AVOID THE TOP ERRORS MADE
With interest rates being at their lowest in over 35 years, many homeowners are exploring the option of refinancing their current home mortgage loan.
Whether you secure a loan with a new mortgage company or the same lender who has your current loan, you have to start all over again. This means that you will have to fill out an application, get your home appraised, get an updated title report, and pay closing costs. Refinancing is a brand new loan and therefore will be treated as one. The only difference is that there won’t be a buyer/seller situation.
Just as you did with your original mortgage, shop around for rates.
Determine what your finances can handle, a 15-year or 30-year loan.
When many people start out in a home, they go with an Adjustable Rate Mortgage (ARM), which most often changes annually (although some change only every three years). When you look at refinancing, you should look into getting a Fixed Rate Mortgage (FRM) that will lock you into a non-changing loan. In other words, your payments will remain the same over the life of the loan.
Make sure you look at all the costs involved with refinancing.
There could be additional fees for underwriter fees, title search, title insurance, etc.
Next, find out if your lender will be charging you any up-front points.
Remember that each point is equal to one percent of the loan amount. If you were to borrow $100,000, each point would cost you $1,000.
Work with your lender to determine the amortization so you know exactly what your monthly payments will be. If you want you can go to any of the main search engines such as www.google.com or www.bing.com, and in the search field type in “mortgage loan calculator”. These are free and allow you to calculate your down payment, monthly payment, payoff, etc.
If you plan to stay in the house for some time, it makes more sense to go with a lower interest rate and add the point or points you need to pay on the new loan. Keep in mind that points on refinance loans are usually not tax deductible unless the purpose of the loan is to pay off improvements made to the house.
Although there is no guarantee as to what the future will bring, analysts are predicting that interest rates will start to creep back up. As the economy is recovering, interest rates will also re-establish at a higher rate.
Locking into a 30-year fixed rate at a lower interest rate has a lot of merit and is a great consideration.
On the other hand, if you don’t plan to stay in your home more than three years, and you can lock into an adjustable rate for less than 6%, it would make more sense to go this route. The reason is that over the three-year period the rising interest rate from the ARM will not be enough to be worried about losing.
If you’re not sure which way to go, sit down with several lenders as well as a financial adviser and have them look over the figures with you. Keep in mind that not all refinance programs are the same. They will vary from one lender to the next, so look around.
It’s never too late to refinance.
A standard rule is anytime the interest rates drop 2% or more from your original interest rate, you should refinance. A difference of 2% could save you around $200 a month, or $2,400 a year. That’s definitely worth considering.
There are many different reasons for refinancing a house. Lower interest rates are just one of them. Other reasons might include going through a divorce, education needs, debt consolidation (getting credit cards and other bills paid off). No matter what your reason, this is a great time.
Just as with your first mortgage, when you refinance, you need to stay in your home long enough for the new mortgage to pay off as far as up-front costs to process the refinance. This would include settlement charges, application fees, points, credit report fees, title insurance, etc. All these costs would be added into the new loan so determine how long it will take to pay off all of these fees.
Beginning February 1, 2002, Fannie Mae made changes to its refinancing rules. Since they are the largest mortgage buyer in the country, this is important.
There are two types of residential refinancing.
Rate-and-term and cash-out. For the rate-and-term, the borrower wants to lock into a lower rate and a short repayment schedule (such as 15 years opposed to 30). In this case, the borrower is trying to avoid more debt other than closing costs of settling the loan. For the second option (the cash-out) the borrower might want to obtain a lower rate, shorter payment term, and lower monthly payments. In this situation, the borrower also wants to finance more than the remaining loan amount. For example, if the remaining figure is $150,000 they may want to secure $200,000. With the additional money they will payoff credit cards and other debt.
The changes made in February of 2002 divided the cash-out option into two categories, cash-out refinancing and limited cash-out refinancing.
The limited cash-out refinancing allows the homeowner to refinance current debt in order to get a lower rate, smaller payment, and shorter loan term. This change also means that Fannie Mae will now be defining current debt as the original financing used to acquire the property.
The limited cash-out will include only loans that involve the pay-off of the outstanding principal balance of an existing first mortgage, the pay-off of the outstanding principal balance of existing subordinate mortgage used in whole to acquire the property, the financing of closing costs (including prepaid expenses), and cash back to the borrower in an amount no more than the lesser of 2% of the balance of the new refinance mortgage (or $2,000).
What this means is that Fannie Mae is looking for more compensation when there is greater risk.
Refinancing always includes some costs. To determine if refinancing will work for you, look at the overall expenses as well as monthly savings. You need to know the full package price as well. Shop around, look at all the numbers, and if possible, consider refinancing before rates increase.
If you have any questions or if I can be of any help with your real estate purchase or sale, please do not hesitate to call me.
Best wishes,
Brian LaDue
“Lakeside Property Shop”
(586) 873-2242 Mobile
brian@lakesidepropertyshop.com
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