If you are a first time homebuyer considering a new mortgage loan the process of refinancing can be an intimidating proposition. No one wants to be taken advantage of by a greedy mortgage broker or pay more than they have to for the loan. Doing your homework before refinancing will help you avoid expensive refinancing pitfalls; here are several tips geared for first time homebuyers who are considering mortgage refinancing.
Mortgage Refinancing Terminology
Before you begin shopping for a new mortgage loan it is important to brush up on basic mortgage terminology. Here are several common terms you are likely to encounter and key concepts you need to know.
Mortgage Amortization – The process of paying down your loan balance over the loan’s term length; mortgage loans are front loaded with interest so in the beginning most of the payment is applied to interest. Over time more of your payment amount is applied to paying down the loan principle.
Term Length – The amount of time you have to repay your loan along with the mortgage interest rate determines your payment amount and amortization schedule. Common term lengths are 15 or 30 years; however, there are now 40 and 50 year mortgage terms available. Most homeowners considering refinancing would benefit most from a 15 year term length.
Mortgage Rate – Your interest rate represents the finance charge you are paying expressed as a percentage of your total loan amount. The mortgage rate along with term length is responsible for determining your monthly payment amount. Most homeowners don’t realize that mortgage loans are retail products and that “retail” mortgage rates include markup intended to give the loan originator a commission.
Mortgage Banker – Loan originators that close mortgage loans in their own name are considered banks and broker banks. These lenders are exempt from the Real Estate Settlement Procedures Act thanks to the Banking Lobby and are not required to disclose their profit margins or how much they’ve marked up your loan. You should never refinance your mortgage with a mortgage banker for this reason.
Mortgage Broker – These loan originators sell loans from wholesale lenders for a commission; mortgage brokers are compensated for the work they do in two ways. Your mortgage broker charges an origination fee for their service, also called origination points, and marks up your interest rate for a bonus from the lender. This markup of your mortgage rate is called Yield Spread Premium and is completely unnecessary.
Part two of this series, mortgage refinancing for first time homebuyers, will cover advanced mortgage terminology including Service Release Premium, Yield Spread Premium, and points. You can learn more about refinancing your mortgage without paying too much with my free mortgage toolkit; register today by clicking the DVD image found at the top of this page. The toolkit is free and you’re under no obligation now or in the future.