Mortgage Refinance Guide

If you’re considering refinancing your mortgage there are a number of reasons for taking out a new home loan.

Some people choose to refinance because of a financial hardship, others want to borrow cash against the equity in their homes; however, the most common reason is to get a lower monthly payment.

Here are several tips to help you get that lower payment and take back control of your paycheck.

How to Get Lower Mortgage Payments

The method you choose to lower your mortgage payment depends on your situation and your financial goals. Here are four of the most common methods used to get a lower monthly payment:

I. Extend the term length of your new home loan.

The easiest way to lower your monthly payment is to take your current mortgage balance and stretch it out over a longer amount of time. Suppose for example that you purchased your $300,000 home at seven percent five years ago and want refinance the balance of $280,000. Your current monthly payment is $1,200; however, refinancing with a 6.5% interest rate over forty years would lower payment to $850…a savings of $350. Keep in mind that by extending the term length of your loan you will be paying more to the lender in the long run for your financing.

II. Choose an Adjustable Rate Mortgage with a lower mortgage rate.

A short term fix for many homeowners is to choose an adjustable rate mortgage. If you expect your income to increase in the near future or plan on selling your home within a few years a hybrid ARM could be a sure fit. Hybrid Adjustable Rate Mortgages have the advantage of a fixed rate period that lasts as long as five years before the lender starts adjusting your mortgage rate. Hybrid Adjustable Rate Mortgages are an excellent way to take advantage of lower adjustable rate loans while protecting yourself from economic uncertainty.

III. Consider Interest Only or Option Adjustable Rate Mortgage Loans

If you’re interested in the lowest possible payment amount option ARMs, while risky, provide the lowest possible minimum payment. The problem with this type of loan is that if you only make the minimum payment amount every month you’re not paying enough to cover all of the interest due that month. The unpaid interest is simply added to your loan balance which results in a mortgage that actually grows over time. This is a bad thing. If you want to limit your risk but need a lower payment than a traditional ARM, consider an interest only loan.

IV. Borrow Against Your Equity to Take Back Your Budget

Cashing out the equity in your home to pay off other bills could be the solution for a budget that is out of control. When you refinance your mortgage and take cash back to pay off other bills you get to deduct the interest paid on this debt from your taxes.

Getting the lowest possible payment when refinancing can only happen if you qualify for the lowest mortgage rate. The mortgage quotes you receive shopping on the Internet and by calling your mortgage broker all include commission-based markup. If you want the lowest possible payment you’ll need to qualify for a wholesale mortgage rate…you can learn more about refinancing wholesale without paying junk fees with our free mortgage video tutorial. Register today while this is still a free offer; you’ll get immediate access to the videos on your PC and free live support to answer any questions you have.

If you are in the process of refinancing and are considering interest only mortgages, there are several things you should know to reduce your risk. Interest only mortgages are suitable for homeowners that need a low monthly payment for a short period of time; however, these loans are often abused by people who don’t understand how they work. Here are a several tips to help you decide if refinancing with interest only mortgages is right for you.

Adjustable Rate Mortgages 101

Interest only mortgages are a type of Adjustable Rate Mortgage. These loans are called “adjustable” because the lender periodically changes the interest rate to the loan’s index plus their margin. Adjustable Rate Mortgages are based on a number of different indexes ranging from the Federal T-bills to the London Interbank Offered Rate Index. The index that your interest only mortgage is tied to will be specified in your loan contract. Margin is your lender’s markup of the index for a profit; the amount of margin on your loan is determined by your credit and the lender you have chosen. When shopping for any Adjustable Rate Mortgage it is important to compare the margin from one lender to the next because this markup has an impact on your monthly payment amount.

Interest Only Adjustable Rate Mortgages

Interest only mortgages are a special type of Adjustable Rate Mortgage where your payment amount in the beginning is based only on the amount of interest due that month. Because you’re only paying the interest due, during the interest-only period you will not pay down any of your loan balance. What many homeowners don’t realize is that the interest only period does not last forever. Eventually the lender is going to want their money back and when this happens your mortgage payments will go up.

The length of your interest-only period is specified in your loan contract and typically lasts for up to five years. When the lender resets your loan you will have a mortgage payment amortized for the time remaining in your loan contract. Suppose for example that you take out a 30 year, interest only adjustable rate mortgage with a 5 year interest only period. At the end of the interest only period your payments will be based on a repayment period of 25 years. This means your payments will be much higher than a standard 30 year, adjustable rate mortgage.

