I Want To Refinance But My Home Didn’t Appraise For What I Paid. What Should I Do?

Have you been sidelined from today’s low refinance rates because your home appraisal is too low? Being underwater in your mortgage is not a good feeling, especially when you could be paying hundreds less after refinancing. Here are several options for underwater homeowners to help you get right-side up in that underwater mortgage loan.

Your Home Appraisal & Ability To Refinance

What is a mortgage refinance home appraisal? When prospective lenders order an appraisal for your refinancing application they are looking for the a monetary value to your home, considered its fair market value if you were to sell.

The appraisal helps lenders determine if you overpaid for your home based on the value of comparable homes in your area. If you overpaid for your home when you purchased or because the local market took a nose-dive, the risk for lenders refinancing your home skyrockets.

Mortgage lenders are all about managing their risk when lending and your home’s appraisal is one factor used in determining your eligibility for refinance rates.

There are several kinds of home appraisals ranging from electronic to a walk through performed by a licensed home appraiser. Fully electronic appraisals rely on a sales comparison approach. The computer looks at the sales of homes in your area with similar characteristics.

These characteristics include physical aspects like the number of bedrooms, bathrooms, how old your home is and the square footage. The quality of your neighborhood matters as similar homes with different schools may be more desirable than yours. If the lender is relying on an electronic appraisal it’s easy to see how you’re not getting credit for things like finishing your basement or your home’s curbside appeal.

What Happens When My Home Appraises For Less Than I Paid?

When you apply for mortgage refinancing the lender uses your home’s appraised value to determine your loan-to-value ratio. (LTV) This ratio along with your credit score is used when quoting refinance rates.

If you have an unfavorable loan to value ratio, higher than 80%, you might find the refinance rates you’re being quoted are higher than what lenders are advertising. If you’re underwater, meaning your LTV is greater than 100% you’ll find lenders will simply deny your application.

Refinancing Options For Underwater Homeowners

If you have an unfavorable Loan-to-Value ratio there are options including government refinance programs. If your home loan is backed by Fannie Mae or Freddie Mac and they got ahold of it prior to June 1st, 2009 you could be approved for refinancing under the Home Affordable Refinance Program.

If your mortgage is privately held by someone like Wells Fargo your options are limited to cash-in refinancing. This means you’re bringing sufficient cash to the closing table to buy your Loan-to-Value down to 80%. For many underwater homeowners this is simply not feasible due to the amount of cash it would take.

If you fall into this category of underwater homeowner your options are limited until HARP 3.0 arrives. Rumors of changes to the Home Affordable Refinance Program eliminate the Fannie Mae and Freddie Mac requirement essentially allowing anyone with an underwater mortgage to streamline refinance.

HARP 3.0 proposals come and go in Congress but nothing has made its way to the President’s desk. The Home Affordable Refinance Program is set to expire at the end of this year. If Congress fails to act I fully expect the President to extend HARP by executive order. Unfortunately until HARP 3.0 materializes the government is leaving millions of underwater homeowners in the cold.

How To Pay Less For Mortgage Refinancing

The most common mortgage mistake made by underwater homeowners is shopping for an approval. If you’re desperate to refinance and jump at the first approval you get without paying attention to fees you’re sure to overpay.

The Good Faith Estimate makes it easy to compare refinance rates and fees by focusing on page two. Make sure the quotes you’re getting are all for the same mortgage program and ask your loan officer for zero discount point quotes. If you’d like to see how paying discount points affects your payments there is a comparison table on page three.

Requesting zero point quotes from the same mortgage program is the only way to make an apples to apples comparison of refinance rates and fees from different lenders.

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Don’t Get Hoodwinked By The No Cost Refinance Myth

Are no cost Refinance offers a good deal or just another way for mortgage lenders to hoodwink you? I know mortgage refinance fees can be frustrating and the temptation to roll them into the balance or “let someone else pay” can be overwhelming. Here’s the bottom line on the no cost refinance myth which could save you from an expensive mistake.

