Home Mortgage Refinancing Guide

Mortgage interest rates have been rising recently; however, there are still many great reasons to refinance your mortgage, regardless of interest rates. If you need a lower monthly payment you can reduce the mortgage payment by choosing a mortgage with a longer term length. There are also adjustable rate mortgages with interest only and optional payments to help you meet your financial goals. If you are on the fence about refinancing your mortgage, here are five excellent reasons for taking out a new mortgage loan to help you make an informed decision.

I. Reduce Your Monthly Payment

If you plan on keeping your home for a number of years, qualifying for a lower interest rate will save you thousands of dollars over the life of the mortgage. It may even be in your best interest to pay a point or two upfront in order to qualify for a lower interest rate. If you will not be staying in the home, refinancing may not be a good idea as you need time to recoup your expenses from mortgage refinancing. Generally speaking, the longer you plan on staying in your home, the more sense it makes to refinance your mortgage.

II. Convert Your Adjustable Rate Mortgage

Converting your Adjustable Rate Mortgage (ARM) to a Fixed Interest Rate Mortgage could save your financial peace of mind when interest rates are rising. Many homeowners used Adjustable Rate Mortgages to purchase their homes because of lower initial monthly payments and easy qualification. These mortgages come with an introductory interest rate that is only valid for a period of time specified in the loan contract. At the end of the introductory period the lender will reset the mortgage to the actual interest rate and your monthly payment will go up significantly. Refinancing to a fixed interest rate could help you avoid a financial crisis when the lender resets the loan and you can no longer afford the payments.

III. Avoid Expensive Balloon Payments

Balloon mortgages are loans that come with low payments for a short period of time. At the end of this timeframe the entire balance of the loan becomes due. This is where “balloon” payments get their name. The loans typically last for 5 to 7 years before the entire loan balance is due. If you are approaching your due date of the balloon mortgage, refinancing the loan could help you avoid the balloon payment.

IV. Drop Your Private Mortgage Insurance

If your existing mortgage required you to purchase Private Mortgage Insurance, you can lower your monthly payment by as much as several hundred dollars by refinancing the loan. Private Mortgage Insurance is expensive and does nothing to protect the homeowner; it only protects the mortgage lender from certain losses if you default on your mortgage. As you build equity in your home you will be able to drop Private Mortgage Insurance when refinancing the loan.

V. Borrow Against Your Home’s Equity

Home equity loans are an excellent source of secure credit. Taking cash back when mortgage refinancing can quickly get you the cash you need to make repairs or renovations, consolidate your debts, pay educational expenses, even buy a new car or take a vacation. All of these expenses become a tax deduction when your refinance your mortgage and take cash back.

Interest only mortgages are a type of Adjustable Rate Mortgage that features payments based on the amount of interest due for that month. Traditional mortgage loans come with payments amortized for full repayment over a certain period of time. During the interest-only period of this loan the payment is not amortized at all. Here are the basics of interest only mortgages to help you decide if this type of mortgage is right for you.

Interest Only Mortgage Payments

During the interest only period your payment amount is based solely on the finance charges due that month. Interest only periods vary and will be specified in your loan contract. This interest only period could last as long as five years. During this time you will not repay any of the principal loan balance; the loan balance will not go down at all during the interest only period. The advantage of interest only loans is the payments will be significantly lower than if you had a traditional mortgage that included loan principle.

Interest Only Loan Conversion

When the interest only period comes to an end, your mortgage lender will convert the loan to a traditional, adjustable rate mortgage. The payment for this loan will be fully amortized based on the remaining time in the loan’s term. If for example, your interest only period was 5 years on a 30 year mortgage, the payments would be based on a 25 year repayment schedule. This shorter amortization schedule means your payments will be significantly higher that they were during the interest only period.

Pros & Cons of Interest Only Mortgages

Interest only mortgages can be a beneficial tool for homeowners in certain financial circumstances. Interest only mortgages are ideal for borrowers that need short term financing such as real estate investors. The disadvantage is that you do not build equity in your home during the interest only period. This is a very expensive way of financing your home. Additionally, the mortgage payments will go up significantly at the end of the interest only period. If you are unprepared for this higher mortgage payment you risk losing your home to foreclosure. You can learn more about your mortgage options, including costly mistakes to avoid by registering for our free mortgage refinancing guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

The Internet is an excellent tool for locating mortgage quotes and comparison shopping for the most competitive mortgage refinancing offer. Online search makes it easy to quickly locate and compare stated income, no obligation quotes from dozens of mortgage refinancing lenders. It is important to comparison shop using stated income quotes because the lenders will not access your credit until you are ready to apply for the mortgage refinancing loan.

Mortgage refinancing comparison shopping from a variety of online lenders will help you avoid many costly mistakes when refinancing your mortgage loan. When you comparison shop online it is important to compare all aspects of the mortgage offers you consider. Many borrowers assume choosing the best interest rate will save them money when mortgage refinancing; these borrowers often overlook fees and closing costs and overpay thousands of dollars for their new loans.

