Mortgage Refinance Guide

For many individuals with poor credit homeownership feels out of reach. This is simply not true; people with bad credit can still qualify for competitive mortgage rates, you just need to know how to do it.

If you are a homebuyer with poor credit you may need to secure your mortgage from a specialized mortgage lender called a “Sub-prime” mortgage lender. Your credit score determines what type of mortgage you will qualify for. credit scores range from 300 to 900. You will often hear credit scores called FICO scores after the company that calculates them. An average credit score falls in the range of 620 to 700.

If your credit score is less than 620 you are considered by lenders to have poor credit. Most traditional mortgage lenders do not cater to individuals with credit scores this low; you will need to find a sub prime mortgage lender for your mortgage. The interest rate you will qualify for with this loan is higher than a traditional mortgage loan. Because lenders consider you a high risk borrower this risk is passed on to you in the form of higher interest payments.

The terms you receive on a sub prime mortgage are often less than favorable. Sub prime lenders often require prepayment penalties and a large amount of prepaid interest paid upfront. Your loan contract may also require a balloon payment at some future date. Why would you agree to a mortgage like this? Your goal for this loan is to rebuild your credit. After two years of on-time mortgage payments you should qualify to refinance the mortgage with a traditional mortgage lender.

During the two year period you need to focus on cleaning up your credit. Pay down the balances on your credit cards and above all else make your payments on time. Homebuyers with poor credit will have to pay quite a bit more for their financing; however, if you do your homework and research mortgage lenders prior to applying you can save yourself quite a bit of money. To learn more about your mortgage options register for our free mortgage guidebook: “Five Things You Need to Know about Your Mortgage.”

Traditional mortgage loans are attractive to homebuyers for a variety of reasons. The main reason is security; choosing a mortgage loan with a fixed interest rate means your monthly payment amount will not change because of rising interest rates for the duration of your mortgage loan.

The disadvantage of a fixed rate mortgage is that if mortgage interest rates decline you will have to refinance to take advantage of lower interest rates. Many homebuyers choose a 30 year mortgage because mortgages with shorter term lengths come with higher monthly payments. While choosing a mortgage with a long term length will give you a higher interest rate, the monthly payment amount will be lower because the lender is giving you more time to pay the loan back.

If you plan on staying in your home for a long period of time a 30 year fixed rate mortgage may be the right loan for you. Your monthly payment amount will be fixed for the duration of the 30 year loan. This allows you to easily plan your monthly budget around your mortgage payment. There are circumstances you should know about where your monthly payment amount could change. If you pay your property taxes and insurance in escrow with your mortgage payment you will see increases as the taxes and insurance premiums go up. Your payment amount will not increase due to interest rate hikes.

If your financial goals include paying down the balance of your mortgage as quickly as possible, there is a strategy you could use to speed up repayment and save thousands of dollars in the process. The method is very simple, involves no financial risk, and only requires a little discipline on your part.

The process is bi-weekly mortgage payments. Making bi-weekly mortgage payments sounds infinitely more complicated than it actually is. The only thing you do to take advantage of the savings is split your monthly mortgage payment in two; pay half of your mortgage payment every two weeks. It’s really easy to do, especially if you use online banking; simply schedule a payment to your mortgage lender whenever your paycheck comes in (assuming you get paid every two weeks) and viola, you will realize the savings bi-weekly mortgage payments has to offer.

Making bi-weekly payments every two weeks for an entire year results in an extra mortgage payment made directly to your mortgage loan’s principle balance. Because the amount of your interest payment due each month is calculated based on the remaining loan balance, the savings you realize has a compounding effect. Of course you don’t have to make bi-weekly payments to realize the savings. Making extra mortgage payments each year in a lump sum has the same effect.

You can learn more about your mortgage options, including common mistakes to avoid, by registering for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

If you are in the market for a mortgage there are a variety of sources to find one. Your bank, S&L, local mortgage company, and online mortgage lender are all options for securing a mortgage. There are also government programs through the VA and FHA that can help you get a mortgage.

There are a variety of different mortgages for different financial situations. Each of these loans has different options that directly impact the interest rate you might qualify for. The term length of the mortgage is one such option. Term length is the amount of time you have to pay back the loan. The longer term length you choose the higher the interest rate will be due to increased risk for the lender. Other factors that determine the interest rate you qualify for are you credit score and debt-to-income ratio.

Mortgage Interest Rates

The mortgage interest rate you choose can be a fixed interest rate or an adjustable interest rate. Choosing a mortgage with a fixed interest rate means your interest rate and mortgage payment amount will not change. Mortgages with fixed interest rates have the lowest amount of risk for the borrower. The drawback of a fixed interest rate mortgage is the interest rates are higher and if rates decline you will have to refinance to take advantage of lower interest rates.

The other interest rates you could choose is a variable mortgage interest rate. These adjustable interest rates are periodically updated by the mortgage lender. When you have an adjustable rate mortgage your interest rate is tied to some financial index such as the prime rate; the mortgage lender will add their own markup to this index when they adjust your payment amount. Pay close attention to the conditions in your mortgage contact. Adjustable rate mortgages come with rate and payment caps to protect the borrower from excessive increases in the interest rate or monthly payment amount.

There is significantly more risk associated with adjustable rate mortgages. It is important to know what you’re getting yourself into before taking out an adjustable rate mortgage; if you have a low tolerance for financial risk this is not the mortgage for you.

Another option for your mortgage is government programs through the FHA or VA. The FHA helps homeowners with credit problems by guaranteeing their loans. Your mortgage is still processed through a traditional mortgage lender; however, the loan is insured by the government. VA loans are similar; they are loans for veterans that are guaranteed by the Veteran’s Administration. To learn more about your mortgage options including common mistakes to avoid, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

If you are currently shopping for a new mortgage you want to avoid overpaying lender fees for the new loan. Using the Good Faith Estimate can help you avoid overpaying lender fees and closing costs for your new mortgage. If you neglect to review the Good Faith Estimate from your lender you could be throwing your hard earned money away.

The Good Faith Estimate your mortgage lender is required by law to provide you outlines every expense charged for your mortgage. This document itemizes all the charges and shows who they are paid to; pay close attention to what these charges are and were they are going. Use this list to ensure that you are being charge reasonable amounts by comparing the Good Faith Estimates from a variety of mortgage lenders.

Make sure the document the lender provides you is actually a “Good Faith Estimate” and not simply a summary of lender fees. Mortgage lenders are required by law in the United States to provide this document; if your lender is stalling or blatantly not providing it you should find another mortgage lender.

The Good Faith Estimate is an excellent tool for comparison shopping for a mortgage loan. If you review this document with a fine tooth comb your lender cannot slip charges or rate changes into your loan contract. Mortgage brokers and lenders often try and disguise fees in their loan contracts; these lenders and brokers are required to provide you with a Good Faith Estimate within three days of receiving your application. Make sure you carefully review this document and understand all of the fees associated with your mortgage.

It is a good idea to keep the original endorsed copy of the Good Faith Estimate provided by your mortgage lender. You can use this document to reconcile fees on your final mortgage contract. If you find changes your lender will need to explain why the figures have changed. You can learn more about protecting yourself from advantageous mortgage lenders by registering for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”