,000 giving you an extra $30,000 to spend on whatever you please.

Although a cash-out mortgage refinance is an attractive option, you must watch out for certain aspects in order to go about the mortgage refinance arrangements properly. You would not want to make crucial and expensive mistakes. The common mistake that most borrowers commit in a cash-out mortgage refinance is the loan amount requested vis-à-vis the value of the property.

In your first mortgage, you were required to purchase private mortgage insurance (PMI) for a loan amount of at least 80 percent loan-to-value (LTV). This requirement does not change for mortgage refinance. While you can obtain a cash-out mortgage refinance of more than 80 percent LTV, you will not only be required to purchase an equivalent PMI but you will also have to pay higher interest. Other mortgage refinance lenders even charge you at least one-fourth point fee for higher LTV.

The primary justification for a higher interest rate in cash-out mortgage refinance is grounded on delinquency and default research studies. These show that borrowers who obtain cash-out mortgage refinance are likely to show weaker payment records than those who don’t. It is supposed that these borrowers are financially weaker and may, in some cases, be financially distressed. The higher monthly payments may prove too burdensome.

While mortgage refinance is a good source of raising money, or reducing your monthly payment and the loan’s term, you have to remember that similar to your first mortgage, your home is the security of the loan. Failing to pay your monthly obligation would result in the repossession of your home.

Bookmark It

Hide Sites

If you have an adjustable rate mortgages, here is some good news. It may be worth your while to look at a mortgage refinance. But before you decide that, let’s take a look at the ins and outs of an adjustable rate mortgage.

Well, you might wonder, just how different is an adjustable rate mortgage compared with the other basic kind of mortgage – the fixed-rate mortgage. A fixed-rate mortgage has the same (fixed) rate of interest for its life. An adjustable rate mortgages has an interest rate that changes periodically. The change is usually linked to an index. If the index goes up, so do the payments. If the index goes down, the payments go down.

The catch is, if you’re getting a mortgage or a mortgage refinance, an adjustable rate mortgage can be attractive because lenders usually offer adjustable rate mortgages with a low initial interest rate. Also, there is a chance that the index will stay the same or drop. Either of these events would be good for your mortgage as the low initial rate of interest may not change at all. The downside is that there is a gamble involved. You could just as easily face an increase in interest rates that would mean a higher monthly payment. And maybe you did not budget for a higher mortgage payment or it comes at a very bad time. This can be frustrating.

This is the biggest problem you can face with an adjustable rate mortgage – not knowing what you could end up paying for your monthly payment. The adjustments up or down are linked to an index, as mentioned, but what index, most people want to know. It is not the consumer price index. It is not the so-called going rate.

There is a flip side too. If you are looking for a mortgage refinance, don’t overlook the adjustable rate mortgage. The initial low interest might be worth while considering. There is only one warning. Be very careful about understanding the fine print. A lot of people are confused about just how the adjustable rate mortgages work. In the 1990s, about one-quarter of mortgages in the United States were adjustable rate. By 2004 the number had jumped to about a third of the mortgages granted.

In a study by Federal Reserve Board economists, more than one-third of the people who got adjustable rate mortgages did not know the extent to which their mortgage interest rate could increase. More than 40 percent did not know what the maximum rate was that they could be charged. There are several aspects the to adjustable rate mortgage. When you get one, you make a deal for how long the low initial rate lasts (from 2 to 10 years, usually) and what index it will be measured on and what percent of margin will be added to the index’s interest.

Two of the most popular indexes are the Treasury One-Year Constant Maturity series, and the 11th District Cost of Funds Index (COFI). Here’s an example. You can get a mortgage that is set at 4 percent for three years. At the end of the three years, the Treasury One-Year Constant Maturity index is 5 percent. Your margin is 2 percent. The margin is added to the index so your new interest rate is 6 percent. When you mortgage or mortgage refinance, be sure to ask a lot of questions about the index. It can have a very large impact on your life.

