How to Refinance a Mortgage

If you are in the process of purchasing your home or refinancing your existing mortgage you will most likely encounter the term “points.” What are points and is it ever in your best interest to fork over additional cash at closing? Here are the basics you need to understand about mortgage points and whether or not it’s in your best interest to pay them.

Mortgage Points Come In Two Flavors

There are two varieties of mortgage points. The first are the origination points you pay for your loan originators part in arranging your loan. Your loan originator could be a mortgage company, internet mortgage site, your bank, or a mortgage broker. Origination fees vary widely and are one of the reasons many homeowners overpay for their mortgage loans. How much is a reasonable amount to pay for your mortgage origination points? A reasonable fee to pay is one percent of your loan amount and not a penny more.

One Mortgage Point = One Percent of Your Loan Amount

The second type of mortgage points you will encounter are the “discount” points you pay in exchange for something from the lender, usually a lower mortgage rate. Discount points can be used for other reasons when negotiating; for example you could negotiate to pay discount points in exchange for a certain rate and not having a prepayment penalty included in your loan contract. Don’t underestimate your ability to negotiate with mortgage lenders, especially with the current economy. Mortgage lenders are hurting and are desperate to close loans. You can leverage this to your advantage when negotiating for loan terms.

Should You Pay Discount Points?

The decision to pay discount points depends on your financial situation and what you have to gain by paying this fee. One of the main factors to consider is how long it will take you to recoup the expense from paying discount points with the lower mortgage payment. You can easily calculate how long this will take by dividing the amount you’ll pay in discount points by how much lower your mortgage payment will be because of the fee. This will tell you the number of months it will take you to recoup paying discount fees before you realize any savings. If you plan on selling your house within the next five years or in the amount of time you calculated above, it doesn’t make sense to pay discount points.

There Are Tax Advantages When Paying Discount Points

Paying discount points will earn you a tax deduction in most cases. According to the IRS the discount points you pay are prepaid mortgage interest. There are stipulations and you may or may not be able to deduct the full amount in one year according to IRS rules; however, this prepaid interest can certainly reduce your tax liability if you itemize deductions on your tax returns.

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If you are a homeowner paying on an Adjustable Rate Mortgage, refinancing could help you avoid a financial nightmare. Many homeowners don’t know when their Adjustable Rate Mortgages are scheduled to reset and experience payment shock when their monthly payment goes up by several hundred dollars. Here are several tips to help you manage your Adjustable Rate Mortgage and decide if refinancing is right for you.

Many homeowners use Adjustable Rate Mortgages to purchase their homes because these loans are easier to qualify for and have lower payments, at least in the beginning. These loans frequently come with ultra-low “teaser” interest rates; however, at the end of the introductory period the loan switches to the contract mortgage rate and the payments go up significantly. Homeowners who don’t understand how their contracted mortgage rate works can experience payment shock when their lender starts adjusting the loan.

What is Mortgage Payment Shock?

Imagine waking up one day to a statement from your lender showing that your Adjustable Rate Mortgage has reset and the new monthly payment will be $400 more than you’re currently paying. For many homeowners living paycheck to paycheck this would be a disaster resulting in the eventual loss of the home. Payment shock occurs for a number of reasons; some homeowners don’t understand how their Adjustable Rate Mortgages work or even what their contract interest is.

Benefits of Refinancing Your Adjustable Rate Mortgage

There are a number of benefits from refinancing in addition to locking in your monthly payment amount. If you decide to stick with an Adjustable Rate Mortgage, refinancing could get you a better margin if your credit score has improved. Margin is the amount of markup that’s added your mortgage rate every adjustment cycle; the amount you’ll pay is partially based on your credit score. If you’ve improved your credit rating you could get a lower margin and pay less interest.

Of course the main benefit or refinancing your Adjustable Rate Mortgage with a fixed rate mortgage is having a stable payment amount. When interest rates are on the rise for whatever reason you can expect your mortgage payments to follow. Fixed rate mortgage loans protect you from economic uncertainty and rising mortgage interest rates. If you don’t want to refinance with a fixed rate mortgage you can improve your stability by refinancing with an Adjustable Rate Mortgage with better caps. Caps are safety features that limit how much your payment amount and mortgage rate can rise during any one adjustment and over the lifetime of your mortgage.