When you shop for a new mortgage refinancing loan online it is important to make sure the interest rate you receive is one that you are qualified for. Some lenders take advantage of borrowers with good credit by qualifying them for bad credit mortgage refinancing loans. These loans cost more and come with higher interest rates. By carefully comparing mortgage refinancing loan offers you will be able to tell which offers are too high for a borrower with your credit rating.

Once you decide on a mortgage refinancing loan offer, carefully review the closing costs listed on the Good Faith Estimate. Mortgage lenders are required to provide you the Good Faith Estimate upon receipt of your application; however, most lenders will provide you the Good Faith Estimate upon request. It is important that you compare all aspects of similar loan offer using the Good Faith Estimate to determine which offer is better.

Carefully compare all the mortgage refinancing terms associated with the loan you choose. Make sure this loan does not have a prepayment penalty, periodic refinancing requirements, or balloon payments. Predatory mortgage lenders often require that borrowers purchase additional services such as insurance as a requirement for mortgage refinancing approval. If you are dealing with a lender of this type you should seek mortgage refinancing from another lender. To learn more about mortgage refinancing while avoiding costly mistakes, register for our free mortgage guidebook.

Refinancing your Adjustable Rate Mortgage to a fixed rate loan has the advantage of providing a monthly payment amount that you can plan your budget around. Whether or not refinancing is right for you depends on how high interest rates rise, there are also expenses to factor into your cost and savings analysis. Here are several tips to help you determine if mortgage refinancing is right for you.

Determine the Costs of Mortgage Refinancing

Before you commit to refinancing your mortgage, determine your out-of-pocket costs for the new loan. When refinancing your mortgage loan you can expect to pay between 1-3% of the loan amount, not including any points you pay. The longer you plan on staying in your home the easier it will be to recoup your expenses from mortgage refinancing. If you are nearing the end of your current loan’s term you might be better off staying with your current mortgage loan.

Mortgage Refinancing Benefits

Converting your adjustable rate loan to a fixed interest rate mortgage and locking in the payment amount is the primary benefit of refinancing your mortgage. With a fixed payment amount you will be able to plan your budget around your monthly payment and significantly reduce your risk of foreclosure. Remember that mortgage refinancing is not without risks. If you are not careful when researching mortgage offers you run the risk of overpaying for the new loan and losing any potential savings. Additionally, after you refinance your mortgage you will be starting the amortization schedule on your loan from the beginning. This means the majority of your payment will be applied to interest in the early months of your loan.

Choosing the Best Mortgage Refinancing Lender

Comparison shopping for the best lender will save you thousands of dollars when mortgage refinancing. Choosing the right type of lender is an important aspect of refinancing your loan. As a rule you should never refinance your mortgage with a bank. Banks are exempt from disclosure laws that protect homeowners from predatory lending practices. Your banker is not required to disclose their markup or profit margins on any of their mortgage products. By applying for a mortgage from your bank you risk overpaying for the loan without ever knowing. You can learn more about your mortgage refinancing options, including costly homeowner mistakes to avoid by registering for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”

If you are considering mortgage refinancing with a broker, there are several things you need to know to avoid overpaying for the new mortgage loan. When you understand how retail mortgage loans work, it is easy to spot excessive markup and fees that mortgage companies and brokers slip into their loan offers. When dealing with a mortgage broker, the first thing you need to determine is if the person you are dealing with actually a mortgage broker, or a bank pretending to be a broker. Broker-banks are banks masquerading as mortgage brokers. Broker-banks do this to take advantage of loopholes in the Real Estate Settlement Procedures Act that protects homeowners from the abuses of predatory mortgage lenders.

The way to tell if your broker is actually a mortgage broker and not a bank is to ask if the company closes on mortgages in their own name. If the broker closes on the loan in their own name you know the broker is really a broker-bank. Never refinance your mortgage with a bank or broker bank.

Once you have decided on a mortgage broker you are certain is not a bank, you need to understand how your broker will be compensated. When refinancing your mortgage you will be required to pay origination points for the new loan. This fee is paid to the broker or mortgage company for originating your loan. Mortgage companies and brokers should be compensated for finding you a loan; however, brokers take this compensation too far when they get a bonus for overcharging you.

The way mortgage brokers overcharge you is by inflating the interest rate you receive on the new loan. When a mortgage lender qualifies you, they provide the broker with a guaranteed interest rate. The broker will mark this interest rate up and pass you a separate guarantee on an inflated interest rate. Mortgage brokers do this because the lender gives them a bonus of 1 point for every .25% they overcharge you on the interest rate. This mark up on the interest rate you receive is called Yield Spread Premium (YSP).

How can you avoid paying Yield Spread Premium? Tell the mortgage broker you will pay the origination points and closing costs, but will not pay YSP. Ask your mortgage broker to see the original interest rate guarantee from the wholesale lender and compare it to the one provided by your broker. Also, pay close attention to the interest rate quoted on the Good Faith Estimate and HUD-1 statement. By carefully examining these documents and using a broker that agrees not to charge you YSP you can save yourself thousands of dollars on the new mortgage loan. To learn more about refinancing your mortgage while avoiding common mistakes register for our free mortgage guidebook: “Mortgage Refinancing - What You Need to Know.”