How to Refinance a Mortgage

What is the best term when selecting a mortgage loan?

The term of your mortgage loan is what your lender uses to set your monthly payment. The longer the term you select, the lower this monthly payment will be. The downside of selecting a longer mortgage term is that you will build equity at a much slower rate while paying more interest over the life of the loan.

If you are financing your home with a traditional fixed interest rate mortgage you will have the option of choosing a mortgage term from ten to forty years. Nearly all adjustable interest rate mortgage loans have a term of thirty years.

You may be able to use the term of your mortgage loan as another bargaining chip to help secure a lower interest rate. With all other contributing factors being equal, the interest rate on a fifteen year mortgage will always be lower than a thirty year mortgage loan. Twenty-five and twenty year mortgage terms are less common but should offer lower interest rates than their thirty year counterparts. The interest rate on a forty year mortgage will always be the highest.

As a consumer in today’s marketplace you need to arm yourself with information to avoid being taken advantage of. This is true whether you’re shopping for a refrigerator or a mortgage loan. Just like that refrigerator your mortgage loan comes with different options from a variety of different lenders. If you’re a regular reader of this mortgage blog these options are familiar to you. Basic options include: prepaying points, escrow waiver, and a pre-payment penalty.

Points are a fee paid at closing to acquire a lower interest rate. A point is typically 1% of the loan amount. For example, 1 point on a $100,000 mortgage is $1000. The more points you prepay, the better your interest rate will be. Paying points is similar to a down payment; you are paying this fee so your monthly mortgage payment will be smaller and you’ll pay less interest over the life of the mortgage. The longer you stay in your home the more you’ll benefit from paying points.

Like any other good thing there is a negative twist to points on a mortgage. Negative points, sometimes cleverly disguised as “rebates” are payments to you from lender. For this “rebate” you pay a higher interest rate. You can use this cash at closing to pay your closing costs. If you’re cash poor this could be an attractive offer; however, you will end up paying back a great deal more in interest payments over the life of the loan. Obviously the longer you stay in this mortgage loan the more you will pay for the rebate.

Generally speaking, if you plan on staying in your home for at least 5 years, prepaying points on your mortgage is a sound investment. Stay away from negative points as they will hurt you in the long run unless you will sell or refinance within three years. Different lenders will offer you different deals based on the same number of points paid. Be sure and shop around from a variety of mortgage lenders to ensure you get the best deal for your prepayment dollar.

Another option to consider when choosing a mortgage lender is whether or not they will waive escrow on your loan. Many lenders require that the property taxes and homeowners insurance premiums are paid in escrow. Escrow is a third party that makes these payments for you at a premium paid by you. Not paying this premium can be an advantage if you are able to make these payments yourself. Many escrow companies are notoriously unreliable; this can cause a real nightmare for the homeowner. If you have a down payment or prepay sufficient points you may be able to talk your lender into waiving their escrow account requirements.

The final option we’ll discuss here is the pre-payment penalty. This prepayment penalty is a clause in your mortgage contract that gives the lender the right to charge you a fee if you pay the mortgage off before the end of the loan’s term. These penalties usually only apply to the first five years of the mortgage loan; however, it could discourage you from refinancing if a better mortgage deal comes along. If you’re using a sub-prime lender for credit reasons you?ll most likely be stuck with this penalty. If you finance your mortgage with a traditional mortgage lender this is an option you can take to the bargaining table. If you’re not interested in taking this option with your loan you may be able to barter for a lower interest rate by accepting the pre-payment clause.

Remember, bartering for options on your mortgage is completely negotiable. It pays to be a shrewd consumer; this is true whether you’re shopping for a refrigerator or a home mortgage loan.

The most popular choice when it comes to financing the purchase of any home is using a mortgage. Mortgages are loans that are secured by the property itself. There are many different methods to obtain a mortgage loan; because of this it pays to do your homework and shop around before selecting a mortgage lender. For most people, their home represents the largest purchase of a lifetime; however, many homeowners forget this when it comes to a mortgage. When shopping for a mortgage keep in mind that interest rates and loan terms can very a great deal from one lender to the next. Even slight differences in interest rates or terms could mean saving thousands of dollars, or being stuck with a loan that doesn’t suit your situation. The most important thing when it comes to a mortgage is doing your homework.