Refinancing Can Help You Build Ownership Faster

Refinancing your mortgage with a new loan with a shorter term length allows you to build equity in your home at a much faster rate, meaning that you will pay your mortgage down faster and pay less to your lender in finance payments. The disadvantage of a shorter term length is that your monthly payment will be much higher; however, if your budget can support his payment you can save yourself thousands of dollars in the long run. There are other circumstances where refinancing can raise your payment amount. Borrowing against the equity in your home for instance results in qualifying for a slightly higher mortgage rate and a higher monthly payment. The money you get back can be used for any reason; many homeowners use equity in their homes to consolidate higher interest debts such as credit cards.

Is Mortgage Refinancing Right For You?

There are a number of factors to consider when deciding if mortgage refinancing is right for you depending on your objective for the new loan. Many financial advisors and websites will tell you not to refinance unless your new mortgage rate is at least two percent lower than you’re already paying; however, this so-called “rule of thumb” is bad advance.

Rather than basing your decision to refinance on an arbitrary mortgage percentage rate, it makes more sense to base your decision on how long it takes you to recoup your expenses from refinancing and realize a savings. Here’s why…whenever you take out a mortgage loan you will be required to pay a number of fees and closing costs. If your objective for refinancing is to save money with a lower payment amount you will not realize any savings until you have recouped these expenses.

You can easily calculate how long it will take you to recoup your expenses by dividing the amount of your out of pocket expenses by the amount you will be saving each month on your mortgage payment. This will tell you the number of months you have to realize a savings from the new mortgage. This only works if you are considering refinancing to lower your monthly payment amount. Homeowners refinancing with longer term lengths or borrowing against their homes may never recoup the expenses of refinancing their mortgage loans.

Another factor to consider is the amount of time you plan on keeping your home. If you sell your home before recouping your expenses you will lose money by refinancing. You should not plan on moving prior to the reaching this break-even point for your loan.

Beware Mortgage Broker Fees

Once you’ve decided to go ahead with refinancing your mortgage there are a number of potential pitfalls you’ll need to avoid. These problems include paying unnecessary closing costs, Broker fees and commission based markup of your mortgage interest rate. If you’re not careful a greedy mortgage broker can wipe out any potential savings you stand to realize from refinancing the loan. You can learn more about refinancing your Adjustable Rate Mortgage with a wholesale rate and avoiding unnecessary fees with a free mortgage DVD.

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Many homeowners wonder if taking out a new mortgage during the holidays is a good idea. If you’re considering refinancing this holiday season, there are a number of very good opportunities available for savvy homeowners. Here are several tips to help you make an informed decision if refinancing this holiday season is right for you.

Mortgage Rates This Holiday Season

Despite the credit crunch in the United States wholesale mortgage rates are currently hovering at 5.875% for a 30 year, fixed rate mortgage. This is an excellent opportunity to refinance if you are still paying on a higher rate mortgage loan. Keep in mind that this is a wholesale mortgage rate and the rate quoted by your mortgage broker will include Yield Spread Premium. Your goal when taking out a mortgage is to avoid paying this unnecessary and controversial markup.

Reasons For Refinancing Your Mortgage

The most common reason for refinancing during the holidays is to borrow cash against the equity in your home. While borrowing cash for the holidays might not be the best use of your home’s equity, it is after all your equity. You can use the cash you get back at closing for any reason that you see fit. Other reasons for refinancing include consolidating your first and second mortgages to get one monthly payment and consolidating your higher interest credit card debt.

Refinancing With a Wholesale Mortgage Rate

Homeowners who avoid the unnecessary retail markup of their mortgage rate can save thousands of dollars in finance charges. Avoiding this markup known as Yield Spread Premium is easier than you think; the hardest part is learning how to recognize it in your loan documents. The Annual Percentage Rate provided by the lender tells you nothing about Yield Spread Premium and many brokers conveniently leave this fee off the Good Faith Estimate.

