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What every
homeowner should know about refinancing
Surrounded by a sea
of refinancing confusion!
What basic terms do I need to
know?
When should I refinance
my home mortgage?
What refinancing myths do I need to
watch out for?
What exactly do I need
to consider about refinancing?
What will
actually be involved when I refinance?
There are probably many lifesaving tips people have thrown you to help you
determine the right time to refinance your home. You may have heard that the
interest rate on the new loan must be at least two percent less than the old
loan or it is not a good decision. Another frequently quoted, but just as
frequently incorrect statement, is that if your loan is less than two years old,
you shouldn’t refinance it now.
Neither of these statements is entirely correct, and it can be extremely
difficult to receive unbiased and accurate information about the refinancing
decision and process. It is my desire to offer you a clear, concise guide to
help rescue you from that sea of refinancing confusion. This report has been
designed to provide unbiased information that will help you make an educated
decision about whether you should refinance your home mortgage.
The mortgage industry is continuously changing—it's a challenge just to
keep up. New regulations, government programs, and terms are always being
created; therefore, the first step to understanding the refinancing process is
to learn the language!
 | Adjustable Rate Mortgage (ARM)— A loan that allows the lender to adjust
the borrower's interest rate and payments at prescribed times and sometimes with
prescribed limits. Lower interest rates are customary. |
| Amortized Loan—A loan which is paid off in equal installments during its
term. |
| Annual Percentage Rate—The actual interest rate the borrower pays when
all the costs of obtaining credit are included. |
| Appraisal—A report made by a qualified appraiser setting forth an opinion
of estimate of value. The term also refers to the process by which the estimate
is obtained. |
| Appraised Value—An estimate of property value made by a qualified expert. |
| Appreciation—An increase in the value of a property. Appreciation must be
the result of an increased demand for property, any improvements or additions
made, improvements to the neighborhood, etc. |
| Balloon Mortgage—A mortgage with periodic installments of principal and
interest that, at the end of such a period, do not fully amortize the loan. The
balance of the mortgage due is usually paid in a lump sum at a specified date,
usually at the end of the term of such periodic installments. |
| Closing—The process that brings a loan into legal existence, including
the signing of all loan documents, their delivery to the appropriate parties,
and the disbursing of at least some of the loan funds. |
| Closing Costs—These are costs that are not controlled by the lender and
are required for anyone purchasing a home regardless of loan amount or lender.
These include expenses such as attorney fees, title insurance, survey, recording
fees, appraisal, and termite inspection. Independent professionals who are not
affiliated with your lender provide all of these services. You can usually
figure on your closing costs being approximately one to one and one-half percent
of your loan amount. |
| Comparables—Properties used in an appraisal report that are substantially
equivalent to the subject property. |
| Conventional Loan—A loan that may or may not require Private Mortgage
Insurance. (Any loan amount with 20 percent or more down payment will not
require PMI. Any loan amount with zero or 3 to 19 percent down payment will
require PMI.) This type of loan is subject to the qualifying guidelines set
forth by FNMA (Fannie Mae) or FHLMC (Freddy Mac). |
| Credit History—This is a snapshot of your past and present debt, current
available credit, and a rating of your debt repayment history. This is very
important to a lender so that they can know if you are a good credit risk. |
| Credit Report—A document completed by a credit-reporting agency providing
information about the buyer's credit cards, previous mortgage history, bank
loans, and public records dealing with financial matters. |
| Deed—The formal written document that transfers the rights of ownership
and possession (the title) from the seller to the buyer. |
| Discount Point—A unit of measurement used for various loan charges; one
point equals one percent of the amount of the loan. |
| Down Payment—The difference between the loan amount and the sales price
of the home you are purchasing. This is measured in a percentage—for example:
a 3 percent down payment on a $70,000 home would be $2,100. |
| Equity—The owner’s interest, or the amount of cash the owner has,
realized, paid in, or invested in real estate. |
| Escrow Payment—The portion of a borrower’s monthly payment that is set
aside by the lender in an escrow account to pay the taxes, hazard insurance,
mortgage insurance, ground rents, and other special items as they come due. |
| FHA Loan—A loan that is insured by the Federal Housing Authority. This
type of loan is geared toward providing mortgages for moderate to low income
families and is subject to the qualifying guidelines set forth by the Federal
Housing Authority. |
| Fixed-Rate Mortgage—The type of loan where the interest will not change
for the entire term of the loan. |
| Good Faith Estimate—Provides a breakdown of the estimated closing
charges. |
| Home Equity Loan—A loan under which a property owner uses his or her
residence as collateral and can then draw funds up to a prearranged amount
against the property. |
| Interest Rate—The percentage of interest charged on the amount of money
borrowed. This rate will vary slightly from lender to lender and will vary
according the type of mortgage chosen (30-year fixed, 3-year adjustable, etc.).
