How to Refinance a Mortgage

If you are in the market to refinance your existing home mortgage you might be considering the pros and cons of a fixed rate mortgage over their adjustable rate counterparts. Fixed rate mortgage loans can give you financial peace of mind knowing that your payment will not change over time; however, this peace of mind comes at a price. Fixed rate mortgages come with higher interest rates than similar adjustable rate mortgages. Here are several tips to help you decide if fixed rate mortgage refinancing is right for you.

Fixed rate mortgages are exactly what their name implies; a mortgage with an interest rate that does not change over the duration of the loan. This is a great loan option for homeowners in need of consistent financing for a long period of time. The peace of mind offered by fixed rate mortgages comes from the fact that your payment amount and finance charges remain constant regardless of what’s happening with the economy or if mortgage rates skyrocket.

This consistency of payment amount and mortgage rate is an advantage when interest rates are rising; however, when interest rates go down homeowners can choose to refinance it paying the expense of a new mortgage is beneficial. Many homeowners rush out and refinance their fixed rate loans at the first dip in mortgage rates without considering how long it will take them to recoup the expense of taking out a new mortgage loan. All mortgages come with fees and other expenses; you should evaluate refinancing on a cost and savings basis before going forward with a new mortgage. Never let your bank or mortgage broker pressure you into refinancing without doing this cost/savings analysis.

Fixed Rate Mortgages Are More Expensive

Having financial peace of mind will cost you. In almost every case a fixed rate mortgage is a more expensive option than a similar adjustable rate mortgage, at least initially. This means you can expect to pay on average .5 to 1.5 percent more than an adjustable rate mortgage, which translates to a higher monthly payment. Fixed rate mortgages are higher because the lenders assume greater risk of higher rates when locking you in at a fixed interest rate.

Is Fixed Rate Mortgage Refinancing Right For You?

The answer to this question depends on your individual situation, including your tolerance for financial risk. If you purchased your home with one of those risky option or interest only mortgages and are facing a higher payment when the lender resets your loan a fixed rate mortgage could be right for you.

If you need a lower payment and can tolerate some risk with your finances, consider a hybrid adjustable rate mortgage which allows you to take advantage of a lower fixed rate period before the lender starts adjusting your mortgage rate.

You can learn more about your fixed rate mortgage refinancing options, including expensive pitfalls to avoid like paying retail markup on your mortgage interest rate, by registering for a free refinancing tutorial.

If you are in the market for a new mortgage loan and are looking for refinancing advice to get the best deal for your new mortgage, the best bit of advice I can give you is to avoid paying Yield Spread Premium on your new loan. Never heard of Yield Spread Premium? Well you are not alone; in fact most homeowners have not and it’s gotten so bad that the Secretary of Housing and Urban Development recently stated that Yield Spread Premium is responsible for homeowners in the United States overpaying sixteen billion dollars every year. Here’s what you need to know in order to avoid paying this ridiculous markup when refinancing your mortgage.

Yield Spread Premium: What Is It?

The term Yield Spread Premium or YSP sounds scarier than it really is. In fact, all Yield Spread Premium does is add markup to your mortgage interest rate to give the person originating your loan a bonus. The person “originating” your loan could be a mortgage broker, a local mortgage company in your town, or even the Internet mortgage giant you see advertising on television.

How does this markup work? When you apply for a mortgage the wholesale lender that approves your application qualifies you for a specific mortgage interest rate. Your broker knows this rate but quotes you an entirely different, higher mortgage rate.

Your mortgage broker does this because the wholesale lender pays them a bonus for overcharging you. For every.25% you agree to overpay beyond what the lender approved you, the broker gets a kickback of one percent of your mortgage amount. This “kickback” is paid in addition to the perfectly reasonable origination fee you’re paying the broker for their part in arranging your loan. A reasonable fee to pay for mortgage origination is one percent of your loan amount; although many brokers charge more unnecessarily.

If you agree, unknowingly or otherwise, to pay Yield Spread Premium when refinancing your mortgage you are doubling, often tripling, the commission your broker receives for arranging your loan. Many people think that since the lender is paying the premium and that fee doesn’t come out of their pocket they don’t need to worry about Yield Spread Premium. The problem with YSP is not the fact that this fee is being paid by the lender but the reason these lenders pay the fee. The fee is being paid because you’re agreeing to an above market mortgage rate which can result in higher monthly payments as much as several hundred dollars per month.

Why Do Lenders Pay Yield Spread Premium?

Mortgage lenders reward loan originators for overcharging homeowners because they know that mortgages with above market interest rates bring them a premium profit on the secondary mortgage market. Lenders sell their loans to investors and make the majority of their profits doing so. Your mortgage with an above market interest rate is the icing on the cake; this is why wholesale lenders offer an incentive to loan originators for overcharging people.

