WHY REFINANCE?
When market interest rates are low, homeowners should see if they can quality for a new home loan. Refinancing can save you money each month, making your budget easier to handle and it can also save you hundreds and perhaps thousands of dollars in interest payments by the time your entire mortgage is paid in full. An annual evaluation of your finances should include whether a mortgage refinance should be considered.
Many property owners are paying too much for their mortgage loans or are locked into mortgages that are too high for their income. Financial experts recommend that your mortgage payment require no more than a third of your gross monthly income. If you have some home equity but are finding it difficult to meet your mortgage payment, perhaps because you have an adjustable-rate loan whose interest rate has risen or because your income has dropped, you should seriously consider refinancing.
Even if your current home loan payments are affordable, there are other reasons to consider refinancing.
LOWER INTEREST PAYMENTS
You might be able to refinance your mortgage loan and obtain a lower interest rate than your current mortgage rate. A mortgage lender can help you determine whether the interest savings are enough to offset the cost of the refinanced mortgage-with a significant rate drop, you can potentially save thousands of dollars over the full term of your loan.
LOWER MONTHLY PAYMENTS
Refinancing to a lower interest rate can lower your monthly mortgage payments, but extending the term of your loan can also reduce your monthly payments. You can choose a 30- or 40-year fixed-rate loan for the remaining principal on your current loan.
CONSOLIDATE DEBT
If you feel overloaded by high-interest debt on your credit cards or car loans, you may be able to consolidate your debt into your mortgage payment. For example, if you have a $150,000 mortgage and $20,000 in credit card debt, you may qualify for a $170,000 mortgage and use the extra $20,000 to pay your credit card debt. Mortgage loans typically carry a significantly lower interest rate than consumer debt such as credit card debt, so refinancing can help in decreasing debt more quickly. Best of all, mortgage interest, unlike credit card interest, is usually tax-deductible.
HOME IMPROVEMENTS
One of the best reasons to refinance is to make home improvements or repairs. Such improvements may add to the value of your home, and you can wrap the costs into your monthly mortgage payments. Some homeowners choose to refinance into one mortgage, while others opt for a home equity loan or a home equity line of credit as the best way to access the equity value in their home.
Freed-up cash can also be used for other purchases or for college tuition. The best expenditures are investments rather than frivolous purchases, remember that you are reducing the equity in your home when you take out some of the value in cash.
EARLIER LOAN PAYOFF
Would you like to own your home free and clear as soon as possible? Consider refinancing your home to a shorter term, such as 15 years. While 15- and 30-year home loans are standard, mortgage lenders are also willing to consider home loans on your terms.
INCREASE FINANCIAL SECURITY
If you have an adjustable-rate home loan, you might want to refinance to a fixed-rate loan so that your mortgage payments will stay the same for the entire loan period. This is particularly helpful if you expect interest rates to rise.
While there are seemingly as many reasons to refinance as there are homeowners, every decision to refinance should be based on solid calculations. Test out different refinancing scenarios to see how long it will take to recoup your costs.
TYPES OF LOANS
It’s important to know your options. There are hundreds of home loan products on the market; all with different fees, interest rates and features.
ADJUSTABLE RATE MORTGAGE
As the name suggests, the interest rate on these loans change through the life of the loan. Many people have heard bad things about ARM, or adjustable rate mortgages, but there are just as many advantages to refinancing your home with an ARM as there are disadvantages. If you are considering refinancing your current home loan, and have a fixed rate home loan at the moment, an ARM loan is definitely worth looking at, as far as saving money on your repayments, and getting a better interest rate goes.
What Is An Adjustable Rate Mortgage?
An adjustable rate mortgage has significantly lower interest rates than any offered fixed rate mortgage at any given time. The initial interest rate of the loan is fixed for a set amount of years and then it adjusts according to the economic index it is linked to. This means it can go up or down after the fixed interest period. Adjustable rates on an ARM can change over the life of the loan in accordance with current markets and trends, unlike a fixed rate mortgage where the rates are never subject to change over the life of the loan.
What Are The Benefits?
The greatest benefit of refinancing, using the adjustable rate mortgage option is the savings gained by having a lower interest rate. It is hard to believe, but a small difference in interest rates, such as half a percent, over the course of a year can equate to thousands of dollars.
What Are The Risks?
There are risks involved when you refinance with an adjustable rate mortgage loan. The riskiest type of ARM loan is the type that has no fixed term attached to it. Although the interest rates will be even lower than the average rates offered on a fixed term ARM loan, the rates on an ARM loan that isn’t fixed are subject to change monthly, or yearly. An ARM loan that is fixed for a particular period, such as 5 years, is much safer, because you are getting a very low interest rate, locked in over a period of five years.
