How to Refinance a Mortgage

Many mortgage lenders are changing their marketing strategies and are focusing on homeowners with adjustable rate mortgages. These lenders are marketing fixed interest rate loans hoping to capitalize on recent interest rate hikes and uncertainty in the economy.

Many homeowners in the United States used adjustable rate mortgages to lower their monthly payments or purchase homes they could not qualify for with traditional financing. Now that short term interest rates are climbing higher than long term interest rates many of these homeowners need to refinance.

Mortgage interest rates are currently averaging 6.27% for a traditional 30 year fixed rate loan. This is still extremely low by historical standards. The advantage of locking in this rate with a traditional mortgage is you are guaranteed your interest rate will not change for the duration of your mortgage.

This latest marketing blitz by mortgage lenders follows a decline in the number of mortgage loans processed and intense competition between lenders. Mortgage lenders have seen their profit shrink as the volume of loans has decreased. In an attempt to drum up a little business and keep the mortgage boom going these lenders are desperate to refinance your mortgage loan. As a result, you could walk away with a fantastic deal on your refinance. Remember, the interest rate you receive is not the only factor that makes a mortgage a good deal. You can negotiate for friendly terms and lack of fees.

Refinancing your mortgage makes a commission for your loan officer or broker. The lender itself loses money when writing your loan; their money is made by servicing the loan and collecting interest. Some lenders make money by selling your loan to another lender. Right now mortgage lenders are pushing refinancing options because they don?t want to lose your business to another competitor.

If you are on the fence with your decision to refinance your mortgage you need to consider several things before making a decision. First, how long will you be staying in your home? You need to stay in the new mortgage long enough to make up your expenses from refinancing. Before shopping around for the best deal you should do you homework and learn how the industry works. Our guidebook to mortgages and mortgage refinancing will help you do just this, and it’s free.

To learn more sign up for our free guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

As a homeowner paying interest on a mortgage you are eligible to deduct the interest you pay each year from your Federal income taxes. In order to get the maximum mortgage interest tax deduction you need to understand the rules.

Mortgage interest that you pay on your primary and secondary home is generally deductible. Mortgage interest is any amount you pay as interest on a loan for your primary or secondary home. Eligible loans include:

The mortgage you used to purchase your primary home.

Any second Mortgage you have on your home.

Your Home equity loans or equity lines of credit.

The most important factor is that the loan has to be secured by your home. If the loan is not secured by your home it is not eligible for the mortgage interest deduction.

For IRS purposes, your home can be a house, condo, coop, boat, mobile home, RV, or anything that has sleeping area, cooking area, and a toilet. The deduction only applies to your primary residence and second home. You can not deduct interest from any properties after you second home. You are eligible to claim the deduction as long as the loan is your legal responsibility, and you make the monthly payments.

There are limits to the amount of interest you can deduct. You cannot deduct more than the value of your home. Additionally, the deduction is limited to one million dollars. Home equity loans are limited to $100,000. For more information on the limits for interest deductions refer to IRS publication 936.

To claim the deduction on your taxes you will need the form 1098 from your mortgage lender. This form outlines the interest as well as any points you paid the previous year. If you recently closed or refinanced your mortgage you will need the closing statement. You may also need the name, address, and SSN of the seller you purchased from.

Every homeowner knows the advantage of having a mortgage every year when April rolls around. As a homeowner you get to deduct the interest you paid the previous year on your mortgage loan.

What many homeowners don’t know is that they are eligible for another deduction if they paid points for refinancing or purchasing a new home. As a reader of this blog you know that a point is 1% of the loan amount paid at the time of closing. In exchange for paying this fee up front you get a lower interest rate. Take a close look at the 1098 you got from your mortgage lender. If you paid points last year they should be itemized on this document.

The 1098 you receive each year shows the amount of mortgage interest you paid the previous year. If you prepare your own tax return the interest paid and points go into line 10 of your Schedule A. If you paid points and they are not on your 1098 but you have them on your closing paperwork, the amount goes on line 12 of your Schedule A. Don’t overlook this deduction, it could save you money.

If last year was the first year of your mortgage pay close attention to points that were paid. The seller will often pay part or sometimes all of the points for you. Guess what? If the seller paid all the points, the buyer still gets to claim the deduction. Whether or not you get to deduct all of what you paid in points depends on the following factors.

The points must have been paid on your primary residence, where you live for most of the year. You must report the points in the year they were paid and claim the deduction for that year. You must be able to document on your settlement papers that the points were paid on the mortgage.

Points that are paid on an investment property or vacation home cannot be fully deducted the year you took out your mortgage.