Fixed interest rate or variable?

When shopping for the best mortgage, you need to learn the lingo. For instance, mortgages come with either fixed interest rates or variable rates. Fixed rate loans hold their interest rates for the duration of the loan. This is true for traditional 30 year and even 40 year mortgage loans. Adjustable Rate Mortgages, also called ARMs, have a fixed rate during a specified introductory period. After this period ends the interest rate will change to the adjustable rate; this rate changes with prevailing interest rates.

Adjustable rate mortgage loans have much more risk than fixed rate mortgages. They are popular however, because payments are typically much lower when interest rates are low. When interest rates begin to climb, as they have for the past year, these adjustable rate mortgages become much less popular. For many homeowners the risk is outweighed by the monthly savings; this is especially true for those who are planning on staying in their property for five years or less.

Mortgage Fees

Mortgage lenders charge a fee for processing a mortgage loan. Typically they charge many different kinds of fees. These fees include entry, exit, administration, and insurance expenses. There may also be attorney’s fees, and settlement charges at closing. If you are financing your mortgage with a Bank, they may require a survey of your property in addition to the appraisal you would normally be required to provide.

To learn more about the terminology and industry lingo, sign up for our free guide: “Five Things You Need to Know About Your Mortgage.”

Mortgage loans are typically the most important purchase a homeowner will make. In order to find the best loan you need to educate yourself. Mortgage jargon is an important part of that education. Here are a few basic mortgage definitions.

Closing Costs

When you are ready to close on your mortgage you will have to pay expenses at closing. The amount of these expenses depends on the type of loan you are refinancing and where you live. Your mortgage lender is required to disclose any fees before closing. This disclosure is made in the truth in lending estimate provided by your lender.

Points

Points are fees you will pay to receive a lower interest rate. One point on your mortgage loan is typically 1 percent of the loan value. For instance, if you borrowed $100,000 and wanted to lower your interest rate you could pre-pay 1-3 points. This means you would pay anywhere from $1000-$3000 in upfront fees. Be sure and read the fine print from your lender as most discount rates advertised require points to be paid at closing.

Interest Rates

When your lender writes a mortgage they charge you interest to realize a profit. Interest on a mortgage loan is front loaded. This means payments made in the early years of the mortgage are applied mostly to interest charges. When closing on your mortgage loan you have the choice to lock in your mortgage rate. This means you have a specified period of time to close on the loan at this interest rate. You also have the option of floating your interest rate. This means if the interest rates go lower you can take the lower rate. The risk here is interest rates could go higher.

Mortgage terminology is no mystery. If you do your homework prior to refinancing your mortgage you can save yourself thousands of dollars. To learn more sign up for our free eBook: Five Things You Need to Know before Refinancing Your Mortgage

You have an adjustable rate mortgage, and now you need to refinance to fixed interest rate before your payment goes through the roof. Most homeowners visit their banks, fill out an application, and pay much more than they should. Banks prefer that you that you know very little about the mortgage business; this is how they make money. Refinancing your mortgage can save you money, give you better terms, and let you consolidate debt or borrow against equity in your home. As a homeowner you need to understand what you are getting into and shop around for the best deal.

A common mistake many homeowners make is simply walking into a bank. Make sure you have reviewed your current mortgage before you start shopping around. You need to know the interest rate, payoff amount, how much equity you have, and what your credit looks like before getting started. After reviewing this information you can decide if refinancing the mortgage is the right thing to do. As a homeowner it is your responsibility to make an informed decision; your lender simply wants to sell a mortgage, they don’t always have your best interests at heart.

When shopping for a mortgage loan you need to understand the jargon being used as well as the terms of the loan. Our free guide will help you understand the jargon and teach you about the industry. Obtaining a mortgage is a large commitment on our part. Doing your homework and shopping around is the first step you can take to finding the best loan for your home and your family. To learn more about finding the best mortgage loan available sign up for our free guide: “Five Things You Need to Know Before Refinancing Your Mortgage.”