How can you find out if your loan includes Yield Spread Premium? Ask your mortgage broker to see the rate sheet from the wholesale lender behind your loan. Don’t accept a rate sheet printed on your mortgage broker’s company letterhead, it needs to come from the wholesale lender. Tell your mortgage broker that you understand Yield Spread Premium and will not consider loan offers that include lender paid fees.

Beware Garbage Fees

In addition to avoiding Yield Spread Premium when refinancing there are a number of garbage fees you need to be aware of. Carefully review your Good Faith Estimate for any fee that resembles an application fee, rate lock fee, broker courier fee, or loan processing fee. These are garbage fees added by your mortgage broker that have absolutely nothing to do with lender approving your loan. If you find fees like this on your Good Faith Estimate you should call your mortgage broker out and negotiate to have them removed or pay a lesser amount.

Reconciling Your Good Faith Estimate

The Good Faith Estimate you receive is one of the least understood mortgage documents. When your mortgage company or broker quotes you an interest rate they typically provide you a copy of the Good Faith Estimate. This document estimates your closing costs and fees for obtaining the loan. The Good Faith Estimate you receive is only as good to you as the person preparing it is honest. In many cases mortgage brokers fabricate these documents so you’ll commit to the loan. Once this happens you can be sure that bait and switch will get you more expensive loan.

You can avoid this by reconciling your Good Faith Estimate with the HUD-1 statement before signing the loan contract. While the Good Faith Estimate is supposed to approximate your costs, the HUD-1 is the final list of what these fees actually are. Never sign your loan contract without reconciling your Good Faith Estimate against the HUD-1. If you find any discrepancies whatsoever you should have a heart-to-heart discussion with your mortgage broker before you sign anything.

You can learn more about refinancing your mortgage without paying garbage fees and retail markup of your mortgage rate by registering for a free Mortgage DVD.

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Many homeowners have never heard of Yield Spread Premium and do not understand why their mortgage rate is marked up. Yield Spread Premium sounds complicated; however, once you understand why it’s there, you can avoid paying this unnecessary markup. Cutting the fat from your mortgage rate by as little as a quarter point can lower your monthly payment by hundreds of dollars in many cases. Here are the basics you need to understand about Yield Spread Premium and mortgage interest rates.

Why Yield Spread Premium?

From the lender’s point of view this markup is all about return on investment. Wholesale lenders make the majority of their profits selling mortgage loans to investors on the secondary market. Mortgages with above market interest rates bring these lenders premium profits; this is why lenders incentivize overcharging homeowners with retail mortgage rates.

There’s a lot that goes on behind the scenes when your mortgage broker quotes you an interest rate. Once your broker understands your financial situation they’re sizing you up much like a used car salesman does when you walk onto the lot. Your mortgage broker knows the wholesale mortgage rate you qualify from the wholesale lender; however, the broker wants to up sell you on a higher mortgage rate because of this incentive from the wholesale lender. Here’s an example to illustrate how Yield Spread Premium works.

Suppose you are refinancing your 1st and 2nd mortgage loan for a total of $250,000. You wanted to consolidate these two mortgages with a lower interest rate and one payment. The broker tells you that you qualify for a 6.75% fixed rate loan and charges you 1.5 points for the origination fee. One point in this example is $2,500 as a point equals one percent of your loan amount. What your mortgage broker isn’t telling you is that you actually qualified for a 6.0% mortgage rate and they’ve marked it up for a commission from the lender.

In this example the mortgage broker receives $3,750 from you in origination fees. This is compensation for their work in arranging your mortgage; however, a reasonable amount to pay is no more than one percent. In this example 1.5 percent is too much. In addition to overcharging you for origination fees, the mortgage broker receives a commission from the lender for inflating your interest rate. In this example the broker pockets an additional 3.0%, or $7,500 for overcharging you. This fee is Yield Spread Premium. The broker walks away with $11,250 at your expense for little more than a few hours work.

Yield Spread Premium is Dishonest

The overwhelming majority of mortgage brokers will never admit what they’re doing with your mortgage rate. Those that do often become defensive and even angry about any questioning regarding this fee; they will tell you “since the fee isn’t coming out of your pocket don’t worry about it.” The fact of the matter is this fee is advantageous and dishonest. A bill is currently making its way through the House of Representatives making Yield Spread Premium illegal. If this happens how will your mortgage broker afford their boat payments? Too bad for them.