Points paid when refinancing a mortgage may also be tax deductible. If the proceeds from the refinance are used for home improvements they may be fully tax deductible. If you used the money for other reasons such as purchasing a car, you must take the deduction over the term of your new loan.

To calculate the amount of deduction you are eligible for, divide the points you paid by the number of payments you will make over the loan?s term. Your lender will also be able to provide this information to you.

To learn more about maximizing the tax deduction for your mortgage interest payments, sign up for our free guide to mortgages and mortgage refinancing.

In order to get the best deal for your mortgage you need to do your homework and shop around. Part of doing your homework is learning the terminology of the mortgage industry. Here is a list of basic mortgage terms you should be familiar with.

Adjustable Rate Mortgage Loan (ARM) These are mortgages where the interest rate changes based on market conditions. The interest rate will be tied to some index such as the prime rate for example, and the lender will charge a premium on top of that index. These loans typically have an introductory period where the interest rate will be fixed at a lower rate; however, at the end of the introductory period the interest rate will go up to a much higher rate. When the interest rates change the amount of your monthly payments will change with it.

Annual Percentage Rate (APR) This is the interest rate that includes all finance expenses for the loan. The Annual Percentage rate factors in origination fees, points, and any other fees that come with the loan, including the interest paid on a yearly basis. This APR is higher than the advertised interest rate and will let you compare mortgages from different lenders and the fees associated with each.

Interest Rate and Payment Caps Caps on the amount interest rates can go up at any one time or over the life of the loan serve to protect the homeowner from rate hikes. Payment caps also protect the homeowner by limiting the amount the monthly payment can go up.

Closing Costs This is the sum of all fees and expenses you must pay when taking ownership of a property. These fees must be disclosed prior to closing and include any fees, insurances costs, and taxes.

Debt to Income Ratio This is the ratio a lender will use by taking the sum of your debt versus the amount of income your receive. This is used by the mortgage lender along with your payment history to determine your credit worthiness.

Down Payment The initial payment you make when purchasing your home. It is typically 20% of the property value and is the difference between that value and the amount of your mortgage loan.

Equity is the portion of the home owned by the homeowner; the mortgage is the portion of the home owned by the lender. Put another way Equity is the difference between the appraised value and the outstanding balance of the mortgage.

Escrow Account This is an account set up by the mortgage lender that is used to pay the homeowners insurance and property taxes for the home. Escrow accounts protect the lender’s interest in the property by ensuring taxes and insurance are paid

Pre-paying points on your mortgage loan to get a lower interest rate is great if you can afford it, but what if you don?t have the cash? Is it always best to pre-pay interest with points?

There are situations where pre-paying points is not the best thing to do. Points, called “origination fees” or “discount points” are equal to one percent of your total mortgage amount paid at the closing table. When you pre-pay points on the loan you are paying up front to get a lower interest rate. The more points you buy, the better your interest rate should be. Points came about in the 80s when interest rates were 15 percent and higher. This was a way to help people purchase homes in the stagnant housing market of the day. Mortgage lenders offered discounted loans for homeowners that could put down the cash for pre-paid interest.

Today’s marketplace is very different. Interest rates are still at historically low levels. Today you can finance a $400,000 home for as little as 6%. The market place is extremely competitive and mortgage lenders are fighting each other for your business; as a result you don?t need to drop all your cash at the closing table to get a decent interest rate.

For example, if you were to take out a 30 year fixed-interest rate mortgage at 6.5 percent and pre-pay 2 points on a $200,000 home you would have to pay $4,000 at closing. If another lender is offering you the same loan at 7 percent with zero points which mortgage loan is the best deal?

Assuming that you have 20 percent down the payment each month for the first loan is $1,264. Since this loan has a fixed interest rate the payment will not change for entire duration of the loan. While the interest rate you are getting is 6.5%, you have to fork over four thousand dollars to close.

The second loan is a 7 percent offer with zero points due at closing. At 7 percent your monthly payment goes up to $1,330; your monthly payment is $66 more per month. To compare the savings divide $4,000 in pre-paid interest by $66 and you?ll see it takes 60 months (five years) to realize the savings. If you invested that same $4,000 at a modest return you could earn more that what you save by pre-paying points.

By prepaying points on your mortgage loan you would have to live in your home for six years before realizing any savings from your money. If you move during the first five years you?ve effectively wasted your money. As you can see points may not be the best way to secure a lower interest rate for your mortgage loan. To learn more about saving money on your mortgage loan sign up for our free guidebook to mortgages and mortgage refinancing.