Lower Refinance Rates vs. Higher Mortgage Fees

Have you heard the saying “There’s no such thing as a free lunch?” Unfortunately there’s no such thing as no cost refinancing. These no fee refinance loans are just clever marketing designed to sell you an overpriced mortgage loan.

Every mortgage loan comes with fees; it doesn’t matter if you’re purchasing or refinancing. If your lender requires an appraisal the person doing the work needs to be paid. If an attorney is involved there will be attorney fees. Brokers and direct lenders all charge loan origination fees. If you don’t have the cash to pay these fees there are options available to you; however, tread carefully if you want to avoid an expensive mistake.

In the real world refinancing your mortgage is going to cost money, so how is it that lenders advertise no fee refinance offers? Like the leprechaun’s pot at the end of the rainbow no cost refinance loans simply don’t exist.

What are no cost refinance offers really?

What mortgage lenders are really offering with the no cost refinance is a mortgage with no out-of-pocket costs. This is accomplished either by rolling all of your closing costs into the mortgage balance, (meaning you’ll owe more after refinancing) or by jacking up your refinance rates in exchange for the lender paying your fees.

Are you okay with rolling an additional $5,000 into your mortgage balance to lower your payment by a hundred dollars a month? For some this is not a bad option. Just to be clear this is not a no fee refinance. Your mortgage balance went up meaning you’re paying more over time for the financing.

You get an above market refinance rate

The next option for your no cost refinance loan is taking a higher than market refinance rate to cover your closing costs. Mortgage lenders pay cash for closing home loans with higher than market interest rates and this cash can be used to pay your loan origination fee and other closing costs.

This is the so-called lender credit you’ll find accompanying many no fee refinance offers. If you take higher refinance rates in exchange for having your out-of-pocket fees paid, you’ve protected your mortgage balance from going up; however, your monthly payments will be higher. This option has the same closing costs as before, the difference is that someone else is paying them.

There are situations where this can be a great strategy for refinancing, especially if you’re not planning on staying in your home long. The problem is that your mortgage lender wasn’t born yesterday and most include some form of prepayment penalty to prevent you from refinancing again in the short-term.

Which is the better choice for refinancing your home? The answer depends on how long you plan on keeping your home and whether or not you have cash on hand to pay your closing cost. If your goal is to find the lowest refinance rates possible from today’s best mortgage lenders you’ll want to pay your out of pocket expenses yourself.

Yet another problem with no cost refinance deals

Are you thinking to yourself as you read this “the economy is crap… who has five grand to fork over to a mortgage lender?” If so, one common mortgage mistake is to write off your fees with one of these no fee refinance offers and not pay attention to what the lender is actually charging you.

Here’s the problem with this “ignorance is bliss” approach to no cost refinancing.

If you’re opting to roll your closing costs into your loan balance and aren’t paying attention that $5,000 in closing costs could quickly balloon up to $6,000, $8,000 or more. Section 800 of your Good Faith Estimate is filled with junk fees and discount points you can negotiate to pay less simply by asking. The more you pay closing on this type of no cost deal the higher your mortgage balance is going to be when all is said and done.

If you don’t want your mortgage balance going up and opt for higher than market refinance rates it’s going to be even harder to make sure you’re getting a good deal. The problem is that your refinance rates depend on how much you’re paying or overpaying at closing. Let’s stay that you negotiate your fees in this case down to $5,000. The lender pays one percent of your home loan for every .25 percent increase on your refinance rates.

Suppose you qualify for 4% with a zero point “no fee” refinance offer. You need $250,000 to refinance and in order to cover the $5,000 in closing costs you’ll need 2% of that mortgage balance which means higher refinance rates by .5%. (remember the cash from 1% of your balance costs you .25%)

What does this extra half percent do to your payments? Keep in mind that the more garbage-stuffed your fees the higher your refinance rates will need be to cover the closing costs.

