How to Refinance a Mortgage

If you are a first time homebuyer considering a new mortgage loan the process of refinancing can be an intimidating proposition. No one wants to be taken advantage of by a greedy mortgage broker or pay more than they have to for the loan. Doing your homework before refinancing will help you avoid expensive refinancing pitfalls; here are several tips geared for first time homebuyers who are considering mortgage refinancing.

Mortgage Refinancing Terminology

Before you begin shopping for a new mortgage loan it is important to brush up on basic mortgage terminology. Here are several common terms you are likely to encounter and key concepts you need to know.

Mortgage Amortization – The process of paying down your loan balance over the loan’s term length; mortgage loans are front loaded with interest so in the beginning most of the payment is applied to interest. Over time more of your payment amount is applied to paying down the loan principle.

Term Length – The amount of time you have to repay your loan along with the mortgage interest rate determines your payment amount and amortization schedule. Common term lengths are 15 or 30 years; however, there are now 40 and 50 year mortgage terms available. Most homeowners considering refinancing would benefit most from a 15 year term length.

Mortgage Rate – Your interest rate represents the finance charge you are paying expressed as a percentage of your total loan amount. The mortgage rate along with term length is responsible for determining your monthly payment amount. Most homeowners don’t realize that mortgage loans are retail products and that “retail” mortgage rates include markup intended to give the loan originator a commission.

Mortgage Banker – Loan originators that close mortgage loans in their own name are considered banks and broker banks. These lenders are exempt from the Real Estate Settlement Procedures Act thanks to the Banking Lobby and are not required to disclose their profit margins or how much they’ve marked up your loan. You should never refinance your mortgage with a mortgage banker for this reason.

Mortgage Broker – These loan originators sell loans from wholesale lenders for a commission; mortgage brokers are compensated for the work they do in two ways. Your mortgage broker charges an origination fee for their service, also called origination points, and marks up your interest rate for a bonus from the lender. This markup of your mortgage rate is called Yield Spread Premium and is completely unnecessary.

Part two of this series, mortgage refinancing for first time homebuyers, will cover advanced mortgage terminology including Service Release Premium, Yield Spread Premium, and points. You can learn more about refinancing your mortgage without paying too much with my free mortgage toolkit; register today by clicking the DVD image found at the top of this page. The toolkit is free and you’re under no obligation now or in the future.

For many homeowners Adjustable Rate Mortgages have a bad name and are overlooked completely when refinancing. While it’s true that Adjustable Rate Mortgages are riskier than their Fixed Rate counterparts, when used properly they can save you thousands of dollars. Here are several tips about the pros and cons of Adjustable Rate Mortgages to help you decide if a variable rate mortgage is right from you.

What Are The Risks of Adjustable Rate Mortgage Refinancing?

The risk with this type of mortgage refinancing comes from the potential of experiencing payment shock. Payment shock occurs when the lender adjusts your payment amount or recasts the loan and you can no longer afford to make your mortgage payment. This typically happens with Adjustable Rate Mortgages that do not have their caps structured properly or with homeowners that abuse the so called “Payment Option” loans.

When Use Properly Adjustable Rate Mortgages Have Very Little Risk

Adjustable Rate Mortgages typically come with a low, fixed introductory interest rate. This rate is often much lower than the actual contract rate, and in the case of Hybrid Adjustable Rate mortgages this introductory period can last as long as five to seven years. If you plan on selling home within five to seven years you could take advantage of this introductory period to lower your payment amount with little or no risk.

Adjustable Rate Mortgages Come With Safety Features

Caps protect homeowners from abrupt changes in their adjustable mortgage rate and payment amounts. There are two types of caps you need to be concerned with; periodic caps that limit the amount your interest rate can go up or down and payment caps that limit how much your mortgage payment can change. Both have the option of lifetime caps which limits the change over the duration of your loan. When you refinance your mortgage with an Adjustable Rate Mortgage make sure your loan has both payment and periodic caps. Loans that have only payment caps are prone to negative amortization when the cap prevents the payment going up enough to cover an increase in the mortgage interest rate.

Be Careful Refinancing With Payment Option Mortgage Loans

Option Adjustable Rate Mortgages have become extremely popular due to their flexibility and the “optional” minimum payment amount. The option mortgage gives you the choice of making a payment based on a 15 or 30 year amortization schedule, an interest only payment, or the “optional” minimum payment.

When you make the minimum payment you are not paying enough to cover the mortgage interest due that month and the outstanding amount is added to your loan balance. This is called “negative amortization” and it means your loan is actually growing over time. Homeowners who abuse the minimum payment will find that the lender automatically recasts the loan when they reach a certain threshold of what they owe. When this happens the loan is converted to a standard Adjustable Rate Mortgage amortized for the time remaining on the contract.

Many homeowners who abuse Option Adjustable Rate Mortgage loans can barely afford the minimum payment; when the lender recasts their loans they are one step away from foreclosure and frequently lose their homes. You can learn more about your Adjustable Rate Mortgage refinancing options, including expensive pitfalls to avoid with my free mortgage toolkit. You can register for the free toolkit with no obligation now or ever using the links at the top of this page.

In an effort to increase the level of expert support for RefiAdvisor’s Mortgage Refinancing Toolkit I have invited Rob K. Blake from the popular mortgage blog The Mortgage Insider to join the mentoring team.