Bookmark It

Hide Sites

Mortgage refinance comes with a price tag. There are fees you would associate with loan processing costs, such as fees for origination, application, and credit checking, and closing costs for documenting the new mortgage refinance agreement, which would be the same costs you paid for your existing mortgage. There are attorney’s fees to be paid – both to your attorney whom you will want to review the agreement, and to the lender’s attorney. These add up to quite a sum, so you’ll want to make sure mortgage refinance will be worthwhile. Here’s how you calculate for the net benefit.

1. Make an itemized list of mortgage refinance costs. You can get an idea of these costs by asking your potential mortgage refinance lender for a schedule of fees you will be required to pay. This should include points, which are equivalent to prepaid interest. Loan points plus the other fees comprise the biggest costs associated with mortgage refinance. You may want to review the costs you paid at the time you arranged your existing mortgage, because they are likely to be similar.

2. Add the prepayment penalty charge, if any. Some mortgages contain a prepayment penalty provision, which imposes a fee when the borrower pays off the mortgage before the loan matures or before a specified number of years have elapsed. If your current mortgage has such a clause and you arrange a mortgage refinance, that counts as a prepayment. A typical penalty will charge between 1% and 3% of the loan amount.

3. Sum up the figures in Steps 1 and 2 to find the total cost of mortgage refinance. Let’s say your total fees, closing costs, and prepayment penalties come to $3000 total.

4. Subtract the new monthly payment amount on the mortgage refinance loan (which you expect to be lower) from the monthly payment on your current mortgage. For example, your present monthly mortgage payment is $1,000 and your monthly payment after mortgage refinance is $700. Obviously, you will get a monthly savings of $300.

5. Divide the total mortgage refinance cost you calculated in Step 3 by the payment savings in Step 4. This will give you the number of months needed to amortize and recover all the mortgage refinance costs you paid for. From that point on, you really start enjoying the savings derived from mortgage refinance. Hence, if you divide $3,000 (Step 3) by $300 (Step 4), then you will get 10. This means, you have 10 months to break even your mortgage refinance costs.

If the result of your calculation indicates mortgage refinance is a favorable option, you may want to start shopping with your existing lender. Your current lender might consider giving you a good mortgage refinance deal, and might forego certain procedures, like appraisal of the property, or waive some fees.

If you have been prompt in your mortgage payments and still earn income not less than when you took out the original mortgage, it is likely your current lender will accommodate your mortgage refinance proposal. Before making final commitments, it is still a good idea to check other mortgage refinance providers; you might get an even better deal.

Bookmark It

Hide Sites

You may be among the many borrowers who have a 25- or 30-year mortgage loan. If you have been religiously paying your monthly mortgage for more than five years, then you may want to enjoy one of the key benefits of being a homeowner: taking out a mortgage refinance loan.

Raising Money for Some Purpose:

Mortgage refinance is particularly useful if you have to raise a substantial amount of money for a felt need. As you pay your mortgage, you accumulate equity in your home. Your equity, which is what remains when you deduct the mortgage balance from the current value of the house, increases as the property value rises and as the principal is paid down.

This capital is locked in the house. Unless you want to sell your home, you can release this equity through mortgage refinance. Although there are so many types of consumer loans, you may find that a mortgage refinance is less expensive because it is secured by your home equity. Besides, interest costs on mortgage refinance are tax-deductible, an advantage not found in other consumer loans.

Taking Advantage of Lower Interest Rates:

If interest rates are lower, it is also another great reason to take advantage of a mortgage refinance. For instance, suppose you took out a fixed-rate loan during a period of high interest. You can arrange a new loan at the prevailing lower rate by mortgage refinance, which would significantly reduce your monthly payments.

It is possible the seller arranged for your loan at the time you bought your home. Many of these ‘seller-provided’ loans have balloon payment terms that expire in a few years. Through mortgage refinance, you can rearrange the loan period to a longer maturity thus assuring yourself of long-term financing.

If you have an adjustable-rate mortgage, you may also want to take out mortgage refinance with a fixed-rate during a period when rates go down. This allows you to lock in the more favorable rate and protect yourself against the risk of rate increases, going forward.