If you had paid the closing costs yourself and walked away with 4% your monthly payment will be $1,193. Since you opted for the “no fee” refinance loan and your interest rate is 4.5% your payment will be $1,267. That’s a difference of $74 a month or $888 a year.

Let me put this in perspective, in six short years you’ll have paid $5,328 for $5,000 worth of closing costs. After ten years you’ll have paid $8,880 for that $5,000. You get the point.

Remember if you’re thinking “I’ll just refinance again and come out ahead” that your lender wasn’t born yesterday and will surely have a prepayment penalty buried in the fine print.

How to pay less refinancing your home

It doesn’t matter if you opt for a no fee refinance offer or pay your closing costs yourself, the less you pay at closing the better off you are.

This is where shopping for the lowest refinance rates and fees can save you a boatload.

I know, shopping for the best mortgage lenders is a pain in your keester but so are taxes and there’s no getting around that. Do you know which fees you’re stuck paying, which can be negotiated, and which are pure garbage?

I can show you for the small investment of less than an hour of your time.

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5 Mortgage Mistakes Even Smart People Make

If you’re thinking about refinancing your home you’re probably already shopping for the best mortgage lenders. Shopping for refinance rates can be confusing and choosing poorly could cost you. Common mortgage mistakes like comparing quotes from different programs are currently costing your neighbors thousands of dollars. Here are a few tips to help you avoid the hazards when shopping for the lowest refinance rates from today’s best mortgage lenders.

Common Mortgage Mistakes You Want to Avoid

  1. Fixating on the lowest refinance rates
  2. Getting the lowest refinance rates doesn’t automatically mean you’re getting a good deal. Especially if the offer is loaded with discount points and junk fees. Do you think choosing a mortgage based on the Annual Percentage Rate is a smart move? Mortgage lenders like to brag about their low APR refinance offers; however, the mortgage with the lowest Annual Percentage Rate usually comes with the highest closing costs and junk fees.

    Sure, you can buy down your refinance rates but if you’re not able to recoup your closing costs you’re losing money no matter how great your interest rate.

  3. Comparing refinance rates & fees across different programs
  4. Pick a mortgage program and stick with it. Don’t let a fast talking mortgage broker muddy the waters quoting refinance rates on a 5/1 ARM when you want 30-year fixed. It’s impossible to make an apples-to-apples comparison of lender fees unless you’re comparing offers from the same program. If you want a 15-year fixed mortgage then you should only be comparing fees from section 800 of the Good Faith Estimate from quotes on 15-year fixed rate mortgages.

  5. Not comparing closing costs correctly
  6. Do you know which of your closing costs are negotiable? Can you spot a junk fee at a 100 yards?

    You already know not to compare fees across different mortgage programs but did you know there are fees you can negotiate to pay less? When comparing refinance offers from today’s best mortgage lenders pay close attention to section 800 of your Good Faith Estimate.

    First, make sure you’re comparing zero point quotes for your mortgage program. Next, separate the fees paid to third parties like attorneys or the title company. These fees should be pretty much the same across different lenders and generally cannot be negotiated. Next, look for junk fees like processing, rate lock, administrative and courier fees. These you can call out and question to avoid paying as a condition of your business. Finally, look at the loan origination fee.

    The mortgage origination fee is paid to the broker or lender arranging your home loan. One percent is common; however, I’ve reviewed credit unions that charge as little as $400 for loan origination. Remember, the less you pay closing on your next home loan the more benefit you’ll get from lower refinance rates.

  7. Choose a mortgage lender based on Annual Percentage Rate
  8. Annual Percentage Rate is the most manipulated marketing tool in your lender’s arsenal. Spend any amount of time shopping refinance offers from today’s best mortgage lenders and you’ll find they quote based on the lowest APR first.

    This is because the lowest APR home loans come with the highest closing costs. The reason this happens is mortgage lenders manipulate their APRs with discount points to make them appear to be the best deal. If you choose the loan with the lowest APR you will have the highest closing costs.