Now is an excellent time for mortgage interest rates as 1996 has ushered in
consistently low rates that are in fact the lowest in over 30 years! |
| Loan-to-Value Ratio (LTV)—The ratio, expressed as a percentage, of the
amount of a loan (numerator) to the value or selling price of the property
(denominator). Usually the higher the percentage, the greater the interest
charged. |
| Mortgage Broker—A mortgage broker is different from a single lender/bank
in that the broker represents many different lenders in much the same way a
travel agent represents many different airlines. Most people can't call a single
airline and expect to get a complete picture of all available flights and
prices, and yet some people will call a single lender/bank and end up choosing
the wrong type of financing which can literally cost them thousands of dollars.
A mortgage broker's knowledge and complete view of all financing options can
enable people with low incomes, self-employment, commissioned income, or even
credit problems to obtain excellent financing. A mortgage broker's compensation
as your consultant (much the same as a travel agent) is a finders' fee paid by
the lender. These lenders always offer better rates and superior prepayment
privileges and often shave as much as a half percentage point off the normal
market rate. |
| Origination Fee—The fee that the lender charges the borrower to cover the
cost of issuing a loan commitment. It pays for processing the loan which
includes collecting information about the borrower's creditworthiness and the
property. The fee is usually computed as a percentage of the mortgage loan. It
usually does not include fees for appraisals, credit reports, inspections, and
loan document preparation. |
| Points—An amount equal to one percent of the principal amount of a note.
Loan discount points are a one-time charge assessed at closing by the lender to
increase the yield on the mortgage loan to a competitive position with other
types of investments. |
| Pre-Paid Costs—These are the costs that cover your escrow account for the
future payment of interest, property taxes, and homeowners' insurance. Property
taxes are set by the appropriate government taxing authority and, unfortunately,
are not negotiable. Depending on the regulatory agency (FHS, Fannie Mae, etc.),
you will be required to prepay anywhere from 2 to 11 months of property taxes at
closing. Premiums for homeowners' insurance are set by the insurance company you
select, and you are required to pay your first year's homeowners' insurance plus
two additional months at closing. You can usually figure on your prepaid costs
being approximately one to one and one-half percent of your loan amount. |
| Private Mortgage Insurance—This insurance is required for most loans that
have a down payment of 20 percent or less. Private Mortgage Insurance inures the
lender in the event that you default on your mortgage payment and the lender is
forced to sell your property at a loss. |
| Title—The evidence of the right to, or ownership in, property. In the
case of real estate, the documentary evidence of ownership is the title deed
that specifies in whom the legal state is vested and the history of ownership
and transfers. Title may be acquired through purchase, inheritance, devise,
gift, or foreclosure of a mortgage. |
| Title Insurance—An insurance policy which protects the insured (purchaser
or lender) against loss arising from defects in title. |
| Underwriting—In mortgage lending, the process of approving or denying a
loan based on an evaluation of the property and the applicant's creditworthiness
and ability to repay the loan. The underwriter analyzes the risks involved and
selects an appropriate loan term and interest rate. |
| VA Loan—A load that is insured by the Department of Veteran's Affairs.