Yield Spread Premium Can Be Avoided

Fortunately for you, Yield Spread premium can be avoided. By learning how to recognize this unnecessary markup of your mortgage interest rate you can negotiate with potential mortgage companies and brokers to avoid paying it. You can learn more about recognizing Yield Spread Premium on your Good Faith Estimate and HUD-1 statement, including strategies to negotiate and avoid paying it, by registering for a free mortgage refinancing tutorial.

If you used an adjustable rate mortgage to purchase your home or are considering refinancing your existing loan with an Adjustable Rate Mortgage, there are several things you need to know to protect yourself from economic uncertainty. Many homeowners view Adjustable Rate Mortgages as an unnecessary financial risk and avoid them completely. Here are several tips to help you make an informed decision as to which type of loan is right for you before refinancing your home mortgage.

While it’s true that no one can predict or control mortgage interest rates there are steps you can take to protect yourself from uncertain times. This is true if you already have a mortgage with an adjustable interest rate or need to refinance with one to get the lowest possible payment amount.

Many homeowners initially choose Adjustable Rate Mortgages because they need the lowest possible payment. Problems generally arise when the lender begins resetting the loan and the interest rate and payment amount go up. When using an Adjustable Rate Mortgage you always run the risk of payment shock after your loan resets. Payment shock is the risk of waking up one day to find that your loan has reset and the new payment amount is now several hundred dollars higher.

If you are concerned that payment shock could happen with your existing Adjustable Rate Mortgage or the new loan you are considering, there are steps you can take to protect yourself. This allows you to take advantage of the lower introductory mortgage rate while limiting your risk of experiencing payment shock.

Understanding Teaser Rates

Teaser mortgage rates are frequently used as a marketing tactic to attract borrowers. While teaser rates are not necessarily a bad thing as long as you know what you’re getting yourself into, it is important to understand that the teaser rate is not your contract rate. Your contract mortgage rate is the initial interest rate your loan is based on once the teaser expires. When the teaser expires your payment will go up based on this contract interest rate.

Some teaser rates are only valid for 30 or 60 days while others may last for as long as six months. Homeowners who don’t understand how teasers work often find themselves in trouble when the lender resets their loans to this contract mortgage rate. After your teaser expires your loan should remain at the initial contracted rate until your first regularly scheduled reset.

Protecting Yourself When Refinancing

Hybrid Adjustable Rate Mortgages are a special type of mortgage loan that combines the savings of an adjustable rate loan with the stability of a fixed rate mortgage. Hybrid mortgages offer an initial fixed rate period that lasts anywhere from three to ten years and may include an unusually low teaser rate. During this initial period your mortgage rate remains fixed and the payment will not go up. Mortgage rates on hybrid loans are typically lower than traditional 30-year, fixed rate loans without the risk of a standard, Adjustable Rate Mortgage loan.

Homeowners who financed their homes with ultra risky interest-only or option Adjustable Rate Mortgages can take advantage of the Hybrid loan’s fixed rate period to avoid their lenders reset without taking a large jump in their payment amount refinancing with a conventional fixed-rate mortgage loan.

Are All Indexes Created Equal?

Many homeowners obsess over the index their Adjustable Rate Mortgage is based. Every Adjustable Rate Mortgage and Hybrid loan is tied to a financial index that the mortgage interest rate is based on. While it is true that some indexes can experience more volatility than others there isn’t necessarily one index that is better than the others. Common indexes include the Treasure one, two, and three year indexes, the Bank Prime Rate, and the LIBOR (London Inter-Bank Offered Rate).

Many homeowners are surprised to find their mortgages tied to the LIBOR Index; however, the LIBOR is popular because many lenders that sell their loans to European investors. The bottom line when choosing an index for your Adjustable Rate or Hybrid mortgage is that there is no “best” index; you should concentrate on making your decision based on loan terms and interest rates rather than worrying about which index you are getting when shopping for an Adjustable Rate Mortgage.

What About Loan Caps?

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If you are considering mortgage refinancing it is well worth your time to review your credit before you contact lenders. Your credit scores influences not only the type of mortgage products you will qualify, but how much each loan will cost you. Before applying for a new mortgage it is important to review your credit records for errors…this will save you a good deal of time and frustration down the road. Here are the basics you’ll need to know about your credit score before refinancing your home mortgage loan.

What Are credit scores?

Your credit score is one of the major factors determining the type and amount of mortgage you will qualify when refinancing. Your credit score is a snapshot of the contents of your credit reports and is intended to provide a numerical estimate of your ability to manage personal finances. Your credit score is based on the following aspects of your credit reports:

1. Your history of making on-time payments.
2. How much available credit you have.
3. Reports made by your creditors.
4. Negative information including judgments, leans, or bankruptcy.