    Always compare refinance rates and fees with zero point offers from the same program across different mortgage lenders. Mortgage refinance rates are still at historically low levers so the only thing paying points does is separate you from your cash.

  9. Neglecting to shop around from the best mortgage lenders
  10. Many of your neighbors simply refinance with their current lender or bank because it’s convenient. Your home loan is the largest financial commitment most people ever make, isn’t it worth spending a few hours to get a better deal?

    Refinance rate shopping isn’t hard and if you follow the tips outlined in this article you’re on track to get a better deal than most of your neighbors. Some of the best deals I’ve found have come from small, community-based credit unions so don’t assume the Wells Fargos and Bank of Americas of the world have the best deals. Pay attention to section 800 and never choose a mortgage based on the Annual Percentage Rate.

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Should You Refinance Again in 2013?

You refinanced your mortgage a couple years ago when refinance rates were rock bottom…or so you thought. Since then refinance rates have fallen even lower and you’re thinking should I refinance again? There is a downside to serial refinancing that can wind up costing you a lot of money; however, in some situations it makes sense to refinance that mortgage again. Here are the pros and cons of refinancing to help you make an informed decision and avoid losing money.

Serial Mortgage Refinancing Can Bite You

Refinance rates averaged 5.5 percent in 2009 at the height of the refinancing boom. Many people, including most financial analysts predicted we had reached the bottom and rates would correct higher to just above six percent.

Instead refinance rates continued to fall and set new records for historic lows. If you took advantage of refinance rates during the past few years you might be surprised to find that some programs have dipped below three percent.

When Is Refinancing a Bad Idea?

One of the problems with refinancing your mortgage aside from the fees you pay is that you reset the clock on your home loan’s amortization. If you’re ten years into a thirty year mortgage and you refinance with a 30-year mortgage, you’re right back where you started with your amortization schedule.

Another problem with resetting the clock on your home is that your payments are front-loaded with interest. In the early years of your amortization schedule the majority of your payment goes to pay interest. Over time this changes and you begin building more equity in your home, stuffing less of your cash in the lender’s pockets.

In a down market this lack of equity building could result in being underwater, meaning you owe the lender more than your home is worth.

You might think that getting low refinance rates is the most important aspect of refinancing. It’s true that refinance rates along with the term length you choose determines your payment amount; however, the test of how good of a deal you’re getting comes from the fees you pay.

The more you pay closing on your new home loan the less benefit you’re getting from today’s best refinance rates. If you’re still recouping your out-of-pocket expenses from the last time you refinanced two years ago it’s going to take you that much longer to break even on the new mortgage.

Paying too much for things like the loan origination fee or discount points means it’s going to take longer before you realize any benefit from refinancing.

Tax Consequences of Mortgage Refinancing

Politicians love to scare people to further their agendas. That’s what all the talk about the fiscal cliff is about including axing the mortgage interest tax deduction. Many homeowners paying six percent or more have enjoyed a large deduction from their tax returns every year.

What do you think refinancing at three percent is going to do to that deduction? That’s another downside of record low refinance rates. Millions of homeowners are going to find their mortgage interest tax deduction shrink dramatically as a result of refinancing.

This is happening despite fear of falling off the fiscal cliff. It’s actually more of a fiscal slope and not a cliff but where’s the fun in falling down a hill?

Should You Refinance Your Mortgage Again?

You can calculate how long it’s going to take to break even recouping your out-of-pocket expenses to decide if getting lower refinance rates makes sense. This calculation is really just an approximation because factors like term length affect your ability to recoup closing costs. If you choose a longer term length than what you have on your existing mortgage you’ll never break even thanks to the additional years you’re financing.

To approximate your break-even point, add up all of your closing costs and divide by the amount your payment is going down by refinancing. Suppose for example refinancing is going to cost you $5,000 and lower your payment by $200. Divide your closing costs of $5,000 by the $200 you’re saving to get 25 month recovery for breaking even. This is in addition to the time left recouping fess from your first refinance if you took out the mortgage within the last year or two.