Paying for Major Home Improvements:

Mortgage refinance is a good way to provide the money to cover the costs of major improvements to your home. The improvements should add more value to your home, and this is a good way to invest money from a mortgage refinance loan. Although there are other ways to finance home improvements, mortgage refinance may be the cheapest source.

Tapping Equity before Home Sale:

Mortgage refinance may also be beneficial before selling your home. If the interest rates are low, you may get a mortgage refinance loan that your buyer can assume. If rates rise before you sell, or tight credit makes mortgage loans harder to obtain, the assumable mortgage refinance loan becomes an added attraction and increases the resale value.

You have to remember, though, that you will need to pay for mortgage refinance costs such as application fees, discount points, and other various charges. You will have to consider these costs before you decide to refinance. The savings generated from mortgage refinance should exceed the costs to make economic sense. These savings are realized gradually, so you should remain house long enough to fully recover the costs from mortgage refinance.

Bookmark It

Hide Sites

Mortgages are so much a part of your daily life that you rarely stop to think about them. They exist. They eat up a lot of cash. But they form the basis of your life – the roof over your head. It is worth while every now and then to stop and think about your mortgage and what a mortgage refinance would mean to you. There are several beneficial reasons to refinance.

One of the most compelling reasons for a mortgage refinance is the ability to get cash in hand. This is called cash-out refinance. In this type of mortgage refinance, you use the equity that you have gathered in your home to supply that cash. Here’s an example. If your mortgage is $100,000 and your house is worth $150,000, you have an extra $50,000 that can be turned almost instantly into cash. You can simply refinance for a larger mortgage and end up with the mortgage and the equity converted into cash in hand. This money can be used to further increase the value of your home by renovating it. Or it can be used for whatever you want. It’s your money.

Home mortgages are usually provided at a lower rate than bank loans or credit card debt. Therefore it can be beneficial to consolidate your loans through a mortgage refinance. If you have a bunch of credit cards, a car loan, or a bank loan you can fold these into one single payment through a mortgage refinance. The single payment will likely be a lot less than the total of all the credit card and loan payment you were making every month. You have wiped out your debts and still pay less than you used to. That’s real freedom.

Adjustable rate mortgages can be risky to a borrower. The monthly payments can change as they are dependent on the current interest rates. It is even possible to end up owing more than you borrowed. Sometimes there are penalties if you try to pay off your adjustable rate mortgage. The big problem with adjustable rate mortgages is that you don’t have the kind of financing planning control that you need. If the penalty is not prohibitive or if the overall savings are worth it, it is a good idea to get a fixed rate mortgage refinance.

Another benefit of a mortgage refinance is that you can change your mortgage to a shorter term and pay it off faster. It may cost a bit more each month but you have the benefit of building your equity a lot faster. It’s a win-win situation because you can use your increasing equity as collateral for home improvement loans that additionally increase your equity. Another benefit of a mortgage refinance is that it can also bring you to the golden moment when you can burn your mortgage because it is paid off in full.

The reasons for renegotiating your mortgage finance depend on your financial situation. You have leverage when you have a home that is mortgaged and you can use this leverage by capitalizing on your equity. It can help you move to the full home ownership faster, it can help you find the money you need for other ventures, or it can help you out of a sticky situation if your debt load is getting out of hand.

Bookmark It

Hide Sites

There are several factors that indicate whether mortgage refinance is appropriate for you. Here are some of the things that you may want to consider to help you decide if it is now the right time for you to call a mortgage specialist and talk about taking out a mortgage refinance.

Interest Rates: Compare the interest rate of your existing mortgage with the current market rates. When the market rates are declining, it can be the right time to take advantage of low-interest mortgage refinance loans. If you will be able to lower your existing mortgage interest rate even for just one percent, it can translate to hundreds of dollars in savings.

Home Equity: Another important factor that you need to consider before taking out a mortgage refinance is to check whether you have some equity in your home. Without enough equity, no lender would allow you to borrow more money on the property.

Mortgage Refinance Costs: Mortgage refinance helps you save money. This can only be true, however, if the savings you expect to gain from mortgage refinance will not be eaten up by its originating costs. Ask your prospective mortgage refinance lender about the approximate amount you will pay for the charges, costs, and legal fees. Also, check if there is a prepayment penalty clause on your existing mortgage; this is another hidden cost of mortgage refinance loans.