Who Will Benefit From An Adjustable Rate Mortgage?
Almost anyone can benefit from a fixed rate ARM mortgage. According to financial statistics many American families either sell their homes, or refinance after four years. If you intend to sell in this time frame, having a 5-year fixed ARM loan poses little risk, with a much lower interest rate. The only risk is that after the 5 years, if you can’t refinance, or choose not to sell, and interest rates do get higher, you will have to pay more on your payments. The ARM rate is especially helpful to lower income bracket families, or for those who want to pay their home off quicker than they are already.
By keeping your monthly repayments the same, and refinancing to an adjustable rate mortgage with a much lower interest rate, the money that you are saving because of the lowered interest rates can be paid to reduce your principal each month. This can mean you are shaving years off your mortgage, without paying anything more than you were before you refinanced.
FIXED RATE MORTGAGE
If you are considering refinancing your home loan, you may be faced with the decision to take an ARM ( adjustable rate mortgage), or a fixed rate. Your own personal situation, as well as what you expect from your refinanced mortgage will have a great bearing on whether you should choose a fixed rate mortgage, or look for another alternative.
What Is A Fixed Rate Mortgage?
A fixed rate mortgage is exactly what it sounds like – a home loan whose interest rate does not change over the term of the loan. If you take a home loan refinance over 30 years, your interest rates will stay the same over the next 30 years, or until you refinance. This allows you to budget effectively and gives you peace of mind for that period; knowing your monthly payments won’t change. The downside is this loan comes with less features, therefore less flexibility.
How Is a Fixed Rate Mortgage Different From an ARM?
An adjustable rate mortgage has an interest rate that is subject to change depending on current markets and financial trends. Unlike a fixed rate mortgage, ARM loan monthly repayments are subject to change, if interest rates increase, so do monthly repayments.
Who Will Benefit from a Fixed Rate Mortgage?
A fixed rate mortgage offers borrowers stability. If you have a great credit rating, you will always be offered a reasonable interest rate. Many people with a long-term steady job who want to budget over the long run choose a fixed interest rate loan over taking the risk of an ARM loan, which is subject to change depending on current markets.
Benefits and Concerns with a Fixed Rate Mortgage
The fixed rate mortgage is one of the safest types of loans available, and you know right from the start what you are paying since this figure never changes over the term of the loan. Some of the problems you may encounter with a fixed interest rate mortgage are the difference in interest rates. A fixed rate mortgage will always be higher than an adjustable rate. If you have a bad credit history, you are likely to pay an even higher interest rate than other people with good credit. Because of this, many people choose to take an ARM loan over a fixed rate.
Other things to be mindful of when refinancing to a fixed interest rate, is the likelihood of interest rates dropping dramatically, and you are left with a very high interest rate compared to what others are paying. Apart from this, a fixed interest rate refinance has very few risks involved, and will provide borrowers stability over the long term with their refinancing needs.
BALLOON LOAN
A balloon loan is a mortgage with a fixed interest rate for a set period of years. This period of is typically short, around 7 to 10 years. The advantage of the balloon loan is that the interest rate is almost as low as those found with adjustable rate home loan. Refinance to this with caution. The disadvantage is that when the term is up, the loan is repayable in full. Caution and careful planning needs to be taken to enjoy the advantage of this type of loan without being hurt by it’s disadvantage.
HOME EQUITY LOAN/LINE OF CREDIT
These fixed rate loans that allow you to tap into your equity; providing you with the funds to renovate, invest in shares, managed funds etc. Home Equity loans and lines are among the most economical lending solutions available. Depending on your unique financial situation, the interest paid can be tax deductible. They are flexible and generally offer good rates. There are many advantages to a home equity loan, but care needs to be taken as it results in a reduction in the equity you have built up in your home.
There are two types of home equity loans. The actual loan is usually a fixed rate with a specific time period in which the loan will be paid off. The payment is also fixed. These types of loans are good for the borrower who has a specific amount in mind. When consolidating debts, such as credit cards, student loans, car loans, or doing specific home improvements, a person will use a home equity loan to put all their payments into one, usually, lower payment.
A home equity line of credit is a more flexible option. This type of loan is open ended. The rate and payment is generally variable and tends to be lower. You can use a line of credit somewhat like a credit card with added tax benefits. You only pay interest on the portion of the line that you use and the rest is available for you when you need it. When you make payments, the portion applied to the principle is made available for use again. Many lenders offer a card for easy access. This option is useful for those who don’t have an immediate use for the funds or want to have the flexibility to keep borrowing without going through the application process over and over.
