Are you stuck with increasing monthly payments and looking for favorable rate and terms on your loan? Or, do you want to consolidate your debts and pay them off faster? All these and more can be done by mortgage refinance or refinancing.
What is Refinancing?
Refinancing gives you the chance to replace your current mortgage with a new loan having favorable rate and terms that you can afford. The new loan is offered against the same property as the collateral and may or may not exceed the current loan balance. The new loan funds are used to pay off the current mortgage while any remaining cash can be used to your best advantage.
For example: Mr. X and Mr. Y both took a mortgage loan worth $400,000. After 4 years, both of them paid off $200,000. Mr. X then took another home loan for $200,000 in order to repay the existing balance on the loan. On the other hand, Mr. Y opted for a second home loan for $300,000 in order to repay the unpaid loan balance which is $200,000. Mr. Y could use the remaining balance in order to fulfill other financial obligations.
The first scenario is regarded as mortgage refinancing and the second scenario where the new loan amount is higher than that of the existing loan balance is cash-out refinancing.
6 Reasons for You to Refinance
- You want to save more: Your monthly payments will be reduced if you get a low rate or when your loan term is extended. However, with an extended term, your monthly savings will increase but you'll be paying more in total interest for the life of the loan.
- You want to pay down your mortgage quickly: You can shorten the length of your mortgage by reducing the loan term. Monthly payments will no doubt go up, but you will be able to save more in the overall interest payment. Moreover, you'll be debt free in a shorter time.
- You need extra cash to pay off credit cards: If you have enough home equity, you can borrow more than the current loan balance. With the extra cash, you can pay off high interest debts such as credit card balances or installment loans. You gain out of it as the interest on such debt is not deductible unlike mortgage interest. *The information contained in this article is for informational purposes only and may not reflect current tax year rules and regulations. Consult your tax advisor or the IRS for current tax year rules, restrictions and regulations.
- You wish to consolidate 2 loans into one: If there's enough equity (due to high appreciation), you can consolidate first and 2nd mortgages and refinance into a single first mortgage. The monthly payment on the new loan is likely to be lower than the combined payments on the first loan and the second mortgage.
- You want to convert an Adjustable Rate Mortgage (ARM) into Fixed Rate Mortgage (FRM): This allows you to lock in at a low rate. You can thus repay the loan with stable monthly payments rather than variable payments over the loan term.
- You want to get rid of Private Mortgage Insurance (PMI): If your current loan balance is below 80% of the new appraised home value, you can go for a home refinance and stop paying the PMI.
Tips on When to Refinance
It doesn't make sense refinancing when you shouldn't. So, check out the mortgage refinance tips as given below and get an idea on when to refinance.
- Build up equity: It is feasible to go for a refinance when you have built up at least 10% equity in your home (For Fannie Mae owned mortgages, the value is 5%). It is also possible for you to choose the option if your equity is less than 5%, but you may have to pay a certain amount of cash in order to make up for the difference in equity.
- Check if current market rates are low: It's better to follow the 2% Rule which suggests that you can enjoy the benefits of a home refinance if you get an interest rate 2% lower than that on your current loan. The interest savings will help you recoup the costs you've paid for the new loan provided you stay in the property for a certain period of time (break-even period). However, there are no-cost as well as low-cost refinance loans wherein the costs are included into the loan. But you can expect comparatively higher rates on such loans. Moreover, these loans are limited when the market is in a credit crunch.
- Remove negatives and improve credit score: Pull your credit report from the bureaus and review it for any negative items (late pays, collections etc) and inaccurate detail. Try to dispute negative items and remove them from the report. If required pay off any unpaid debt. Otherwise, you won't get a low rate and may not even qualify. Of course there are lenders in the subprime market who may offer you a bad credit refinance loan, but it's better to avoid them as they'll possible charge higher rates and fees. * AmeriFirst Financial, Inc. is not a credit counseling or financial advisement firm and this information is for educational purposes only and is not to be taken as guidelines or guarantees to improve your credit or financial situation or eligibility to secure a home loan.
Shopping Around for Rates
First: make sure you are working with an experienced, professional loan officer. The largest financial transaction of your life is far too important to place into the hands of someone who is not capable of advising you properly and troubleshooting the issues that may arise along the way. But how can you tell?
Here are FOUR SIMPLE QUESTIONS YOUR LENDER ABSOLUTELY MUST BE ABLE TO ANSWER CORRECTLY. IF THEY DO NOT KNOW THE ANSWERS, RUN - DON'T WALK - RUN TO A LENDER THAT DOES!
- What are mortgage interest rates based on? The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.
- What is the next Economic Report or event that could cause interest rate movement? A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, visit www.suewoodard.com and hit the green MMG Weekly banner - this is a copy of our weekly newsletter, let us know if you want to be added to my weekly distribution list.
- When Bernanke and the Fed "change rates", what does this mean. and what impact does this have on mortgage interest rates? The answer may surprise you. When the Fed makes a move, they can change a rate called the “Fed Funds Rate” or the “Discount Rate”, These are both very short-term rates that impact credit cards, credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets. For more information and explanation, just give us a call
- Do you have access to live, real time, mortgage bond quotes? If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday's newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday's paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future? No way!
Be smart... Ask questions. Get answers! More than likely, this is one of the largest and most important financial transactions you will ever make. You might do this only four or five times in your entire life. but we do this every single day. It's your home and your future. It's our profession and our passion. We're ready to work for your best interest. Once you are satisfied that you are working with a top-quality professional mortgage advisor, here are the rules and secrets you must know to “shop” effectively.