Until Yield Spread Premium is illegal, savvy homeowners who learn to recognize this unnecessary markup can avoid paying it when refinancing. By avoiding Yield Spread Premium you’ll be able to refinance with wholesale mortgage rates, potentially lowering your monthly payment amount by hundreds of dollars. Refinancing with a wholesale mortgage rate isn’t as difficult as you think. You’ll need to find a mortgage broker willing to work for the origination fee alone, without receiving the kickback from the wholesale lender. Honest mortgage brokers do exist; however they can be difficult to find.

How to Find an Honest Mortgage Broker

Your best bet in finding an honest person to originate your mortgage is to look for a local, self-employed broker. A representative a large brokerage house may not have the authority to refinance your mortgage without Yield Spread Premium; in this case mom and pop shops can be the best way to go. Start by contacting local mortgage brokers in your phone book and telling them that you are looking for a mortgage without Yield Spread Premium. Explain that you understand how the markup works and are willing to pay a reasonable origination fee for their work; however, you will not accept a higher mortgage rate for any lender paid compensation. Once you find a mortgage broker willing to work for an origination fee alone you are well on your way to saving thousands of dollars on your next mortgage.

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The mortgage industry is undergoing the worst crisis lenders have ever faced; if you’re considering refinancing your mortgage it’s more important than ever do your homework and choose an honest lender. Here five common mortgage refinancing mistakes you need to avoid in order avoiding paying too much for your next loan.

Mistake Number One: Going for the “Cheapest” Loan

The cheapest mortgage offer isn’t necessarily the best loan for your situation. Turn on the television and you’ll see lenders bragging about their “unbelievable mortgage rates” or “no closing costs” loan offers. These loans are nearly always loaded with fees and unnecessary markup of your mortgage interest rate; always treat these loan offers with a healthy dose of skepticism. Most mortgage representatives are simply trying to get your application and commit to the loan; after you’ve done this you are at the mortgage company’s mercy for rates and fees. This is why you should choose loan offers carefully and make sure nothing changes once you’ve committed to a loan offer.

Mistake Number Two: Comparing Dissimilar Loan Offers

When you’re comparing mortgage offers it’s important to compare similar loan types. Comparing a 30 year fixed rate mortgage to a 15 year loan with an Adjustable Mortgage Rate does you no good. Keep in mind that a company with great fixed rate loans may not have the best adjustable rate offers. Make sure you are using the Good Faith Estimate to compare loan offers and are making apples to apples comparisons before choosing a lender.

Mistake Number Three: Relying on the Annual Percentage Rate

Many people think the Annual Percentage Rate (APR) is the best way to compare loan offers. While it’s true that Truth-in-Lending laws require lenders to publish Annual Percentage Rates, which is supposed to tell you the total cost of a loan expressed as an annual percentage, there is no standard for calculating this rate. The APR from one lender may not reflect the same costs as an APR from another, making this figure completely useless.

Mistake Number Four: Not Requesting a Good Faith Estimate

Mortgage lenders are required to provide you the Good Faith Estimate after receiving your application; however, most lenders will provide you this document upon request. This document is an itemized list of all expected fees you will be responsible for paying; however, keep in mind that the Good Faith Estimate is only an estimate. Dishonest mortgage companies change loan offers and terms after you’ve committed to a loan. This is why it’s important to reconcile your Good Faith Estimate with the HUD-1 statement before signing the contract.

Mistake Number Five: Shopping Over a Period of Time

Interest rates change on a daily basis. If you do your comparison shopping over a period of days or weeks the mortgage rates you compare may no longer be available. Try to limit your comparison shopping to one morning or afternoon at a time. This will allow you to keep up with changing interest rates.

You can learn more about your mortgage refinancing options, including other mistakes to avoid by registering for a free video tutorial. The videos walk you through the entire process of refinancing with a wholesale mortgage rate, saving you thousands of dollars in the process.

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