When you refinance your existing mortgage and have equity left over, many times you will be offered a home equity loan or line. If you have additional debts that you did not include in your first mortgage, a home equity is a good way to go. Why would you not include all your debts in the first loan you ask? Well, many times, debt is split into two loans in order to keep the larger portion under 80% loan to value. This allows a borrower to take advantage of the best rate. The lower your loan to value is the better your rate will be. Keeping a loan under 80% of the appraised value of your home will also allow you to avoid paying costly PMI, or Private Mortgage Insurance.
If you do not have use for a second loan at the time you are refinancing your first, you can get a line of credit. Even if you don’t use it right away, it is a good thing to have in case of an emergency. When you need it, it’s there ready for use. You will not need to go through the lengthy application and approval process all over again. Another benefit is that they can use the same credit inquiry and appraisal that they used for the first loan. One thing to be aware of is that there is usually an annual fee for a line of credit. Ask your bank about any special programs they may offer to help offset this cost. Sometimes they will negotiate with you to entice you to take the offer.
As you can see, there are many benefits to both home equity loans and lines. Carefully weigh all of the options before you make your decision. Talk about the cost and ask about any hidden fees so that you can make the most informed decision possible.
OTHER WAYS TO SAVE – Refinance with Your Current Lender
Your current lender might be able offer you a good deal and waive some processes and fees. If the lender servicing your loan is the one that funded it, you have an excellent chance to claim some savings in the form of waived origination, processing, appraisal, credit, or closing charges. Just know that your lender isn’t terribly anxious to replace your 6.25% home loan with a 4.75% refinance-it may take a while to actually get the thing done, and you won’t be the highest-priority client. If your current lender approaches you with an offer to refinance, request a Closing Disclosure with the interest rate and fees. Often, mortgage lenders offer current borrowers low-cost refinance deals to prevent them from going elsewhere, but the rate is likely to be higher than what’s available on the current market.
To negotiate the best deal with your lender, get quotes from other mortgage lenders first. Compare the Closing Disclosure and the rates and costs involved. Then, call your lender and ask for your payoff amount. Most mortgage companies have customer retention programs, and you’ll find that your lender may spring into action when you request your payoff amount. They’ll probably offer to refinance you, and they’ll know they’re competing for your business. Then see if they can do better than the other companies you’ve already checked with.
REFINANCE WITH THE HOME AFFORDABLE PROGRAM (HARP)
Application Deadline: September 30, 2017
If you haven’t shopped for a mortgage in a while, you may be surprised at the risk-based pricing adjustments Fannie Mae and Freddie Mac lenders add on to loan fees today. Extra charges for credit scores less than 740, condominiums or manufactured housing, cash out, investment property, second homes, interest-only features, ARMs, or 40-year terms may shock you-and that goes double if your loan-to-value is high. With a HARP refinance, however, if your home value and credit scores have slipped a bit, you can still refinance to a lower rate, and the additional fees are limited to 2%. Your current loan has to be with Fannie Mae or Freddie Mac to qualify, but you can owe as much as 25% more than your home is worth and still get refinanced. Best of all, if you don’t have mortgage insurance on your current loan, you won’t be required to get it on your new one-even if you owe more than 80% of your home’s value.
CONSIDER A SHORTER TERM MORTGAGE
The interest rate on a 15-year mortgage is about half a percent lower than the 30-year rate. And your mortgage payment might not even increase that much if you have already been paying on your loan for a number of years-try running the numbers through a mortgage calculator and see. Another way to benefit from a shorter term and lower rate is by refinancing to a 5/1 hybrid adjustable-rate mortgage (hybrid ARM). This loan’s interest rate is fixed for five years before converting to an adjustable-rate mortgage. Rates on 5/1 ARMs are generally 1% lower than for comparable 30-year fixed-rate mortgages. This offers great savings to those who don’t intend to keep their homes for many years. The payment on a $400,000 loan at 4% is $1,910–$237 a month less than the 30-year loan at 5%, for a savings of $14,220 over five years.
Lowering your interest rate isn’t enough if you want to maximize your savings when you refinance. Getting the best mortgage rate and the lowest fees means doing comparison shopping, asking the right questions at the right time, choosing the best mortgage term, and maybe being a little pushy.
HOW TO CALCULATE YOUR BREAK EVEN POINT
Use the step-by-step worksheet below to give you an estimate of the time it will take to recover your refinancing costs before you benefit from a lower mortgage rate.