Length of Stay: The number of years that you plan to stay in your home should also be taken into consideration when taking out a mortgage refinance loan. Remember, until you have fully recovered the mortgage refinance costs, you do not really save any money. It is not wise to take out mortgage refinance if you foresee the possibility of moving soon.

Mortgage Refinance Amount: If you have a bigger equity in your home, you may have to decide whether to take a larger or smaller amount of mortgage refinance loan. Your decision will be dependent on whether you can afford, or are willing to make bigger monthly payments. Taking out a larger mortgage refinance amount will save you from the higher interest and hassle of taking out a home equity loan going forward, and from the risk of interest rates going up.

Best Rates: Shopping around for the best possible rates helps ensure that your decision to get a mortgage refinance is worthwhile. You may start your shopping with some rate-comparison sites. A simple way is to request for a best-price guarantee. Some mortgage refinance lenders offer guarantees that they have the lowest rates in the market, as at a particular closing date. Do not forget to examine the little details print on such offers.

Lender’s Reputation: Home lenders have different practices. You would not only want the best possible mortgage refinance rates, but also a lending company with a solid reputation in the market. You would like to do business with a mortgage refinance company that also provides perks and conveniences like hassle-free application process, best-rate guarantee, a quick decision on the loan, and a firm closing date. Reputations notwithstanding, make sure to evaluate a mortgage refinance offer vis-à-vis your individual circumstances.

Bookmark It

Hide Sites

When the time comes to think about a mortgage refinance, you can be overwhelmed with options. Let’s face it, chances are you are considering a mortgage refinance option because of some changes in your life. Perhaps it is a happy change when you can pay down your mortgage. Perhaps it is a less than happy change when you need your mortgage payments lowered because of sudden ongoing expenses or loss of income. There are dozens of reasons why you might want to refinance your mortgage.

The underlying purpose of a mortgage refinance is to get rid of your existing mortgage and start over with a new mortgage. The reasons why you want to do this can be based on simple math – the interest rates have dropped significantly. Even with the costs of refinancing a mortgage, the new rates might be low enough to be financially beneficial in the long run. Another simple math factor could be to use the equity in your home now. If you refinance for a larger amount than your current mortgage and take the extra out as cash.

Even happy changes can be unsettling, so there you are with decisions to make and at the same time you need to consider all your options. After all when you refinance your mortgage you’re making a long commitment to a new deal. And there’s all the fine print to consider. So how do you go about refinancing your mortgage?

You can simply go to your current mortgage holder and ask what they can do for you or you can go to a mortgage broker and let them do the shopping around for you. The other option is to do your own shopping around.

Whichever way you choose, it is worth it to take a quick look at Lending Tree to see what they offer. If nothing else, you will be able to see the process of carrying out a mortgage refinance. I like Lending Tree’s motto which is “When Lenders Compete, You Win.” This is at the crux of carrying out a refinance. You want to have lenders vying for your business rather than have you begging them to work with you. When you are in the driver’s seat, you have control.

The main question you need to answer is: How long will it take to breakeven on a mortgage refinance? The contributing factors to the answer to this question are your current interest rate, the new rate, closing costs and the length of the mortgage that you now have and the length of the mortgage refinanced.

If you look at the answers to these questions, you will know immediately which is the best option to take. There is no point in a mortgage refinance that does nothing to change your current or future cash position. If the mortgage refinance leaves you with the same payment but over a shorter period of time, that is good. If the mortgage refinance gives you access to a lump sum of needed cash but does not put extra strain on your cash outflow over time, that is good.

The main aspect to keep in mind is that a step as big as this needs to be considered calmly and logically. Once you have decided that this is the step to take, then you need to talk to a mortgage broker such as Lending Tree to see the actual numbers in terms of interest rates, monthly payments, and flexibility that are available. At that point, you can check with your current mortgage holder to see how their offer compares. Remember, the bottom line is that you come out ahead in the deal.

Bookmark It

Hide Sites