As long as your budget can support the new, higher payment amount you shouldn’t have a problem when the lender resets your mortgage. Payment shock occurs for homeowners who are not expecting the higher payment because they don’t understand how interest only mortgages work and their budgets cannot support the payments. If you find yourself in this situation you could be facing foreclosure in as little as 120 days if your mortgage payment becomes too much to manage.

Refinancing as an Option

At the end of your interest only period you do have the option of refinancing before your payments go up. By choosing another interest only mortgage or opting for a less risky hybrid adjustable rate mortgage you can minimize your risks of payment shock while taking advantage of the lower rates offered by interest only mortgages.

You can learn more about your mortgage refinancing options, including strategies for minimizing your risk and avoiding lender junk fees by registering for a free video tutorial. These videos were produced by a retired mortgage broker and will show you how to refinance with a wholesale mortgage rate without paying too much. Click here to register for your free mortgage videos.

Interest-only mortgage loans are a source of confusion for many homeowners. If you need the lowest possible payment while minimizing your risk of payment shock, an interest-only mortgage could be your answer. Here are the basics you need to understand about interest-only Adjustable Rate Mortgages (ARM) to make an informed decision and minimize your risk when refinancing.

Adjustable Rate Mortgages 101

What are Adjustable Rate Mortgages and how do they differ from a conventional fixed interest rate loans? Adjustable Rate Mortgages are simply mortgage loans that have a variable interest rate that changes over time. How often your mortgage rate changes depends on the lender and the type of Adjustable Rate Mortgage you’ve chosen; however, every 24 months is a common adjustment period.

What happens when your lender adjusts your mortgage rate? When your mortgage lender adjusts the interest rate they will change your rate to whatever index your loan is tied to plus the lender’s margin. The margin your lender adds is their markup to cover expenses and profit on your loan. When shopping for an Adjustable Rate Mortgage the lender’s margin is an important consideration to make when choosing a loan offer.

What is an index? The index determines your base mortgage rate. Key financial indexes commonly used by mortgage lenders include the Prime Rate, the LIBOR (London InterBank Offered Rate…lenders like this one because they can sell loans tied to the LIBOR to European investors), and the Treasury Index. These interest rates rise and fall based on the supply and demand of credit and other economic factors.

Adjustable Rate Mortgage Features

If you are in the market for an Adjustable Rate Mortgage there are three loan features you need to look at in the offers you consider. These features are the index, margin, and caps. We’ve already discussed index and margin; caps are safety features used to minimize your risk of payment shock when refinancing with an Adjustable Rate Mortgage.

What is payment shock? Imagine waking up one day to a statement from your lender showing that your mortgage rate has gone from 7.5% to 10.5% and your new payment amount will be $700 higher. Fortunately, Adjustable Rate Mortgage loans have built in safety features to protect your from a nightmare like this.

Caps are Adjustable Rate Mortgage safety features that can protect you from payment shock when structured correctly. There are two varieties of caps and you need to make sure your Adjustable Rate Mortgage comes with both types. The first type of cap is called a periodic, or interest rate cap. This cap limits how much your lender can adjust your interest rate up or down during an adjustment period. The second type is payment cap that limits how much your lender can raise or lower your monthly payment during an adjustment period. Both types of caps an have a lifetime cap meaning that the total changes, up or down, are limited over the duration of your loan.

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If you are considering refinancing your mortgage with an interest-only Adjustable Rate Mortgage, there are several things you need to know in order to make an informed decision before signing on the dotted line. Adjustable Rate Mortgages come with the risk of payment shock when your lender adjusts the interest rate. Payment shock means waking up one day to mortgage payment you can no longer afford; here are several tips to help you decide if interest-only mortgage refinancing is right for you.

What Are Interest-Only Adjustable Rate Mortgages?

Interest-only mortgages are a type of adjustable rate mortgage where your monthly payment amount is based only on the amount of interest due that month and does not include any of the actual loan balance. Many homeowners purchase their homes with interest-only mortgages because they need the lowest possible payment amount; what many don’t understand is that interest-only mortgages do not remain interest-only forever.

At some point your lender is going to want their money back and when this happens your loan is converted to a standard Adjustable Rate Mortgage amortized for the time remaining in your loan contract.

What Every Homeowner Needs to Know About Mortgage Amortization

Amortization is a word that gets kicked around a lot but what does it mean when it comes to your mortgage loan? First of all, amortization describes the process of repaying your loan. Mortgage loans are front loaded with interest, meaning that you pay the majority of interest on the loan up-front. Your amortization schedule outlines how much of your payment is applied to interest and how much goes to the loan balance over time. You can see your amortization schedule using a basic mortgage calculator and you’ll notice that over the years the dollar amount applied to interest goes down while the portion paid back increases. What does this mean for interest-only mortgage holders?

