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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?


Surrounded by a sea of refinancing confusion

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.

Basic terms I need to know about

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!

bulletAdjustable 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.
bulletAmortized Loan—A loan which is paid off in equal installments during its term.
bulletAnnual Percentage Rate—The actual interest rate the borrower pays when all the costs of obtaining credit are included.
bulletAppraisal—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.
bulletAppraised Value—An estimate of property value made by a qualified expert.
bulletAppreciation—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.
bulletBalloon 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.
bulletClosing—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.
bulletClosing 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.
bulletComparables—Properties used in an appraisal report that are substantially equivalent to the subject property.
bulletConventional 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).
bulletCredit 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.
bulletCredit 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.
bulletDeed—The formal written document that transfers the rights of ownership and possession (the title) from the seller to the buyer.
bulletDiscount Point—A unit of measurement used for various loan charges; one point equals one percent of the amount of the loan.
bulletDown 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.
bulletEquity—The owner’s interest, or the amount of cash the owner has, realized, paid in, or invested in real estate.
bulletEscrow 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.
bulletFHA 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.
bulletFixed-Rate Mortgage—The type of loan where the interest will not change for the entire term of the loan.
bulletGood Faith Estimate—Provides a breakdown of the estimated closing charges.
bulletHome 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.
bulletInterest 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!
bulletLoan-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.
bulletMortgage 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.
bulletOrigination 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.
bulletPoints—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.
bulletPre-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.
bulletPrivate 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.
bulletTitle—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.
bulletTitle Insurance—An insurance policy which protects the insured (purchaser or lender) against loss arising from defects in title.
bulletUnderwriting—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.
bulletVA 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.

When should I refinance my home mortgage?

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.

Be aware of refinancing myths

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.

Things to consider in refinancing my home

To accurately sum up your refinancing decision, you need to thoroughly consider the following five factors:

  1. The amount of reduction in the mortgage interest rate.
  2. The amount of reduction in the monthly payment.
  3. Any prepayment penalties on the old mortgage.
  4. The amount of closing costs, including any points, loan origination fees, application fees, inspection fees, appraisal fees, title insurance, mortgage insurance. etc.
  5. The number of years you plan to keep your home.

What is involved in refinancing my home mortgage?

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!

What if I'm still not sure if I should refinance?

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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Dan Kilde
  By Referral Only®
Remax Infinity
Your Real Estate Consultant For Life
480-355-8011 or 1-877-829-0252