Mortgage Refinance Guide

Did you refinance your mortgage loan last year?  If so, don’t forget to deduct any points you prepaid for interest on your 2005 tax return.  The points you pay are pre-paid interest; you pay up front to receive a lower interest rate.  The good news for you is these points are a deduction on your tax return. 

If you refinanced your mortgage last year you may have to deduct the points you paid over the life of the mortgage.  This means for last year your deduction will be a percentage of the total amount you paid for points in 2005.  The percentage you are eligible for is the total amount you paid in points divided by the term of the loan.  (the term length is in number of months) 

There is a way around this.  If you refinanced twice in 2005 the full amount of your points is your deduction. Also, if you are cashing out for renovations or improvements your points are fully deductible.

When you apply for a mortgage or a home equity loan there are things you can do to ensure you are getting the best interest rate. The interest rate you receive for your loan largely depends on your credit score. If you have lousy credit you will not get a prime interest rate; however, you can still improve your interest rate with a few easy steps.

To get the best deal for your money you need to do your homework and research mortgage lenders and their products. To avoid hurting your chances of qualifying for the best mortgage keep the following items in mind.

Pay Your Bills on Time When Applying for Your Mortgage

Even if you have a good credit rating, late payments could hurt your interest rate. If you are refinancing your mortgage or buying a new home, it is important to demonstrate a good repayment history. You need to have the history before you apply for the mortgage. Make sure your credit card payments are up to date, keep their balances low, and make your car payments on time. Having a few late payments on your record won’t prevent you from being approved; however, it could cost you a higher interest rate. Establish at least a six month record of on time payments prior to applying; this will improve your credit score and work in your favor.

Keep Credit Inquiries to a Minimum

Many homeowners make the mistake of allowing too many lenders to run their credit when shopping for a mortgage. When shopping for a mortgage loan ask the lenders for no obligation quotes. This will allow you to compare quotes without the lenders accessing your credit history.

When you request a no obligation quote the lender will ask for a description of your credit history. For this reason you should request a copy of your personal credit history prior to shopping for a mortgage loan; requesting this copy does not count as a credit inquiry and will not adversely affect you.

Keep Your Debt to Income Ratio Low

Applying for credit cards or a car loan at the same time you are shopping for a mortgage is a bad idea. The more open lines of credit you have the higher your debt to income ratio will be. Carrying a high debt to income ratio makes you more of a credit risk for your mortgage lender. If you have unused credit cards it is best to close them at least three months before applying for your mortgage. Don’t forget about department store charge cards, even if they have a zero balance they can affect your overall credit rating.

If you are a homeowner that financed your home using an Option Adjustable Rate mortgage pay attention. You may not know that this relatively new type of mortgage is considered the most dangerous loan on the market. The option mortgage was intended for real estate investors; however, it was marketed for homeowners as a way to buy more home than you could normally qualify for.

An Option Adjustable Rate Mortgage loan is a mortgage with an adjustable interest rate and four different options for repayment. You have the choice of paying the mortgage back like a traditional 30 year mortgage, a 15 year mortgage, an interest only mortgage, and a minimum payment option. The minimum payment choice does not pay enough each month to cover the interest due on the mortgage. While this low payment amount may seem like an attractive choice, the interest you are not paying is tacked on the principal loan balance. Growing mortgage principal is a phenomenon called “negative amortization.” This means you owe more for the property than you should have paid for it with traditional financing.

If you are a homeowner making the minimum payments on an Option Adjustable Rate Mortgage you are at the helm of a sinking ship. Get out now! Interest rate hikes along with the fact that your principal balance will come due one day spell financial disaster for any homeowner in this predicament. You need to refinance this loan immediately to a traditional fixed rate mortgage before you get in over your head. To learn more about refinancing your mortgage and how to save money doing so, sign up for our free guide to mortgages and mortgage refinancing. The guide is free and there is no obligation on your part. Get “Five Things You Need to Know Before Refinancing Your Mortgage.”

When you refinance your home with a cash out refinance mortgage you are borrowing more than the balance currently due on your loan. As an example, if you owe $60,000 on your home and the house is worth $100,000, then you have $40,000 in equity in your home. You can refinance your home for $100,000 and pocket the $40,000 difference.

Homeowners do this for a variety of reasons. These reasons include home improvements, paying off bills, and college tuition. You can use cash out mortgage refinancing to access large amounts of equity in your home. There are several things you need to know before doing so.

First, You Will Pay Closing Costs

Whenever you refinance a loan you will pay closing costs. The amounts you pay vary from one lender to the next; however, plan on paying several hundred to a thousand dollars at closing. If you are not able to do this you might consider taking out a home equity loan; home equity loans typically do not charge closing costs.

Second, The New Interest Rate Must Be Lower

If the interest rate you settle on when refinancing is not lower than your present mortgage loan, it will cost you a lot of money over the term of the mortgage. This will negate any potential savings you could realize by refinancing.

Lastly, Put Your Money To Good Use

The equity you cash out form your home is your money; however, you are borrowing from the lender to access that money. Since you will be repaying this loan for 15 or 30 years you should put it to good use.

Bad credit is become an epidemic in America. More and more people carry high balances on their credit cards, make late payments, or even default on their loans. As a result, individual credit ratings in the United States have dropped dramatically. The problem for many homeowners is once you have bad credit it can be difficult to clean it up.

The bad credit epidemic has not suppressed lending however. Mortgage companies are always looking for untapped markets and the subprime lending market is booming. Subprime lenders and mortgage companies that specialize in lending to homeowner with poor credit ratings. These lenders allow individuals that would not qualify otherwise to borrow at a premium interest rate.

Traditional mortgage companies are referred to as “Prime” mortgage lenders. These lenders categorize their loans as “Grade A” loans; meaning borrows have high credit ratings posing low risk to the lenders. Subprime lenders categorize loans as “Grade D,” “Grade C,” and “Grade B” loans. These loans have much higher risk thresholds for homeowners with poor to lousy credit ratings. The higher the risk to the lender, the more likely the homeowner is to be delinquent in their payments or default on the loan.

If you fall into this “Subprime” borrower category you don’t have to settle for lousy terms and interest rates. The subprime market is just as competitive as the traditional lender’s market. As a result you can still find decent interest rates and terms for your business. As a homeowner with poor credit you need to carefully shop around from a variety of lenders and brokers to find the best mortgage for your circumstance. You also need to learn the basics of the mortgage industry; then you will know what a good deal looks like when you see it.