During the interest-only period of your loan there is no amortization whatsoever. Your lender pockets the entire amount you pay each month. This interest-only period lasts for a period of time specified in your loan contract, often five to seven years. At the end of the interest-period your loan is converted to a standard Adjustable Rate Mortgage at the prevailing interest rate plus the lender’s margin.

Your amortization schedule starts when the lender converts your loan based on the time remaining in your contract. Suppose your interest-only period lasts five years on a thirty-year Adjustable Rate Mortgage. At the end of the five year interest-only period, your payments are based on a twenty-five year amortization schedule meaning they will be much higher than if you had refinanced with a standard thirty year adjustable.

Once you understand how your interest-only mortgage works you can budget for the future when your payments go up and reduce your risk of payment shock. There are other factors you need to consider when deciding if an interest-only mortgage is right for you, mainly your tolerance for financial risk. Mortgage interest rates are nearly impossible to predict and economic uncertainty coupled with your lender’s generous margin has the potential for you to wind up with double digit mortgage rates.

You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free refinancing video tutorial. Register today with no obligation by clicking the DVD image at the top of this page.

If you are considering refinancing your mortgage with an Interest Only or Option Adjustable Rate Mortgage, there are a number of pitfalls you need to know about. While it’s true that interest loans and option mortgages are much riskier than traditional mortgages, when used correctly these loans could save you thousands of dollars. There are several tips to help you avoid the pitfalls of interest only loans.

What are the Differences Between Interest Only and Option Loans?

Interest only mortgages are as their name implies, loans with payments based only on the amount of interest due that month. Option loans offer greater flexibility; however, they are also more prone to abuse by homeowners who do not understand the risk. Option loans are also called “payment option” loans because the homeowner has the choice of making several different payments each month. If you refinance your mortgage with a payment option loan you’ll have the choice of making a payment based on a 30-year repayment schedule, a 15-year repayment schedule, an interest only payment, and the ultra-risky “minimum payment.”

The problem with the minimum payment option is that it does not cover all of the interest due and the unpaid amount is simply tacked on to the outstanding balance of your loan. This results in a phenomenon known as “negative amortization,” or simply put a loan that grows over time.

What are the Pitfalls of Interest Only Loans?

Negative amortization is one pitfall; however, the single greatest pitfall you could face with an interest only loan, or any Adjustable Rate Mortgage for that matter, is payment shock. This happens when you wake up one day and find that the lender has either adjusted your interest rate or recast the loan and you can no longer afford your payment. Payment shock happens for several different reasons.

Many homeowners find that after abusing Option Adjustable Rate Mortgages with the minimum payment, their loan balance reaches 110% to 125% of their home’s value and the lender automatically recasts their loan. Recasting simply means the lender is executing their right to convert the loan to a fully-amortizing Adjustable Rate Mortgage. If you’ve been keeping your budget afloat by paying the minimum amount on an Option Adjustable Rate Mortgage, you will undoubtedly experience payment shock first hand.

Recasting isn’t limited to option loans; homeowners with interest only loans could face recasting if their caps are not structured properly. Caps are the built in safety features that protect homeowners from rising interest rates and skyrocketing payment amounts. There are two varieties of caps that you need to be aware of: periodic caps and payment caps. Periodic caps limit the amount your interest rate can go up during any adjustment period or in the case of a lifetime periodic cap, over the entire duration of your loan. Similarly, payment caps limit how much your payment can change during any one adjustment or over the lifetime of the loan.

When refinancing with any type of Adjustable Rate Mortgage you need to make sure that your loan has both periodic and payment caps. Loans that only have payment caps are prone to negative amortization and ultimately recasting when the cap prevents the payment from going up enough to cover all of the interest due in a given month. When this happens the unpaid interest is added to the outstanding balance just as it is with the minimum option payment.

Other pitfalls of interest only mortgages include overpaying for lender margin and fees. The margin is the amount your lender tacks on to your interest rate after each adjustment for a profit. Many homeowners think that when the lender adjusts their mortgage rate it changes to whatever index their loan is tied to; however, lenders always markup the index with their margin. The margin is set by the lender so you’ll want to carefully compare margins when shopping for your interest only mortgage.

You can learn more pitfalls of interest only loans, including strategies to avoid paying too much with my free refinancing toolkit. Register today by clicking the DVD image at the top of this page; the toolkit is yours free with no obligation.