Home Mortgage Refinancing Guide

Financing a home purchase can be a very stressful experience for homebuyers. Many homebuyers turn to a mortgage broker to save time and increase their options; brokers can help you whether you are purchasing a home or refinancing your current mortgage loan. The mortgage broker industry in becoming more popular; mortgage brokers typically introduce the majority of new mortgage loan programs. According to a recent survey, about 65 percent of home loans originate with brokers; this percentage is rising as homeowners today are pressured with time constraints and stress. Banks still remain the main lending choice for a mortgage loan; however mortgage brokers are overstepping credit unions as the second source of a mortgage loan.

If you finance your mortgage through a credit union for instance, you are only going to be sold that particular credit union’s mortgage product. However, with a mortgage broker, they establish relationships with a great number of lenders. Once the broker you are working with is aware of what your loan requirements that person can help you find the right loan. Most homeowners don’t have enough time on their hands to do the shopping necessary to find the best mortgage loan for their situation.

A word of caution: Do your homework before consulting a mortgage broker. As with any other service, one bad apple can cause a lot of bad publicity for the mortgage broker industry. Make sure you know what the fees will be and if they are in line with market rates for the services you receive. Don’t make the mistake of assuming your broker will be acting with your best interests at hand. Mortgage brokers are selling a product and receive their fees as a commission for what they sell. While there is nothing evil about being paid on commission, homeowners should be careful when using a broker to secure a mortgage loan. Like any other purchase you make, it pays to shop around when choosing a mortgage broker.

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Interest rates have been declining for the past three weeks as the markets reacted to the Federal Reserve, following Hurricane Katrina. The average 30 year fixed rate was 5.74%, slightly up from 5.71% the week before. The average rate for a 15 year fixed mortgage loan was 5.32%, up from 5.3% the week before and the 5.13% last fall. Mortgage rates didn’t move much this week as the markets wait for reaction from the Federal Reserve committee meeting.

While the outcome of this meeting next week is a relative unknown, the markets seem confident that government will take action against inflation brought on by the Hurricane. Adjustable Rate Mortgages (ARM), are also up this week. The for a 5 year ARM was 5.26%, up from 5.24% last week One year indexed ARM loans are 4.46%, this is up from last week when they were 4.45%. This time last fall, the one-year ARM was 4.03%. The interest rates quoted here require the payment of up front points in the amount of .6 point. One point is equal to 1% of the loan amount; this amount is charged as prepaid interest.

The sizzling housing market in this country coupled with looser lending restriction is allowing bold new scams that consumers haven’t had to face before. Homeowners are bombarded with a variety of pitfalls when facing the mortgage market today, the most common being predatory sales practices where homeowners are bamboozled into paying far more than they thought the transaction would cost them. Forgery of documents is becoming commonplace. Falsified credit histories and appraisal documents are turning up more in more in botched mortgage deals.

The fallout for homeowners can be a disaster. Financial hardship, credit problems, or even foreclosure due to unaffordable mortgage payments or balloon payments build into the loans. Some find out that they do not legally own their homes too late. To avoid these practices, homeowners need to be educated about mortgages. Scams seem to target Hispanic homeowners; taking advantage of the language barrier. However, even the best English speakers don’t always read or comprehend the documents they sign when at the mortgage table.

How do the scammers operate?

These scammers prey on people who are not familiar with lending policy and procedure. The make the documents overly complicated to hide their fraudulent nature and hidden costs. Once a mortgage loan is finalized and the sale is made, the agents involved get their commissions. Some charge fees anywhere from $200 to $5,000 for handling bogus paperwork.

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Many people have been inquiring about Private Mortgage Insurance or PMI. The legislation enacted to protect homeowners regarding PMI is the Homeowners Protection Act of 1998.

Less than a decade after the passing of a bill allowing homeowners to cancel private mortgage insurance policies, the number of cancellations has skyrocketed. The legislation allowing this is outlines requirements for borrowers to cancel their private mortgage insurance. This bill was passed on July 29, 1998, and went into effect in 1999. Homeowners may cancel private mortgage insurance after 24 months if they have an on time payment record and their home equity has grown to more than 20 percent. Homeowners may have to pay for an appraisal of their property to document the equity they have in their homes. Mortgage insurance is typically cancelled automatically when the mortgage amortizes 78 percent of it’s original value; however, few people carry the insurance for this long.

Thinking about refinancing or taking out a new mortgage? Here are several factors to consider:

Be aware of your overall financial picture; do not consider your mortgage loan to be separate from your other finances. Your mortgage should be included in all of your financial planning. You should organize your expenses on paper and keep a tally of what you own, how much you are worth, and what your debts are. Analyze your credit history and make sure the information maintained by the credit agencies is accurate. Maintain a budget so you know how much money you have coming in and what your cash expenditures are. When you have done all of this you will have a good idea of how much mortgage you can afford; you can then determine how you are going to finance your new mortgage.

While it may seem to be the most important factor while you are shopping around, don’t assume that the lowest monthly mortgage payment is going to be the best loan for your situation. If your goal is to live in your home and pay off the mortgage don’t jump at the loan with the lowest monthly payment. The reason for this is the less you pay every month with a lower payment the less you are reducing the principle of your mortgage loan.

Beware interest only loans.

Interest only mortgage loans are very popular at the moment. This type of loan allows you to potentially qualify for more house than you can really afford. Most interest only loans come with adjustable interest rates mortgages; however, some can be found with fixed interest rate loans. Calling these loans “interest only” can be misleading to many homeowners. There is really no such thing as an interest only mortgage loan, because at some point you will have to pay off the principal balance as well. For example, the loan payment on a 6 percent interest rate, 30 year mortgage loan of $100,000 is around $600. Of that payment, $500 is paid in interest on the loan. If you spring for an interest only type of mortgage loan, you’ll be lowering your payment by a measly $100 per month; on top of that you’re not building equity in your home, you might as well be paying rent. The only equity gains in your home you may see with this type of loan is value appreciation in real estate prices. The risk you run there is the housing market could reverse and you would see the value and the equity in your home drop. What happens if you lose your job and are unable to make the payments? Selling your home with this type of debt could be a disaster in the making; you could find yourself easily owing more money than your home is worth.

Many mortgage experts warn that interest only mortgages are only intended for home owners planning to move before the loan principal becomes due, or for individuals who expect their incomes to rise sharply in time.

What are Option adjustable rate mortgage loans?

Similar to their interest only cousins, these mortgages, called option adjustable rate mortgage loans are becoming very popular in the marketplace. These loans like the interest only variety should come with a warning label. This mortgage loan gives homeowners the option to pay less interest than what is due on their mortgage by deferring that part of the payment and adding it on to original mortgage balance. The attraction here is a lower monthly payment. However, if you choose to do this you will owe more than your original mortgage loan. If you fall into this type of predatory trap you could wind up caught in a never-ending loop of mortgage payment increases as the interest due each month increases with the growing balance of your mortgage. Not to mention you’ll never pay your home off.

To learn more about your options when it comes to mortgage loans, sign up for our free book “Five Things You Need to Know When Refinancing a Mortgage.”