Home Mortgage Refinancing Guide

Your mortgage payment that includes loan Principal, mortgage Interest, property Taxes, and homeowner Insurance is commonly referred to as PITI. Payments of this type are often paid through an escrow company. Your mortgage lender will receive the loan principle an interest to pay down your mortgage loan.

The escrow company will then pay your homeowners insurance policy premiums and property taxes. Lenders often structure loans in this manner to reduce their risk by ensuring your homeowners insurance and property taxes are paid in a timely manner.

The insurance and taxes portion of your monthly payment is not paid to the lender although they may hold it until the payments are due. This allows the lender or Escrow Company to collect interest on your money. Suppose for instance the property taxes on your home are $3,000 per year. You will pay $250 per month in addition to your Principle and Interest for the Taxes. The lender or Escrow Company will hold your money until the year’s end when it will be paid to the County for your Property Taxes.

If you financed your home with a fixed mortgage rate the Principal and Insurance portion of your payment will not change from one year to the next. It is likely that your Taxes and Insurance will change when your insurance policy is renewed or the property taxes on your are reassessed. It is a good idea to anticipate these increases and allow room in your budget for the changes.

Escrow Companies are notorious for not keeping up with changes in your Property Taxes and Insurance. If this happens you could receive a bill for the asking you to bring your escrow shortfall current. This money isn’t going to your lender but is being used to make up the difference in the higher amount of your Property Taxes and Homeowners Insurance. You can avoid a shortfall in your escrow account by notifying the Escrow Company whenever you receive a change in your insurance policy or tax information from the county you live.

Balloon mortgages are home loans that have a payment schedule based on long term repayment but have the entire balance due after a shorter period of time. As an example a seven year balloon mortgage would have payments based on a 30 year term length but the entire remaining balance will be due after seven years.

Taking out a balloon mortgage is a common way of getting lower mortgage rates and monthly payments than you could with a traditional 30 year fixed rate loan. Similar to an Adjustable Rate Mortgage, balloon mortgages shift much of the risk from the lender to you in exchange for a lower mortgage rate. The problem is that if you are unable to pay off the entire loan balance when the balloon payment is due or refinance you risk losing your home.

The risk associated with balloon loans and Adjustable Rate Mortgages is referred to as mortgage rate risk. This is the risk to the mortgage lender when giving you a rate without knowing what mortgage rates will be doing down the road. Lenders lose out on potential income by locking in your mortgage rate…Adjustable Rate Mortgages circumvent this risk by adjusting your payment amount should mortgage rates go up. Balloon payments reduce risk to the lender by requiring the loan be paid back in short periods of five to seven years. Because the balance of the loan is due with the balloon payment the lender can refinance at a higher mortgage rate.

If you are considering a mortgage with a balloon payment to get a lower interest rate you should consider how future mortgage rate increases could affect your monthly payments and your budget. Because most of your payment with balloon mortgage loans is applied to interest you will be building very little equity in your home; balloon mortgages should only be considered as a stopgap measure until more reasonable financing can be secured.

Many homeowners get themselves into trouble with declining home values when they find themselves upside down, owing more than their home is worth when the balloon payment is due. If you are upside down and owe a balloon payment it will be extremely difficult if not impossible to refinance or sell your home. Homeowners in this situation find themselves facing foreclosure…this is the risk you face when using a balloon mortgage loan.

You can learn more about your mortgage refinancing options including pitfalls to avoid like balloon mortgages and junk fees by registering for the free mortgage videos on this web site.

Your home loan’s amortization schedule is the breakdown of repayment necessary to pay off your mortgage loan. There are two parts to your mortgage payment: loan principle that pays down your balance and loan interest. Your amortization schedule shows you how much of your payment is applied to the loan principle and how much is paid to interest over time.

One of the disadvantages you should be aware of when refinancing your mortgage is that you will be starting your amortization schedule from the beginning every time you refinance. Refinancing slows the growth of equity in your home because most of your mortgage payments will be applied to loan interest. Still, mortgage refinancing can be advantageous if you are reducing your payment amount with a lower mortgage rate.

When you take out a mortgage the appraisal is part of the package sent to underwriting at your lender. It doesn’t matter if the mortgage is to purchase your home or to refinance, you must have a recent appraisal in order for the lender to approve your home loan.

Mortgage appraisals use a market comparison to determine the value of your home. The appraiser will compare the recent sale price of three similar properties in your area to determine your home’s value. A “similar” property is one with the same amount of square feet, bed and bathrooms, features, property age, and geographic area. The similar properties also need to have sold within the past six months.

If you’re refinancing your mortgage will you always have to get a new appraisal? Not necessarily; if your appraisal is fairly current, usually within the past two years, your broker may be able to work around you paying for a new appraisal.

Declining Property Values

After the real estate bubble burst many homeowners across the country found their property values declining. In many areas of the country homeowners found they did not have enough equity in their homes to qualify for refinancing after the lender ordered a new appraisal. If this is your situation and you have an adjustable rate mortgage that is scheduled to reset soon and you will no longer be able to afford the payments the FHASecure program may be able to help you qualify if your payments are current.

The HUD-1 Settlement Statement is one of the most important loan documents you will encounter when taking out a mortgage loan. The information on your HUD-1 can make the difference between getting a good home loan and overpaying thousands of dollars.

The HUD-1 Statement shows buyer fees, seller fees, lender fees, broker fees and markup and any third party closing costs. If you are refinancing your mortgage loan, you and your closing agent will be the only ones signing the HUD-1 statement. While the Good Faith Estimate is a weak approximation of what you can expect to pay for your mortgage loan, the HUD-1 is the final word on what you will pay. Good Faith Estimates have become little more than a marketing tool to attract borrowers with bait-n-switch tactics.

One of the most important items you’ll find on your HUD-1 is Yield Spread Premium, or the mortgage broker rebate. This is a fee paid to the broker by the lender for marking up your mortgage rate. If there is any Yield Spread Premium associated with your mortgage you can be sure that you’re paying more than you should. You can learn how to avoid Yield Spread Premium and other junk fees by registering for the free mortgage videos on this site.