First, IF IT SEEMS TOO GOOD TO BE TRUE, IT PROBABLY IS. But you didn’t really need us to tell you that, did you? Mortgage money and interest rates all come from the same places, and if something sounds really unbelievable, better ask a few more questions and find the hook. Is there a prepayment penalty? If the rate seems incredible, are there extra fees? What is the length of the lock-in? If fees are discounted, is it built into a higher interest rate?
Second, YOU GET WHAT YOU PAY FOR. If you are looking for the cheapest deal out there, understand that you are placing a hugely important process into the hands of the lowest bidder. Best case, expect very little advice, experience and personal service. Worst case, expect that you may not close at all. All too often, you don’t know until it’s too late that cheapest isn’t BEST. But if you want the cheapest quote – head on out to the Internet, and we wish you good luck. Just remember that if you’ve heard any horror stories from family members, friends or coworkers about missed closing dates, or big surprise changes at the last minute on interest rate or costs…these are often due to working with discount or internet lenders who may have a serious lack of experience. Most importantly, remember that the cheapest rate on the wrong strategy can cost you thousands more in the long run. This is the largest financial transaction most people will make in their lifetime. That being said – we are not the cheapest. Of course our rates and costs are very competitive, but we have also invested in the systems and team we need to ensure the top quality experience that you deserve.
Third, MAKE CORRECT COMPARISONS. When looking at estimates, don’t simply look at the bottom line. You absolutely must compare lender fees to lender fees, as these are the only ones that the lender controls. While the Good Faith Estimate no longer breaks all fees down for you, we offer a Personal Loan Calculator worksheet that does show you all costs, from our origination fee to estimated inspection fees to estimated closing costs. You can take this sheet as you comparison shop — and it’s reasonable to ask other lenders to break their costs down for you too. APR? It’s required on many documents, but can be worthless as a tool of comparison.
Fourth, UNDERSTAND THAT INTEREST RATES AND CLOSING COSTS GO HAND IN HAND You CAN’T have any interest rate you want. You can have a lower interest rate on the spectrum – but you may pay more in costs if the rate is lower than the norm. On the other hand, you can pay discounted fees, reduced fees, or even no fees at all – but understand that this comes at the expense of a higher interest rate. Either of these balances might be right for you, or perhaps somewhere in between. It all depends on what your financial goals are. A professional lender will be able to offer the best advice and options in terms of the balance between interest rate and closing costs that correctly fits your personal goals.
Fifth, UNDERSTAND THAT INTEREST RATES CAN CHANGE DAILY, EVEN HOURLY This means that if you are comparing lender rates and fees – this is a moving target on an hourly basis. For example, if you have two lenders that you just can’t decide between and want a quote from each – you must get this quote at the exact same time on the exact same day with the exact same terms or it will not be an accurate comparison. You also must know the length of the lock you are looking for, since longer rate locks typically have slightly higher rates.
Again, our advice to you is to be smart. Ask questions. Get answers. As you can imagine, we wouldn’t be encouraging you to shop around if we weren’t pretty confident that we feel that we can give you a great value and serve you the very best.
8 Refinance Mistakes
When you've thought of a refinance in order to switch over to a better rate/loan, you should be aware of the mistakes most people make while considering it. Know-how of the common mistakes will prevent you from taking a wrong step in the refinance/refinancing process. Here are the top 8 mistakes which you should avoid when you apply for a new home loan.
- Refinancing Without Shopping Around. Many believe it's easier to deal with their current lender. The fact is that the current lender is probably not the actual lender but only the servicer. Chances are they will not offer the best option in terms of rates, fees and other terms and conditions. It's better to shop around with a few lenders and compare the offers until you have analyzed the total cost of the loan. However, even if it's your current lender with whom you'll refinance, you need to re-qualify for the new loan and as such your current financial situation will be verified.
- Unaware of the Break-Even Period. When you are refinancing, you will typically have to pay closing costs which can be offset by your savings due to lower rate. The time period during which your savings fully offset the costs is the break-even period. You need to calculate the break-even period, so that you know if you intend to occupy the property until the break-even period is reached and you recoup the costs. However, this is helpful in case of refinance transactions involving similar loans and wherein the purpose is to lower the rate and monthly payment.
- Not Receiving a Good Faith Estimate. The lender is required to provide you with a Good Faith Estimate of closing costs within 3 business days of receiving your loan application. This helps you to trace any hidden cost so that you can avoid paying higher costs. So, if you don't receive the estimate, get one from the lender.
- Considering Assessed Value of Property. Do not depend upon the assessed value of your property as determined by the county tax assessor. The loan amount isn't based on the assessed value. Instead, it depends upon the appraised value of your property which a licensed Appraiser determines using either the Sales Comparison Approach or the Cost Approach. Do not consider listings of other homes as value as closed sales are required for the comparison approach.
- Not Analyzing the Total Cost of the Loan. One of the most important metrics to consider when selecting the right mortgage plan for you, is how long you plan on living in the home or what your loan retention time is going to be. Ask the lender to provide you with a total cost analysis showing the proposed savings you will have on the refinance compared with your current loan. This should include total payments, total interest paid, total closing costs and points and balance remaining at a given point in time.
- Signing Loan Docs Without Proper Review Check the loan documents before signing them. Read the terms and conditions thoroughly before you accept them in writing. If possible, request the lender to allow you to read the papers in advance because you may not get enough time to go through all the docs at closing.
- Not Providing Relevant Docs in Time You can prevent unnecessary delays in closing if you submit all relevant documents to your lender when they are requested. If your closing is delayed, and mortgage rates go up, then you may have to choose the higher rate or miss the opportunity to refinance.
- Getting a Verbal Rate Lock. It's better if you can get the rate lock in writing from your lender. This written statement includes your interest rate, length of rate lock and other details of the loan program.