Mortgage Refinance Guide

If you are a homeowner struggling with the payments for your second mortgage loan, low mortgage rates could help you take back your budget by combining your first and second mortgage into one payment. When your home is secured by only one loan you will qualify for a lower mortgage rate which could result in a lower, more manageable payment. Here are several tips to help you decide if now is the right time to refinance and combine your higher interest mortgage loans.

Why Consider Mortgage Refinancing?

The obvious benefit of mortgage refinancing is that you will have only one monthly payment to manage, a lower mortgage rate, and a payment that could be much lower than what you’re currently paying. If you’re interested in paying down your mortgage more quickly you have the option of shortening the term length of your new mortgage, allowing you to pay more towards the principle balance of your loan. Paying more towards your loan balance will save you money in the long run by paying less in finance charges over the lifetime of your mortgage.

Consider the Cost of Refinancing a Second Mortgage

Whenever you take out a new mortgage loan you will be required to pay fees for securing the loan. These fees can include an appraisal, title search, application fees, processing fees, and various third party closing costs. If you are consolidating your second mortgage you should have no problem recouping theses expenses based on your potential savings; however, it is still important to shop around compare loan offers. You can also save yourself a lot of money by dong your homework and learning how to negotiate for a wholesale mortgage rate.

What are Wholesale Mortgage Rates?

There are two kinds of mortgage interest rates available on the market today. There are the retail mortgage rates that include commission based markup offered to the majority of homeowners today, and wholesale rates offered to those that know how to avoid this incentive based markup. This markup of your mortgage interest rate is known as Yield Spread Premium and agreeing to a mortgage that includes it results in overpaying thousands of dollars unnecessarily.

What is Yield Spread Premium?

Simply put, Yield Spread Premium is the unnecessary markup of your mortgage interest rate to get a commission from the wholesale lender behind your loan. For every quarter percent you unknowingly agree to overpay, your broker receives a bonus of one percent of your loan amount. This kickback to the broker is paid in addition the origination fees you are already paying for the mortgage broker’s work.

Consolidate Your Second Mortgage with a Wholesale Mortgage Rate

By consolidating your first and second mortgage loans with a wholesale rate and avoiding junk fees you can save yourself thousands of dollars. If you would like more information on how to refinance your second mortgage, register for a free video guide.

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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Rather than looking at the big picture when refinancing their mortgages many homeowners obsess over interest rates without fully understanding how mortgage rates work. This creates a number of problems when refinancing including paying unnecessary fees and markup of your mortgage rate. Here are several tips to demystify mortgage rates and help you find the best deal when refinancing your home.

There is nothing mystical about mortgage refinancing. You’re simply replacing your existing loan with a new mortgage. This loan could come from a different lender or with your current lender. If you like your current lender and have made all your payments on time you might wonder if calling up your lender and asking for a lower rate would save you the trouble of refinancing.

Unfortunately the answer is no because in order to refinance your mortgage you have to qualify for the mortgage all over again. If anything with your financial situation has changed since you purchased your home it could make the process more difficult. This includes any life altering event such as marriage, divorce, self-employment, running up your credit cards, or economic factors beyond your control like declining home values.

When you apply for mortgage refinancing the loan underwriter will evaluate your current financial situation prior to approving your loan and determining your mortgage rate just as was done when you purchased your home. Because you are going through the mortgage process again you will have to pay many of the same lender fees and closing costs as you did before. These are the expenses commonly overlook by homeowners obsessing over getting the best “mortgage interest rate.” These costs include credit reports, appraisals, loan processing, and retail markup of your mortgage interest rate.

No Cost Mortgage Myth

There is no such thing as a “no cost mortgage” and anyone who tells you different is selling you an above market interest rate. No cost refinancing is simply a marketing trick designed to distract your from paying too much for your mortgage rate. Lenders charge above market rates to boost their profits when your loan is sold on the secondary market. While it’s true that you won’t have to fork over cash at closing, you’ll pay much more in finance charges for the entire duration of your mortgage.

Watch Out For Yield Spread Premium

The unnecessary markup of your mortgage interest rate by the person originating your loan is called Yield Spread Premium. This markup serves no other purpose than to give this person a commission for overcharging you. Most brokers do not disclose their markup of your mortgage rate on the Good Faith Estimate and they all have clever ways of disguising the fee on the HUD-1 statement. How does Yield Spread Premium work? For every .25% you agree to overpay with your mortgage interest rate the wholesale lender pays your broker a commission of 1% of your mortgage amount.

Yield Spread Premium is paid in addition to any origination fees you’re responsible to pay and because this fee comes from the lender many brokers tell you not to worry about it because it’s not coming out of your pocket. The problem with this reasoning is not the fact that the fee is being paid but why the lender pays it in the first place. Yield Spread Premium is paid to your mortgage broker because you’re agreeing to pay an above market interest rate…not exactly a win-win situation.

How do you avoid Yield Spread Premium when refinancing your mortgage? Start by telling your mortgage broker that you understand how this markup works and will not accept any loan with it. Ask your mortgage broker to see the mortgage rate sheets from the wholesale lender and don’t be fooled by rate sheets on the broker’s letterhead. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid by registering for this free video tutorial.

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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Mortgage loan processing is a confusing aspect of refinancing for many homeowners. Many mortgage brokers charge a fee as high as $500 or more; however, isn’t this just a junk fee?

Many mortgages brokers justify their fee by saying they use a “professional loan processor” to process their files. First of all, what the heck is a “professional loan processor” and if this person gets paid $500 an hour for their work, where can I sign up? Nonetheless, here and the pros and cons of the broker’s “professional loan processor” argument to help you decide if “processing fees” are legitimate expenses when refinancing your mortgage.

Mortgage Loan Processing

What happens when a mortgage broker “processes” your loan application? Once your mortgage broker has sold you on a loan offer they’ll set up a file in whatever origination software that broker is using. After they’ve priced out the loan including the potential markup of your interest rate they’ll turn the file over electronically to the “loan processor.”

The “mortgage processor” checks the file for errors (electronically of course…computers do most of the work). If everything checks out the processor prints the application documents and disclosures. The necessary documents for closing your new mortgage include:

Once the application and mortgage documents have been sent to you for signature, the loan processor begins checking the title and proof of insurance and verifies your income using w-2s or bank statements. After your file is complete the processor assembles the necessary documents for the lender you’ve chosen and transfers the file to the loan underwriter. These documents are typically sent via FedEx or other courier. Your mortgage application has not yet been approved.

At this point the loan processor’s job is done and your file is in the hands of the underwriter. How much time is spent preparing your documents? One hour…maybe two? Is printing out documents prepared by a computer worth a $500 processing fee? Shouldn’t your mortgage broker print out their own paperwork?

If a mortgage broker’s time is that valuable they could easily find cheerful college students at temp agency to do this work for $15 an hour…how can you possible justify a $500 processing fee by someone that has nothing to do with underwriting the loan? I’m sure loan processors are real people with kids to feed; however, for the work necessary to get your file to the underwriter there is no justification for a $500 processing fee.

What do you think? Is the application processing fee a valid expense?

Leave your thoughts and comments below…

As for me, I think not…tell your mortgage broker to take out the trash and refuse to pay junk fees when refinancing your home. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free video tutorial. Get started today, there is no obligation and doing your homework could save you thousands of dollars. You can sign up for immediate access by clicking the DVD image at the top of this page.