1. Your current monthly mortgage payment
2. Subtract the new monthly payment
3. This is your gross monthly savings
4. Multiply your gross monthly savings by your tax rate and subtract from your monthly savings
5. This is your after tax savings
6. Total your loan fees and closing costs (this should not include your prepaid interest or your escrows or taxes paid)
7. Divide the total fees and costs by your after-tax savings to determine the number of months it will take to recover your refinancing costs
8. If your intend to remain in the house longer than the number of months it takes to recover your costs, it benefits you to refinance
MORTGAGE LOCK-INS
In most cases, the terms you are quoted when you shop among lenders only represent the terms available to borrowers settling their loan agreement at the time of the quote. The quoted terms may not be the terms available to you at settlement weeks or even months later. Therefore, you should not rely on the terms quoted to you when shopping for a loan unless a lender is willing to offer a lock-in.
What Is a Lock-In?
A lock-in, also called a rate-lock or rate commitment, is a lender’s promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. (Points are additional charges imposed by the lender that are usually prepaid by the consumer at settlement but can sometimes be financed by adding them to the mortgage amount. One point equals one percent of the loan amount.) Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.
A lock-in that is given when you apply for a loan may be useful because it’s likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period.
It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender’s promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender’s commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lender’s conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender.
Will Your Lock-In Be In Writing?
Some lenders have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application. Oral agreements can be very difficult to prove in the event of a dispute.
Some lenders’ lock-in forms may contain crucial information that is difficult to under-stand or that is in fine print. For example, some lock-in agreements may become void through some unrelated action such as a change in the maximum rate for Veterans Administration guaranteed loans. Thus, it is wise to obtain a blank copy of a lender’s lock-in form to read carefully before you apply for a loan. If possible, show the lock-in form to a lawyer or real estate professional.
It is wise to obtain written, rather than verbal, lock-in agreements to make sure that you fully understand how your lender’s lock–ins and loan commitments work and to have a tangible record of your arrangements with the lender. This record may be useful in the event of a dispute.
Do Lenders Charge for a Lock-In?
Lenders may charge you a fee for locking in the rate of interest and number of points for your mortgage. Some lenders may charge you a fee up-front, and may not refund it if you withdraw your application, if your credit is denied, or if you do not close the loan. Others might charge the fee at settlement. The fee might be a flat fee, a percentage of the mortgage amount, or a fraction of a per-centage point added to the rate you lock in. The amount of the fee and how it is charged will vary among lenders and may depend on the length of the lock-in period.
What Options Are Available for Setting the Mortgage Terms?
Lenders may offer different options in establishing the interest rate and points that you will be charged, such as:
Locked-In Interest Rate–Locked-In Points.
Under this option, the lender lets you lock in both the interest rate and points quoted to you. This option may be considered to be a true lock-in because your mortgage terms should not increase above the interest rate and points that you’ve agreed upon even if market conditions change.
Locked-In Interest Rate–Floating Points.
Under this option, the lender lets you lock in the interest rate, while permit-ting or requiring the points to rise and fall (float) with changes in market conditions. If market interest rates drop during the lock-in period, the points may also fall. If they rise, the points may increase. Even if you float your points, your lender may allow you to lock-in the points at some time before settlement at whatever level is then current. (For instance, say you’ve locked in a 3½ percent interest rate, but not the 3 points that went with that rate. A month later, the market interest rate remains the same, but the points the lender charges for that rate have dropped to 2½. With your lender’s agreement, you could then lock in the lower 2½ points.) If you float your points and market interest rates increase by the time of settlement, the lender may charge a greater number of points for a loan at the rate you’ve locked in. In this case, the benefit you might have had by locking in your rate may be lost because you’ll have to pay more in up-front costs.
Floating Interest Rate-Floating Points.
Under this option, the lender lets you lock in the interest rate and the points at some time after application but before settlement. If you think that rates will remain level or even go down, you may want to wait on locking in a particular rate and points. If rates go up, you should expect to be charged the higher rate.
Because practices vary, you may want to ask your lender whether there are other options available to you.
How Long Are Lock-Ins Good?
Usually the lender will promise to hold a certain interest rate and number of points for a specific umber of days, and to get these terms you must settle on the loan within that time period. Lock-ins of 30 to 60 days are common. But some lenders may offer a lock-in for only a short period of time (for example, 7 days after your loan is approved) while some others might offer longer lock-ins (up to 120 days). Lenders that charge a lock-in fee may charge a higher fee for the longer lock-in period.
Usually, the longer the period, the greater the fee.