Minimize The Downside With a Shorter Term Length

If you’re paying on a 30-year mortgage you can reduce the negative impact of refinancing by choosing a 15-year term-length. It’s true that your payment might not go down with a 15-year mortgage but you’ll offset this with much higher principal reduction. Considering that 15-year refinance rates are typically a half point lower than their 30-year counterparts it’s an easy choice for the fiscally conservative.

You can also maximize the benefit you’re getting from today’s best refinance rates by minimizing what you’re paying at closing. Many of the fees you find in section 800 of your Good Faith Estimate Can be negotiated to pay less or not at all.

The loan origination fee is one of the most commonly overpaid fees found on your Good Faith Estimate. One percent is considered standard; however, I’ve reviewed community based credit unions that charge as little as $400 for their origination fee.

Invest some time comparison shopping refinance rates and fees across identical programs from different lenders and you can save yourself thousands of dollars at closing.

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How to Refinance Rate Shop Without Damaging Your Credit Score

Are you shopping for the lowest refinance rates from today’s best mortgage lenders and are concerned how lender inquiries affect your credit score? If the refinance rate quotes you’re getting are higher than what lenders are advertising chances are your credit is the culprit. Here are several tips on shopping for the best refinance rates available without damaging your credit score in the process.

Do Credit Inquires Affect Refinance Rates?

Everyone wants the lowest refinance rates when shopping for a new home loan; however, many homeowners worry about what mortgage lender inquires do to their credit. While it’s true that having mortgage lenders running your credit isn’t the same as having Macy’s run it, you don’t want creditors pulling your credit unnecessarily.

Credit inquires account for up to ten percent of your credit score in the category called new credit. New credit is bad because it raises your total debt liability. The more debt you have the more of a risk you are for lenders. Applying for new credit cards will drop your credit score because new debt increases the risk for everyone else on your credit report.

Not all credit inquiries are the same and fall into four general categories:

  1. Mortgage Related Inquires
  2. Car Loan Related Inquires
  3. General Credit Card Related Inquires
  4. Store Credit or Consumer Loan Related Inquires

Credit bureaus treat these four categories of inquires differently. Applying for a credit card for example is more damaging to your credit score than applying for a mortgage loan or worse yet that Macy’s store credit card. The reason is that credit cards revolve debt, increasing it over time where home and car loans generally don’t increase their balances over time.

That being said, mortgage lender inquiries can still drop your credit score by as much as five points.

According to FICO scoring, 65% of your credit score is based on your payment history. The next 15% is based on the length of time that you’ve had credit in you name. Your history of credit use is considered more important than what you might do with new debt, which is why inquires and new credit account for only 10% of your credit score.

Some Mortgage Brokers Tell You Not to Worry

While it’s true that having late payments or maxing out your credit cards will have a much more negative impact on your credit many mortgage brokers tell you not to worry about lender inquires. Having Mortgage lenders running your credit is estimated to lower your credit score by only five points. You can shop from multiple mortgage lenders with only one inquiry on your credit report. Unlike applying for multiple credit cards the bureaus know you’ll generally only be approved from one mortgage instead of five credit cards. This is why the credit bureaus allow refinance rate shopping without taking a huge hit to your credit score.

How to Get The Lowest Refinance Rates

If you want the lowest refinance rates from today’s best mortgage companies, shop around. Try to confine your shopping to a 14 day period to minimize the number of inquiries on your credit report. Formalize your quotes during this period by providing your social security number allowing lenders to run your credit. This will also make the process of locking in your refinance rates go more smoothly.

Staying on top of your credit score can mean the difference between saving a full point on your home loan or even having your application denied during underwriting. If you’re not sure what’s in your credit reports you should carefully review them for errors before applying for a mortgage loan at AnnualCreditReport.com.

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