How to Refinance a Mortgage

Everyone has seen the ads on television, or heard about some bank testing a “no closing cost” mortgage loan, but aren’t these loans just a gimmick to reel you in? Truth be told there is no such thing as a “no cost mortgage;” you always pay one way or another. One way mortgage companies and banks offer no ost loans is by talking about their charges and no one else’s. This could refer to processing or origination fees and not the third party settlement charges due at closing.

There is usually an asterisk associated with these offers and a lot of fine print indicating that other fees will apply. Other offers might state”no lender fees” and while this is much closer to the truth borrows should know they make up the difference elsewhere. A true no closing cost loan would mean that you do not pay for anything. Attorney fees, credit checks, title insurance, and all settlement fees would be paid for you. The problem is there are a lot of third party companies involved and someone has to pay them for their services.

If you don’t pay third party companies involved with your mortgage, it means the lender will have to pay them. When the lender pays the settlement charges, you pay the lender in the form of a higher interest rate. You pay a higher mortgage rate in exchange for the mortgage company paying your closing costs. Is this a no cost mortgage loan? Not when you’re paying that higher interest rate for the entire duration of your loan.

You can learn more about your mortgage options, including costly mistakes to avoid with our free mortgage video tutorial.

A common myth after bankruptcy is that you have to wait seven years before becoming eligible for a mortgage loan. This common misunderstanding prevents many homeowners that would otherwise qualify for a mortgage from applying because of their credit. Here are several tips to help you qualify for a mortgage and avoid overpaying after bankruptcy.

There are mortgage loans available for homeowners with any credit rating; how much you pay depends on how much time you have to invest. It is possible to qualify for a mortgage even one day after your bankruptcy is completed. Government programs through the FHA and VA could save you money by qualifying for a loan without using a subprime mortgage lender.

If you are unable to qualify for a government backed mortgage loan you could qualify for a conventional mortgage if your bankruptcy is at least 48 months old; Fannie Mae guidelines do allow homeowners with bankruptcies to qualify for traditional financing after this timeframe has passed.

The basic criteria that lenders look for is that you have reestablished credit after your bankruptcy is discharged and have a favorable payment history. If you’re under the impression that reestablishing credit after bankruptcy is too difficult, think again. There is an entire industry of consumer credit companies that cater to homeowners with poor credit and recent bankruptcy. You can expect to pay a higher mortgage rate for at least the first two years that you own your home; however, in as little as 24 months of making your mortgage payments on time and using credit responsibly you will qualify for a conventional mortgage at a competitive interest rate.

You can learn more about your mortgage options, including costly mistakes to avoid with our free mortgage tutorial.

Refinancing your mortgage after declaring bankruptcy can seem like an overwhelming task; however, the task is easier than you think. Six months after completing your bankruptcy you can qualify for a decent mortgage rate if you’re willing to invest the necessary time. You can actually use your mortgage to rebuild your credit after your bankruptcy.

Prepare Your Credit Before Refinancing Your Mortgage

As soon as your bankruptcy is completed, take six months to prepare for refinancing your mortgage loan. Start by working on building a favorable payment history with your existing lender. Take out a credit card and maintain a low balance while making all of your payments on time. Open a savings account and try to put money away each month; the more assets you have to list on your application, the better off you’ll be when refinancing your mortgage.

Shop for a Bad Credit Lender

Because you have a recent bankruptcy on your record you will most likely have to find a subprime lender when refinancing your loan. When comparing loan offers from subprime lenders, request a copy of the Good Faith Estimate for each loan you consider. Plan on paying a few percentage points higher than a homeowner with good credit; however, you need to be careful that your lender does not take advantage of your situation when refinancing. Carefully shopping for the best lender and comparing loan offers using the Good Faith Estimate will help you avoid many of the mistakes homeowner make when refinancing after a bankruptcy.

Once you’ve refinanced your mortgage loan you need to concentrate on building your credit. After a period of two years of making all of your payments on time and maintaining low balances on your credit cards you will have built up sufficient credit to qualify for a mortgage from a traditional lender. During this two year period carefully watch your credit reports for any mistakes or anything resurfacing from your bankruptcy.

You can learn more about Mortgage Refinancing after bankruptcy, including costly mistakes to avoid with our free, six-part mortgage tutorial.

Adjustable Rate Mortgages are a gamble; if you don’t have the stomach for financial risk it’s pretty easy to find yourself in over your head. If you don’t like the idea of not knowing how much your mortgage payment will be five or ten years from now, choosing an Adjustable Rate Mortgage might not be right for you. On the other hand, the average homeowner refinances their mortgage every 5-7 years. Homeowners who leverage Adjustable Rate Mortgages for the short term can save thousands of dollars in mortgage interest on their loans.

If the thought of rising mortgage payments gives you butterflies in your stomach, you probably shouldn’t consider an Adjustable Rate Mortgage, especially if your loan representative is trying to talk you into one. Mortgage lenders often try and steer borrowers into Adjustable Rate Mortgages when their fixed rate offerings are not competitive.

Adjustable Rate Mortgages do have safety features built in them to help you avoid payment shock; however, it is important that you fully understand what you’re getting into before opting for this riskier mortgage loan. If risk isn’t your cup of tea, a fixed rate mortgage could help you avoid a financial nightmare.

The biggest risk when refinancing your mortgage with an interest only mortgage is that you never pay down the principle balance on your loan. Many homeowners fall for the trap of interest-only mortgages because they are easier to qualify; however, if you don’t get in the habit of paying additional loan principle each month, you’ll never get anywhere paying off your loan.

You can easily calculate what your mortgage payment will be with an interest only mortgage. Simply multiply your interest rate by the loan amount and divide by 12 months. Suppose your mortgage rate is 6.0% percent on a $250,000 loan. Multiply 6.0 percent by $250,000 (.06 x $250,000 = 15,000) and divide by 12 months. Your payment amount in this example is $1,250 each month. Compared to a fully amortized, 30 year fixed rate mortgage at $1,498 per month, and you can see why interest-only mortgages are so attractive for many homeowners.

Many homeowners fail to realize that the interest-only period only lasts for a fixed-period of time, often five years. When the interest-only period ends, your mortgage lender will convert the loan to a standard Adjustable Rate Mortgage with payments fully amortized for the time remaining in your loan contract. In plain English, this means your payment amount will go significantly and if you are unprepared to make these payments you risk losing your home.

You can learn more about your mortgage refinancing options, including expensive homeowners mistakes that you need to avoid with our free, six part mortgage tutorial.