Home Mortgage Refinancing Guide

When refinancing a traditional mortgage loan your lender will require verification of your income. Most lenders require complete documentation in the form of pay stubs, statements, or 1099s. For some people documenting income from self-employment or investments can be difficult if not impossible. If you are a homeowner with unpredictable income you may benefit from “no-doc” mortgage refinancing.

No doc mortgage loans are loans that you don’t have to prove your income. Homeowners can refinance their mortgages without documenting where and how much their income is. The catch is you will pay a higher interest rate and may have to accept less favorable terms for securing this type of mortgage loan. No doc loans represent a higher risk for mortgage lenders; this risk is passed on to you in the form of higher payments and strict terms. These terms can include higher penalties for late or missed payments.

To learn more about refinancing your mortgage sign up for our free guide: “Five Things You Need to Know Before Refinancing a Mortgage.”

Interest rates on home mortgage loans reached their highest levels this month since September of 2003. This means people with adjustable rate mortgages should hang on to something solid; monthly payments on these risky types of mortgage loans are skyrocketing. For investors however, these stair-step interest rate hikes have been a stairway to heaven. The Federal Reserve raised short-term interest rates for the 12th consecutive time, and there are more rate hikes on the way.

Mortgage interest rates closely follow the yields on 10 year government bonds. Until now these interest rates have not been keeping up the Treasury bond yields. Once these interest rates catch up homeowners can expect to feel the squeeze on their monthly budgets. This is especially true for homeowners that may have purchased more home than they can afford using riskier interest-only and option type mortgage loans. Risky mortgage loans coupled with little or no down-payment is the perfect recipe for financial disaster as rates increase. If this describes your recent home purchase, refinancing to a fixed rate, traditional mortgage could be your only parachute.

Suppose for example you purchased a $250,000 home with a zero-down payment, interest only mortgage loan. Until recently you have been enjoying low monthly payments on the mortgage, albeit you have very little to zero equity in the home. Future interest rate hikes could easily double that cushy monthly payment when the principle kicks in. When refinancing these risky mortgage loans the single most important question to ask is how long you intend to stay in the property. If you plan on staying in your home at least seven years choose a fixed interest rate 15 to 30 year mortgage. When you do this you will lock in a low interest rate and build equity in your home. Last week the average interest rate for a 30 year fixed mortgage was 6.36%; historically this is still a fantastic interest rate. The average interest rate for a 15 year fixed interest rate loan last week was 5.89%.

If you only plan on staying in the home for less tan five to seven years you could benefit from a hybrid adjustable rate mortgage loan. This is risky however as you have no guarantees on what your monthly payment will be. Last week interest rates for hybrid adjustable rate mortgages (ARM) were 5.65%. Currently the monthly payment on an adjustable interest rate hybrid mortgage is approximately $90 less than a 30 year fixed rate mortgage on a $200,000 home.

Mortgage interest rates went up again for the ninth consecutive week. The 30 year fixed interest rate is considered the industry benchmark and it rose five points to 6.42% last week according to a recent survey of national mortgage lenders. Last fall the 30 year fixed interest rate was 5.76%.

Fixed interest rate 15 year mortgage also rose five points to 5.96%. This is the highest mortgage interest rates have been since the fall of 2003 when the rate was 6.47%. This increase took place after the US Department of Labor released the employment report. The reaction to this news caused bond yields to increase resulting in the interest rate increase. Mortgage interest rates have been steadily increasing for some time now. People with adjustable rate mortgage loans (ARM) have seen their payments go up over the past few months as a result. Interest rates for home equity lines have also resulted in higher monthly payments for many homeowners. Many people are mow refinancing adjustable interest rate mortgages to fixed rate loans.

In many areas interest rates for adjustable rate mortgages are lower than fixed interest rate loans. Rising interest rates are causing adjustable rate loans to lose their attraction compared to fixed mortgages. Interest rates for home equity loans are tied to the prime interest rate; the prime rate goes up every time the Fed raises short term rates. Because of this interest rates on home equity lines are now 60 points higher than interest rates on fixed 30 year mortgages.

When shopping for a new car, most people first decide on a make, model, and a list of optional features they would like. Car buyers know you can’t find a good deal unless you know exactly what you’re looking for. When it comes to mortgage loans people don’t have a clue what they want or how to shop. A mortgage is a major financial decision and most people leave this decision in the hands of a total stranger. This is why many people end up with an over priced mortgage loan that does not fit their needs.

Before you start shopping for a mortgage loan you need to decide what type of a mortgage would best meet your needs. The different types of mortgage loans are: fixed rate mortgages and adjustable rate mortgages. If you choose an adjustable rate mortgage loans you may receive a lower interest rate and monthly payment in the introductory timeframe; however your payments could rapidly increase as interest rates rise or when your introductory tie ends. Fixed-rate loans have the advantage of offering you a fixed payment amount that will not increase. There are other considerations to make when selecting a mortgage. You need to consider using an escrow account for your property taxes and insurance. Another option is an interest only mortgage loan which could be a good idea for someone who is only planning on staying in the property for a few years. You will need to decide on a term for your mortgage loan; this term is used to determine your monthly payment amount. The longer your mortgage term, the shorter your monthly payments will be; however, you will also build equity at a much slower rate. You have the option of select mortgage terms from 10 to 40 years.

Something to consider that could lower your interest rate is pre-paying points on the loan. Points are fees you pay the mortgage lender at closing time. For example if you take out $100,000 and wanted to pre-pay two points, you would pay $2000 at closing. The more points you pre-pay on your mortgage the better your interest rate will be. You should consider paying points an investment in your home that will save you money. Your down payment is the amount you will pay beyond what your mortgage finances. The down payment you pay can also help lower your interest rate. If you don’t have at least 20 percent of the loan amount as a down payment you could be required to purchase private mortgage insurance (PMI). This insurance protects the mortgage lender from loss if you default on your mortgage. The insurance does nothing for you as a homeowner other than charge you monthly premiums.

When shopping for a mortgage loan pay careful attention to the “lock timeframe.” This lock is the amount of time your lender will guarantee your interest rate and points. Your lender can charge you more for longer lock periods; you will have to decide when to accept the lock period and for how long you want it.

To learn more, sign up for our free guide: “Five Things You Need to Know…”

Lenders are softening up in light of recent interest rate hikes. A recent survey by the government indicates mortgage lenders are easing the rules they use when approving home mortgage loans in response to the recent decline in mortgage applications. The Federal Reserve is warning that decreasing critera in approving mortgage loans cold result in an increase in bad loans. Many homeowners are currently paying less than the amount of interest due each month; this results in unpaid interest tacked on to the mortgage principal balance, a phenomenon referred to as negative amortization.

The decline in mortgage demand may be attributed to the decrease in the number of people refinancing their mortgages. Demand for financing new homes is at the lowest level since February.