How to Refinance a Mortgage

Refinancing your mortgage loan can be a stressful time for any homeowner. No one wants to pay too much when taking out a new loan; however, most homeowners don’t fully understand how loan originators and lenders make their money. Learning how your mortgage broker is compensated for their work will not only help you avoid paying too much but show you how to refinance your home with a wholesale mortgage rate. Here are several tips to help you refinance your home with a wholesale mortgage rate.

First Things First: What is a Loan Originator?

Mortgage loans are retail products like any of the other purchase we make as consumers, and there’s always someone in the middle trying to make a buck. This “middleman” is your loan originator. This person could be a mortgage broker or a loan representative at the mortgage company arranging your loan.

Mortgage loans are funded by wholesale lenders that do not deal with the public directly. You might think that by contacting a wholesale lender you’ll get around the middleman and refinance with a wholesale interest rate; however, most wholesale lender have retail divisions and will not get a wholesale mortgage rate by tying to slip on past the middleman.

How Do You Get a Wholesale Rate?

In order to gain access to wholesale mortgage rates when refinancing you’ll need to enlist the help of a mortgage broker. There are problems you’ll need to overcome to get wholesale mortgage rates; mainly that your mortgage broker is paid by commission and a large portion of their bottom line comes from closing loans with retail mortgage rates.

What Are Retail Mortgage Rates?

Retail mortgage loans include the loan originator’s markup of your mortgage interest rate. In order to fully understand your mortgage loan you need to understand how loan originators, in this case your mortgage broker, are compensated for their work. Mortgage brokers receive their compensation from two sources. The first is by charging you an origination fee, also called origination points, for arranging your mortgage loan.

This origination fee is charged as a percentage of your mortgage amount. Remember that one “point” is one percent of your loan amount and you should never agree to pay more than one percent to the broker for loan origination. If your mortgage broker refuses to negotiate on the origination fee you should find another broker for your new mortgage loan.

The second way that your loan originator receives compensation is by marking up your mortgage interest rate which is what we are attempting to avoid. This markup of your mortgage interest rate by the loan originator is called Yield Spread Premium. According to the Secretary of Housing and Urban Development, unnecessary mortgage rate markup will cost American homeowners nearly sixteen billion dollars this year. Markup of your mortgage rate by the broker is completely unnecessary because you’re paying the broker a perfectly reasonable origination fee for their work. Not only is Yield Spread Premium unnecessary but most mortgage brokers forget to mention that they’re charging you the markup or try and explain it away. If your mortgage broker tells you not to worry about Yield Spread Premium because the fee is being paid by the lender they’re lying to you.

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Points on a mortgage loan can be one of the most confusing aspects of financing your home. The process of taking out a mortgage is intimidating enough…throw in unfamiliar jargon and fees and you’ve got a recipe for financial nightmares. Points on a mortgage loan come in two flavors and depending on the lender and your financial situation you may or may not be required to pay both types. Here are several tips to help you make sense of points and decide paying points is right for you.

What Are Mortgage Points?

Points come in two varieties: there are discount points you pay to your lender and origination points you pay to the mortgage broker arranging your loan. Regardless of the type of point, one point is always equal to one percent of your mortgage amount.

What Are Origination Points?

The first variety of “points” you’re likely to encounter with your mortgage are origination points. This is a fee you pay to the Mortgage Company or broker for their part in “arranging” your loan. Origination points are not set by the lender and vary from one mortgage broker to the next. This fee is not the only form of compensation that your broker receives; mortgage brokers will also mark up your interest rate to get a commission from the wholesale lender. Because you’re already paying the mortgage broker a fee this markup is completely unnecessary and you should simply refuse to pay it. This unnecessary markup is called Yield Spread Premium and avoiding it is the topic of the free video tutorial available on this site. A reasonable fee to pay for mortgage origination is one percent of your loan amount and not a penny more.

What Are Discount Points?

Discount points are paid to your lender at closing in exchange for something. That something could be a lower mortgage interest rate, or is simply paid as a condition of qualifying for your loan. Your lender might require that you pay two points to qualify for a $150,000 mortgage; in this case you would be required to pay 2% of $150,000 or $3,000 at closing. If your lender does not require you to pay points you might consider paying points to lower your mortgage interest rate.

There are pros and cons to paying points to your lender in exchange for a lower mortgage rate. One disadvantage of paying this fee is that while it may lower your mortgage interest rate it does not lower your loan balance. You can generally expect that paying discount points will lower your mortgage rate by .25 percent for each point you pay. Remember that one point is one percent of your mortgage amount, due at closing. Whether or not it makes sense to pay discount points in your situation depends mainly on how long you plan on keeping the loan.

There are other advantages to paying discount points. The IRS considers discount points to be prepaid mortgage interest and you will be able to deduct part or all of your points depending on IRS rules for your situation. Before deciding if paying points makes sense you should determine how long it will take you to recoup the expenses based on the savings you’ll get from a lower mortgage payment. The longer you plan on keeping the loan the more sense it makes to pay points and recoup your expenses. You can learn more about your mortgage options with my free video toolkit. Register today with the link at the top of this page.

VA and FHA mortgages are government insured loan programs intended to help those with low income and veterans purchase homes. Because these loans are insured by the Federal government they have less risk for mortgage lenders allowing people that might not otherwise qualify to purchase homes. Traditional mortgage loans are also insured; however, they are not insured by the Federal government but by lending institutions like Fannie Mae and Freddie Mac.