Rob is a licensed Colorado Mortgage Broker and dishes out great tips and advice on his blog about a wide range of mortgage related subjects. Rob will contribute as a guest blogger on topics ranging from the so-called “no cost” mortgages to the “In-and-Outs” of avoiding Yield Spread Premium when refinancing your home mortgage loan.

I’m very happy that Rob has agreed to join RefiAdvisor and I am looking forward to his valuable contributions.

Welcome Rob!

Refinancing your mortgage with less than decent credit is easier than you think. Competition for your mortgage is fierce and despite the meltdown of the sub-prime mortgage industry opportunities still exist for homeowners with poor credit ratings. Here are several tips to help you qualify when refinancing your mortgage with bad credit.

Having bad credit will not prevent you from mortgage refinancing. There is still an entire industry devoted to bad credit mortgage refinancing despite the negative publicity and lender bankruptcies you may have seen in the news. While it’s true the qualification guidelines have been tightened for bad credit refinancing, with a little bit of legwork you can still refinance your mortgage with a loan similar to that a homeowner with good credit receives.

Refinance Mortgage Bad Credit

The first thing you should do before refinancing your mortgage is to check your credit history for errors. Congress passed a law requiring credit agencies to provide you one free copy of your credit report each year. There are three credit agencies that maintain credit records on you and they are Equifax, Experian, and Trans Union. You can print out your credit history by visiting the website annualcreditreport.com; make sure you print your history from each agency as these companies maintain separate records for you.

If you find errors on your credit history you’ll need to dispute the mistake with whatever credit agency maintains that record. Each credit agency has a procedure for dispute resolutions and you can find instructions on the company’s website. Once you’re certain your credit reports are accurate, what can you do to improve your credit score before refinancing your mortgage?

Once your credit reports are accurate you can improve your credit score by removing any negative information like bad debt. Most creditors are willing to settle just to get the debt paid so you could save yourself money by negotiating a settlement. You can also improve your credit score by paying all of your bills on time; 35% of your credit score is based on your history of on-time payments.

How Bad Credit Affects Mortgage Refinancing

Having bad credit will not prevent you from taking out a new loan; you’ll just have to pay more with a higher mortgage rate. Depending on the severity of your credit difficulties you may need to enlist the help of a mortgage broker that specializes in bad credit mortgage loans to get qualified.

Whenever dealing with a mortgage broker you have to be careful that the interest rate you receive is the actual rate you were approved. Mortgage brokers routinely markup mortgage rates to boost their commission at your expense. This markup is completely unnecessary because you’re already paying an origination fee for the broker’s help. The markup your broker adds for his or her commission is called Yield Spread Premium and avoiding it needs to be your number one priority for your bad credit refinance mortgage.

You can learn more about your bad credit mortgage refinancing options, including strategies for improving your credit and qualifying for a wholesale mortgage rate by registering for my free mortgage refinancing toolkit.

If you’re in the process of shopping for a new loan to refinance your existing mortgage, there are several things you need to know about the quotes you receive. Many homeowners don’t realize that mortgage loans are retail products and like anything else you purchase they’re marked up by the “middleman” for a profit. Here are several tips to help you recognize and avoid paying this markup when refinancing your mortgage.

When you request a mortgage quote online or in person the quote you receive should come from a wholesale mortgage lender that broker represents. The wholesale lender determines your interest rate based on your credit and the details of your application and provides this mortgage rate to your broker, who marks your rate up for a bonus. This markup is called Yield Spread Premium and is paid in addition to the origination fees you’re already paying for this person’s services.

The good news is that once you’ve learned how to recognize Yield Spread Premium on your Good Faith Estimate and HUD-1 settlement statement you can avoid paying it. There are several things you need to know in order to pull this off when refinancing. If you’re dealing with a mortgage broker make sure that person actually is a broker, not someone representing a bank. You can do this by asking if they close mortgage loans in their own name, or the name of their company. If the answer to either of these questions is “Yes” you are dealing with a bank and need to find a new broker.

Once you’re certain the mortgage company or broker you’re dealing with represents a wholesale mortgage lender and not a bank, you’ll need to get them to show you the Yield Spread Premium they’ve added to your loan. Most mortgage brokers will be extremely reluctant to disclose this markup of your mortgage rate because the commission they receive for overcharging you represents a significant portion of their income.

Your mortgage broker is legally obligated to disclose Yield Spread Premium on the Good Faith Estimate; however, because this document is just an “estimate” you will probably not get an accurate representation of the markup. The actual markup of your mortgage interest rate appears on the HUD-1 settlement statement. Yield Spread Premium is usually disclosed in the neighborhood of lines 810-812. Many mortgage brokers have clever ways of disguising this markup. You might see it called “broker rebate,” YSP, or YSP paid by lender. Don’t be fooled…this commission is being paid because your mortgage company or broker is overcharging you for the mortgage.

This so called POC charge or “Paid Outside of Closing” is the legal speak mortgage lenders use to justify the markup. Mortgage broker compensation paid by the lender outside of closing really comes out of your pocket in the form of a higher mortgage rate and payment amount. Your mortgage broker might even try and justify the expense by telling you that if the lender didn’t pay this fee it would end up in the “Cost to Borrower” column. What your mortgage broker isn’t acknowledging is that you’re already paying a perfectly reasonable origination fee for their services. Throw in Yield Spread Premium and you’ve got higher monthly mortgage payments for the next 15 to 30 years.

You can learn more about negotiating for a wholesale interest rate when refinancing your mortgage with my free mortgage toolkit. Register today by clicking the image of a DVD at the top of this page; the toolkit is yours free.