This type of loan is available only to veterans and is subject to the qualifying
guidelines set forth by the Department of Veteran's Affairs. |
Put very simply, the decision to refinance a home should be based on whether
you will own the property long enough to recapture the expense connected with
the new loan. The way to figure this can be as easy as subtracting the proposed
new house payment from the existing payment to find out what the monthly savings
will be. Then, divide the monthly savings into the cost of refinancing to
determine how many months is will take to recapture that cost.
There are some situations in which a refinancing decision should invariably
be made. If you are able to negotiate a no-cost mortgage (you pay no points or
closing costs) and if the new mortgage rate is lower than your existing rate,
then refinancing your loan would certainly be of financial benefit to you. If
the remaining mortgage balance, including points and closing costs, can be
refinanced at a reduced monthly payment and still be paid off within your
existing mortgage payment term, then refinancing would be highly advisable. If
you need extra cash for a home equity or auto loan and the mortgage rate is
lower than alternative loan rates, then refinancing is probably the best choice.
Lastly, you can generally count on its being time to refinance when your new
mortgage rate is at least one to two points lower than your existing rate and
you plan to stay in your home for at least three to five years.
One widespread myth that needs to be dispelled is the idea that lowered
monthly payments are the financial yardstick by which refinancing is measured.
Monthly payments are only comparable if they are based on the same loan
duration! In fact, lowered monthly payments can be achieved even at a higher
mortgage rate if the new mortgage has a longer term than the remaining years of
the old mortgage.
Another common misconception about refinancing is that if the new rate is not
at least two points lower than your existing mortgage rate, then refinancing is
not worth the time and trouble. In many cases, especially if you are planning to
stay in your home at least three to five years, even a one-point reduction can
make an enormous difference in your overall home mortgage cost. In addition,
with the constant technological advances in the mortgage industry, obtaining a
mortgage loan or refinance is now faster and easier than ever. If you have any
confusion or apprehension about your refinancing decision, most mortgage brokers
will consult with you at no charge or obligation.
To accurately sum up your refinancing decision, you need to thoroughly
consider the following five factors:
- The amount of reduction in the mortgage interest rate.
- The amount of reduction in the monthly payment.
- Any prepayment penalties on the old mortgage.
- The amount of closing costs, including any points, loan origination fees,
application fees, inspection fees, appraisal fees, title insurance, mortgage
insurance. etc.
- The number of years you plan to keep your home.
When you refinance, the proceeds from your new mortgage loan are used to pay
off your old mortgage. Even if you use the same lender, this is true. You are
not simply re-negotiating the terms of the old mortgage—such as reducing the
interest rate.
The old note you signed will be returned along with the mortgage contract,
and your lender will file a Mortgage Record Change. You will sign a new note and
mortgage contract that your new lender will record. No money will pass through
your hands unless you borrow more than your old mortgage balance. However, you
must pay for points and closing costs unless you finance those as well as the
old mortgage balance.
You need to expect that your home will have to be appraised again and
possibly be inspected. Your credit history will be reviewed again, and there
will probably be changes in your mortgage and title insurance. Of course, money
doesn't just grow on trees; but if it is truly the right time for you to
refinance, then with the money you will be saving after 12 to 18 months, you
should begin to feel like your money trees are in full bloom!
If after reviewing this report you are still not sure whether you should
refinance your home, it is time to call on someone specifically trained to help
you interpret your individual mortgage situation. Many mortgage brokers will
meet with you at no cost to consider your refinancing needs, and a good place to
start is to talk with a mortgage consultant you can trust. A good mortgage
consultant will gladly meet with you at your convenience to discuss your specific refinancing situation.
Remember that refinancing your home mortgage need not be a tedious,
overwhelming task. If you do not know a mortgage consultant you can trust,
simply fill out the following information, and I will put a trustworthy mortgage
consultant in touch with you. This consultation is absolutely free, and there
is no obligation on your part. If you decide this is not the right time for you to
refinance, at least you'll know your options.
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