FHA mortgage loans are underwritten and insured by the Federal Housing Administration. These loan programs are typically for first time homebuyers with credit problems and require a minimum three percent down payment. Closing costs can be rolled into the loan balance with FHA programs; however, there are mortgage insurance premiums of up to 1.5% required by the housing administration. There are also borrowing limits imposed on FHA loans that vary based on the State the home is purchased.

VA mortgage loans are underwritten and insured by the Veteran’s Administration for individuals that have served in the armed forces of the United States. Unlike the FHA, the VA does not require mortgage insurance or a down payment. VA mortgage loans carry a funding fee of 2.15 percent and this fee can be rolled into your mortgage balance along with closing costs.

FHA and VA Mortgage Loans Losing Popularity

FHA and VA loans are becoming increasingly less popular and Congress has even considered doing away with these programs since 1995. One reason these loans are becoming less popular has been the abundance of loan programs available for homeowners with poor credit or little or no down-payment. Many of these programs do not have lender fees or mortgage insurance requirements.

It is possible to find 100% financing without paying insurance or rolling fees in with your closing costs. The recent credit crisis in the United States could bring FHA and VA loans back into favor as qualifying for a mortgage loans becomes increasingly difficult for homeowners with “bruised” credit ratings.

What is Streamline Refinancing?

FHA and VA loans allow for “streamline refinancing.” This means that you can refinance your mortgage with minimal documentation and underwriting without paying lender fees. The basic requirements are that you not be delinquent in your mortgage payments, that refinancing results in a lower payment, and that you cannot receive cash back from refinancing the loan.

There are a number of different mortgage programs available for streamline refinancing. Many lenders charge a higher mortgage interest rate for rolling closing costs into your loan balance. This is why comparison shopping and having a current appraisal is important before you apply for streamline refinancing. You can learn more about your mortgage refinancing options, including expensive mistakes you’ll want to avoid with my free mortgage toolkit.

Many homeowners wonder if timing is a factor when refinancing their mortgage loans. With all of the mortgage problems you hear about in the news is refinancing even a good idea? Here are several tips to help you decide if refinancing is right for your financial situation.

Should You Refinance?

The decision to take out a new mortgage depends largely on your objectives for the new mortgage loan and your financial situation. There are many valid reasons for refinancing and not all are dependent on qualifying for a lower mortgage rate. Taking out a new mortgage to consolidate high interest debt or take cash back against the equity in your home are all valid reasons for refinancing where you may not always qualify for a lower mortgage interest rate.

The “Two Percent Rule” is Rubbish

Some people tell you that you should never refinance unless you qualify for a mortgage rate that is two percent lower than your existing rate. This so called “rule” does not consider any other reason for refinancing than lowering your mortgage rate and greatly oversimplifies the decision. Instead of basing your decision for mortgage refinancing on getting an interest rate that is two percent lower, it makes sense to evaluate your options on a cost vs. savings basis.

Refinancing your mortgage is going to cost you money. You’ll be required to pay a number of fees to your loan originator, lender, and several third parties when closing on the new mortgage. If your goal for refinancing your mortgage is to save money, you should determine how long it will take you to recoup the expenses you’ll pay when taking out a new mortgage. You can do this by adding up your total costs: origination fees, points, and closing costs. Divide this amount by how much lower your payment will be each month and you’ll have the number of months it will take you to recoup your expenses.

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Step One: Do Your Homework

Before you consider a new mortgage it is important that you understand how mortgage loans work and which type of loan is right for you. You’ll need to choose a loan based on the type of mortgage interest rate and term length. You have two basic mortgage rates to choose from: fixed or adjustable. Term length is the amount of time you have to repay the loan and along with your mortgage rate determines how much your payment will be. There are other factors you need to learn about including Yield Spread Premium before shopping for a lender; you can learn more about Yield Spread Premium with my free mortgage tutorial.

Step Two: Check Your Credit

Check your credit reports for mistakes and negative information prior to shopping for a mortgage. You don’t have to pay for a credit reports or score to do this; credit agencies are required by law to provide you with one free copy of your credit reports every year. It’s not necessary to pay for a credit score when applying for a mortgage because you really don’t need to know it and your lender can give you the score when you submit your application.

You can request your free credit reports by visiting the website www.annualcreditreport.com and printing out a copy from Equifax, Experian, and Trans Union. Once you have your credit reports carefully review these records for errors. If you find mistakes you’ll need to dispute the error with each individual credit agency. If you have negative information such as judgments or write-offs you’ll need to try and settle with the creditor listed on your report to have this information removed.

Step Three: Find The Right Loan Originator

Your loan originator is the person arranging your mortgage. This person could be a loan officer at your bank, your mortgage broker, a representative from an Internet mortgage site, or someone at your local mortgage company. Never consider taking out a mortgage from your bank or credit union; banks are exempt from the Real Estate Settlement Procedures Act and are not required to disclose their profit margin or markup on your loan.

Step Four: Choose the Right Mortgage Offer

The right mortgage offer is the one that meets your financial needs without costing too much. If you found an upfront mortgage broker that will not charge Yield Spread Premium you should be paying an origination fee of one percent for the broker’s services. You can keep your broker honest by carefully reviewing the HUD-1 statement at least 24 hours prior to closing. If Yield Spread Premium is included in your mortgage it will be disclosed on lines 810-811 of the HUD statement.

Step Five: Closing and Review Your Contract

After you close you’ll need to review your loan contract and make sure the loan you got is the one you were promised. You have three business days after closing to change your mind before your loan is funded on the fourth business day. This period is your three day rescission which should be explained to you by your broker. During this rescission period you can change your mind for any reason. You can learn more about your mortgage refinancing options, including expensive pitfalls to avoid with my free video toolkit.