The lock-in period should be long enough to allow for settlement, and any other contingencies imposed by the lender, before the lock-in expires. Before deciding on the length of the lock-in to ask for, you should find out the average time for processing loans in your area and ask your lender to estimate (in writing, if possible) the time needed to process your loan. You’ll also want to take into account any factors that might delay your settlement. These may include delays that you can anticipate in providing materials about your financial condition and, in case you are purchasing a new house, unanticipated construction delays. Finally, ask for a lock-in with as few contingencies as possible.
What Happens If the Lock-in Period Expires?
If you don’t settle within the lock–in period, you might lose the interest rate and the number of points you had locked in. This could happen if there are delays in processing whether they are caused by you, others involved in the settlement process, or the lender. For example, your loan approval could be delayed if the lender has to wait for any documents from you or from others such as employers, appraisers, termite inspectors, builders, and individuals selling the home. On occasion, lenders are themselves the cause of processing delays, particularly when loan demand is heavy. This sometimes happens when interest rates fall suddenly.
If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points. If market conditions have caused interest rates to rise, most lenders will charge you more for your loan. One reason why some lenders may be unable to offer the lock-in rate after the period expires is that they can no longer sell the loan to investors at the lock-in rate. (When lenders lock in loan terms for borrowers, they often have an agreement with investors to buy these loans based on the lock-in terms. That agreement may expire around the same time that the lock-in expires and the lender may be unable to afford to offer the same terms if market rates have increased.) Lenders who intend to keep the loans they make may have more flexibility in those cases where settlement is not reached before the lock-in expires.
How Can You Speed Up the Approval of the Loan?
While the lender has the greatest role in how fast your loan application is processed, there are certain things you can do to speed up its approval. Try to find out what documentation the lender will require from you.
Much of the information required by your lender can be brought with you when you apply for a loan. This may help to get your application moving more quickly through the process. When you first meet with your lender, be sure to bring the following documents:
Your bank account numbers, the address of your bank branch and your latest bank statement, plus pay stubs, W-2 forms, or other proof of employment and salary, to help the lender check your finances.
If you are self-employed, balance sheets, tax returns for 2-3 previous years, and other information about your business.
Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
Evidence of your mortgage or rental payments, such as cancelled checks.
Certificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan. Your lender may be able to help you obtain this.
Be sure to respond promptly to your lender’s requests for information while your loan is being processed. It is also a good idea to call the lender and real estate agent from time to time. By calling occasionally, you can check on the status of your application, and offer to help contact others such as employers who may need to provide documents and other information for your loan. It is also helpful to keep notes on your contacts with the lender or correspond by email so that you will have a record of your conversations.
Ask About Lock-Ins
When you’re ready to settle on your loan, you’ll want to get the loan terms that you’ve locked in. To increase that likelihood, it is important to learn as much as you can about what the lender is promising you before you apply for a loan. Ask for the following information when you shop for a loan:
Lock-Ins and Fees
Does the lender offer a lock-in of the interest rate and points?
When will the lender let you lock in the interest rate and points? When you apply? When the loan is approved?
Will the lock-in be in writing? If the lock-in is not in writing, you will have no record of the lender’s agreement with you in case of a dispute.
Does the lender charge a fee to lock in your interest rate?
Does the fee increase for longer lock-in periods? If so, how much?
If you have locked in a rate, and the lender’s rate drops, can you lock in at the lower rate?
Does the lender charge you an additional fee to lock in the lower rate?
Can you float your interest rate and points for now, and lock them in later?
Loan Processing Time
How long does the lender expect to take to process your loan?
What has been the lender’s average time for processing loans recently?
Has the lender’s loan volume increased? Heavy volume might increase the lender’s average processing time.
Expiration of Lock-ins
What rate will be charged if the lock-in expires before settlement-the rate in effect when the lock-in expires?
If you don’t settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?
Complaints About Lock-Ins
Knowing what to look for puts you in a better position to decide whether, when, and how long to lock in mortgage terms. Also, by helping to keep the loan process moving, you can lessen the chance that your lock-in will run out before settlement.
But what if your lock-in does lapse?
If you believe that the lapse was due to delays caused by the lender or someone else involved in the loan process, you should try first to reach a mutually satisfactory agreement with the lender. If that effort fails, consider writing to the appropriate state or federal regulatory agency.
Some lender actions, such as offering lock-in terms which are impossible to fulfill, failing to process your loan diligently, or causing your lock-in to expire are improper and may even be illegal. In addition, because you may have contractual rights under your lock-in or loan commitment, you may want to consult with an attorney. Be aware, though, that complaints may not be resolved as quickly as may be necessary for a home purchase.
Depending upon their authority under applicable state or federal law, regulatory agencies may either attempt to help you resolve your complaint directly or record your complaint and recommend other action.