Home Mortgage Refinancing Guide

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.

You’ve probably been hearing about the credit crisis in the mortgage industry recently and a number of people have been asking me what’s really happening. While it’s true the meltdown of the sub-prime or bad credit mortgage industry is affecting conventional mortgage lenders, the impact is not as bad as the gloom and doom you’re hearing in the news.

Who is the credit crisis affecting?

Homeowners that purchased their homes with loans not appropriate for their needs or financial situation and those with bad credit are feeling pinched by the crisis. This includes homeowners that purchased their homes with risky interest-only and option Adjustable Rate Mortgages (ARM) that are scheduled soon to reset. Many of these homeowners used these risky loans because they have low credit scores or are unable to sufficiently document their income and assets for a conventional mortgage loan. Homeowners with credit scores that are lower than 620 in need of jumbo or stated income loans will find getting approved very difficult if not impossible in the current climate.

Who is the crisis not affecting?

Homeowners with good credit in need of conforming mortgage loans (loans less than the $417,000 limit set by Fannie Mae) are not going to have any trouble refinancing their mortgage loans. The Federal Reserve recently lowered short term interest rates because of the crisis and mortgage rates are still very low. If you are in need of a stated income mortgage loans these loans are gradually becoming available; however, you will need to meet the credit/asset guidelines in order to qualify.

Mortgage brokers and lenders are feeling the pinch and should be eager to make deals; you will need to be careful to avoid junk fees and the unnecessary markup of your mortgage interest rate known as Yield Spread Premium.

Beware Junk Fees and Retail Markup

There are a number of junk fees listed on your Good Faith Estimate and HUD-1 statement you need to avoid when refinancing. Anything you find on these documents that resembles an application fee, lock fee, processing fee, or a courier fee is a garbage fee you should simply refuse to pay. The interest rate you are quoted when applying for a mortgage is typically a retail mortgage rate that includes your mortgage broker’s markup. This markup of your mortgage interest rate serves no purpose other than to give your mortgage broker a commission. Because you’re already paying an origination fee for your mortgage broker’s services this markup often doubles or triples your broker’s commission.

When questioning mortgage brokers about this markup known as Yield Spread Premium many brokers become defensive even angry. Your mortgage broker might tell you not to worry about this fee because it’s coming from the lender’s pocket; however, the reason the lender pays this fee is because you’re agreeing to pay a higher mortgage rate than you need to. You can learn more about avoiding Yield Spread Premium and other junk fees when refinancing your mortgage by registering for this free mortgage toolkit.

Many homeowners wonder if timing is a factor when refinancing their mortgage loans. With all of the mortgage problems you hear about in the news is refinancing even a good idea? Here are several tips to help you decide if refinancing is right for your financial situation.

Should You Refinance?

The decision to take out a new mortgage depends largely on your objectives for the new mortgage loan and your financial situation. There are many valid reasons for refinancing and not all are dependent on qualifying for a lower mortgage rate. Taking out a new mortgage to consolidate high interest debt or take cash back against the equity in your home are all valid reasons for refinancing where you may not always qualify for a lower mortgage interest rate.

The “Two Percent Rule” is Rubbish

Some people tell you that you should never refinance unless you qualify for a mortgage rate that is two percent lower than your existing rate. This so called “rule” does not consider any other reason for refinancing than lowering your mortgage rate and greatly oversimplifies the decision. Instead of basing your decision for mortgage refinancing on getting an interest rate that is two percent lower, it makes sense to evaluate your options on a cost vs. savings basis.

Refinancing your mortgage is going to cost you money. You’ll be required to pay a number of fees to your loan originator, lender, and several third parties when closing on the new mortgage. If your goal for refinancing your mortgage is to save money, you should determine how long it will take you to recoup the expenses you’ll pay when taking out a new mortgage. You can do this by adding up your total costs: origination fees, points, and closing costs. Divide this amount by how much lower your payment will be each month and you’ll have the number of months it will take you to recoup your expenses.

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