Home Mortgage Refinancing Guide

Interest only mortgage loans are simply that; for a specified period your payments will be based solely on the interest due. Because there is no loan principle included in these payments the monthly payment amount is much less. The catch is that when the interest only period ends the principal is added back in and amortized against the remaining loan term. This means for example, if you took out a thirty year mortgage with a five year interest only period, your new payment amount will be based on a 25 year loan term. The end result is a much larger payment amount than if you had financed your loan with a traditional mortgage.

The lower payment amount offered by an interest only mortgage entices many individuals to purchase more home than they can actually afford. When the mortgage lender adjusts the interest rate and monthly payment amount, this can cause a budget crisis that ultimately ends up in foreclosure. Interest only mortgages are among the riskiest type of adjustable rate mortgages and you really need to know what you’re doing to avoid being burned.

If you have a low tolerance for financial risk or have a very tight budget consider financing your home with a traditional, fixed interest rate mortgage. You can learn more about your mortgage options, including how to avoid common mortgage mistakes by registering for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

If you are considering purchasing your home without a down payment, your mortgage lender may require you to purchase Private Mortgage Insurance (PMI). Private Mortgage Insurance protects the mortgage lender from certain losses due to foreclosure. This insurance does nothing to protect the homeowner except add hundreds of dollars to the monthly mortgage payments.

To avoid paying Private Mortgage Insurance, consider an 80/20 mortgage loan. This type of mortgage is usually two separate mortgages: a first mortgage for 80 percent and a second mortgage for the remaining 20 percent. The problem with this type of mortgage is that you will have no equity in your home to act as a cushion. If property values in your area decline you could end up owing more to the lender than your home is worth.

The 20 percent mortgage you receive will most likely be from a different lender than your primary mortgage. This loan will generally come with a higher interest rate than your primary mortgage because there is more risk for the lender. Because you have two separate loans there will two monthly payments you will be required to make; if you fall behind on either payment the lenders could foreclose and take your home. To learn more about your mortgage options, including common mortgage mistakes to avoid, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

Mortgage interest rates have been rising; however, it is still possible to find a good deal if you take the time to do your homework and research mortgage lenders. Here are tips to help you research mortgage interest rates and understand the numbers and terminology mortgage lenders throw at you.

Research Interest Rates

Start your mortgage search by checking current interest rates and trends in the market. Mortgage interest rates follow securities on Wall Street; while it is extremely difficult to forecast interest rates you can watch market trends and make an informed “guess” as to when interest rates will be favorable for you.

What is the Annual Percentage Rate?

The annual percentage rate can give you a rough approximation as to which loan offer is a better deal. The calculation lenders are required by law to provide expresses the costs of borrowing in a yearly rate. The Annual Percentage Rate was intended to prevent lenders from hiding or disguising fees in their loan offers. The only problem with the Annual Percentage Rate is that it does not factor in many of the closing costs. You will need the “Good Faith Estimate” in order to make an informed decision as to which mortgage loan is best.

Lock in Your Interest Rate

Mortgage rate guarantees are a mortgage lender’s promise to hold your interest rate and points for a certain period of time. This guarantee is to allow you time to close on your mortgage. Your mortgage lender may charge you a fee for this guarantee; make sure the lender grants you enough time to close. If you are not able to close on the mortgage prior to the expiration of the guarantee, the lender could change the terms of you your loan.

Mortgage interest rates are on the rise and the Federal Reserve has no plans to stop raising interest rates. If your lender is scheduled to adjust your interest rate and payment amount soon and you are concerned how this will affect your budget, you should consider refinancing to a fixed interest rate. Here are tips to help ease you financial peace of mind.

When you refinance your adjustable mortgage to a fixed interest rate you can reduce your monthly payment and lock in a low rate for the duration of your mortgage loan. Introductory interest rates for many Adjustable Rate Mortgages are still enticingly low; however, most financial advisors recommend avoiding adjustable interest rates. The risk associated with these loans is that your monthly mortgage payments could rise significantly when the lender begins adjusting your loan.

The interest rate you will receive when the introductory period expires is usually tied to one year Treasury interest rates. The mortgage lender will add their premium markup to this rate and you could find your interest rate rising as much as two points each year. On top of the lender markups the Federal Reserve has made a habit of raising short term interest rates.

Adjustable rate mortgages are not for the faint of heart; however, there are certain circumstances where using an Adjustable Rate Mortgage makes good financial sense. If you understand the risks and are certain you will move in less than five years, you could save money and avoid payment increases by taking out a five year Adjustable Rate or Hybrid mortgage. To learn more about your mortgage options, including how to avoid common mortgage mistakes, register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”