Keep in mind that because you have three credit reports you’ll have three corresponding credit scores. Credit records are maintained by three for-profit companies: Equifax, Experian, and Trans Union. These credit bureaus use complicated and secretive algorithms for distilling the contents of your credit files into a numerical representation of your likelihood to repay your mortgage in a timely manner. Credit scores range from 300 to 850; the higher your credit score the less you’ll pay for refinancing your mortgage loan.

How Are Credit Scores Calculated?

Understanding how your credit score is calculated is the first step to improving your credit and qualifying for the best mortgage rate possible. If your credit score needs improvement concentrating on the following areas will allow you to make the most significant improvements in the least amount of time.

35 Percent of your credit score is based on your history of making payments on time. Making all of your payments on time, especially your mortgage payment will have the largest impact on improving your credit score. Even if you make only one late payment prior to applying for a mortgage it could have a significant negative impact on your credit and the mortgage rate you will qualify.

30 Percent of your credit score is based on the amount of outstanding debt you have. The amount of credit you have used measured against your total credit available or the limits on each of the accounts listed on your credit reports represents your available credit. Maxing out your credit cards has a large negative impact on your credit score. Many financial advisors agree that maintaining no less than 25% of your available credit will have the largest favorable impact on your credit score.

15 Percent of your credit score is based on the amount of time that you’ve been using credit. The longer your credit history of favorable reporting, the higher your score will be. Your credit reports are the record of your use of credit so it is important to ensure that your credit records are error free on a yearly basis.

10 Percent of your credit score is based on the number of creditors making inquiries into your credit reports. An inquiry is made before applying for new credit and having too many flags you as a risk to potential lenders. Most inquires made stay in your credit files for a period of one year before dropping off. Because inquires have a negative impact on your credit score it is important to limit them while shopping for a mortgage loan. Accessing your own credit report does not count as an inquiry and does not have a negative impact on your credit score.

10 Percent of your remaining credit score is based on the different types of credit you use. This includes revolving accounts like your credit cards and installment accounts like your car loan and mortgage. Your mortgage payment history is an important aspect of your credit score and you should always strive to make the payments timely.

What Is The Ideal Credit Score?

If you are a homeowner with a credit score below 500 you can still qualify for a mortgage; however, you’re going to pay a lot more and be forced to accept less favorable terms. If your credit score is above 700 you will qualify for the best mortgage programs with the lowest interest rates. You can learn more about improving your credit score prior to refinancing your mortgage with a free video tutorial and wholesale mortgage rate quote.

You’ve probably seen the television ads claiming that no cost mortgage refinancing is “a no brainer.” Advertisers love to claim that they’ll pay your closing costs and offer zero cost refinancing. Most homeowners responding to these offers don’t realize how much of a lie no cost refinancing is. Here is the truth you need to know about the no cost mortgage refinancing lie.

Most homeowners don’t understand how mortgage lenders make their money. The majority of lenders today don’t sit on your loan collecting interest month in and month out. Most lenders make their money by selling loans to investors on the secondary market; the profit they make by selling your loan is called Service Release Premium. The fact that lenders sell your mortgage loan has more to do with you than you think; lenders reward brokers for charging you an above market interest rate to boost their profits when the loan is sold.

Your mortgage broker simply acts as an agent reselling loans for a wholesale lender. Mortgage brokers mark up the interest rate you qualify because the wholesale lender pays them a bonus for every .25% they overcharge you. This means the loan you get is anywhere from 100 to 150 basis points higher than what you could have had. This is why the average homeowner gets a retail rate on their mortgage loan. The interest rate has been marked up to give the broker a bonus.

The problem with this markup is that most brokers do not tell you what their doing and frequently omit what they’re doing on your Good Faith Estimate. Because you’re already paying your mortgage broker a fee for originating your loan any markup of your mortgage interest rate for a commission is not only unnecessary, but is taking advantage of you as a consumer.

In addition to marking up your mortgage interest rate for a profit, many brokers invent fees when processing your loan. These junk fees are often for thinks like “locking in your mortgage rate,” “application fees,” and “courier fees.” Most of these junk fees go straight into your mortgage brokers pocket for no good reason. So what about these companies claiming to offer no fee mortgage loans?

No Fee Mortgage Refinancing is a Lie

The truth is that every mortgage has legitimate fees that must be paid. If the lender is paying these fees upfront they are being paid on the back end in the form of Service Release Premium. When you refinance your mortgage with a “no fee” mortgage you’ll be accepting a much higher mortgage rate meaning that you’ll pay more than you need to for the loan. The lenders know they’ll make up the fees they’ve paid for you and double, even triple their profits when the loan is sold on the secondary market. You’ll be stuck paying hundreds of dollars more each month while the lender makes a handsome profit selling your loan. You can learn more about your refinancing options, including expensive pitfalls to avoid with this free mortgage tutorial.