Should I Refinance My Home Mortgage?

Do you lack home equity or have credit challenges? If so, you might think that the low refinance rates being offered by today’s best mortgage lender are out of your reach. The good news is that government refinance programs exist that can help you overcome the problems that make refinancing impossible. Here are six good reasons to help you answer the question “should I refinance” and save money on your next home loan.

Should I Refinance My Mortgage Loan?

If you’ve got home equity but have a low credit score you can still take advantage of low refinance rates. You might not qualify for what lenders are advertising, but you can still benefit from mortgage refinancing by lowering your payment amount. The best way to find out if paying for a new home loan is beneficial is by using a simple mortgage calculator.

Have you already started shopping for today’s best refinance rates? If so, enter the interest rates you’ve been quoted here along with your loan balance and desired term length.

Simple Mortgage Calculator

Loan Amount: Years: Mortgage Rate:

Annual Taxes: Annual Insurance:

Monthly Payment =

Once you’ve determined how much your payment will go down each month from refinancing you can figure out if paying for a new home is worthwhile by approximating your break-even point.

You do this by adding up all of your closing costs including the loan origination fee and dividing by the amount you’re saving each month. This is only an approximation because it doesn’t factor in things like changes in term length or taxes; however, it’s still useful for our purposes.

Dividing your costs by the savings you determined with my simple mortgage calculator tells you the number of months it’s going to take you to break even recouping your out-of-pocket costs. If this time frame is acceptable to you then refinancing probably makes sense.

Stop! Read This Before You Do Anything Else…

If you haven’t started shopping for refinance quotes you’ll need to hold off for a moment. Have you checked your credit reports? If not, your first step needs to be proofreading your credit files for errors.

You can do this for free by vising the government mandated website, AnnualCreditReport.com. Did you find mistakes? If so, each of the credit bureaus has an online process for disputing the error. Once you’ve done this you’ll want to allow enough time from the outcome of the correction to be reflected in your credit score.

Once you’re satisfied that your credit reports are accurate the quickest way to boost your credit score is to pay down the balances on your credit cards below 30% of your limit. Your credit score will take a hit when mortgage lenders run you credit; however, you can minimize the impact by limiting all of your refinance quotes to a 2 week (14 day period).

When you shop for refinance rates this way you’ll only get dinged once for a mortgage lender checking your credit. Some people think they can avoid this hit by refusing to give their Social Security number when requesting mortgage quotes. If you do this you’re relying on someone’s best guess of what your interest rate will be which is almost always a complete waste of time.

Still Not Convinced Refinancing Your Home is the Right Choice?

Here are six of the most common reasons for paying for a new home loan in today’s economy:

  1. Lowering Your Mortgage Rate
  2. This is the most common reason for refinancing. With refinance rates below four percent for many homeowners you can lower your payment by hundreds of dollars. If you have credit problems you probably won’t qualify for rates this low; however, using a simple mortgage calculator like the one above will help you decide if your mortgage refinance is worthwhile.

  3. Lowering Your Monthly Payments Despite Poor Credit
  4. Bad credit mortgage refinancing can accomplish this in two ways. First, if you qualify for a lower refinance rate your payment will go down. If not, you can still lower your payment by extending the term length of your home loan. This isn’t recommended for everyone as it can make recouping closing costs difficult and slow your rate of building home equity. If you slow building equity in your home you run the risk of being underwater in an economic downturn. Common mortgage term lengths for refinancing include 15, 30, and even 40 years. (again, not recommended)

  5. Easing Pressure on Your Budget
  6. Once you qualify for lower refinance rates or a lower payment amount from extending your term length, you’ll get a lower payment. This frees up cash in your monthly budget to pay down other bills, which will help improve your credit score. Reducing debt and using credit responsibly will help you pay less to lenders in all aspects of your finances.

  7. Build Equity at a Faster Rate
  8. If your goal is to pay off your mortgage as quickly as possible you can do this by shortening your tem-length. The most common term-length in this case is a 15-year fixed or adjustable rate mortgage. Your payments will be higher in this case than you would get with a 30-year mortgage; however, you’ll pay significantly less in lender finance charges and build equity in your home at an accelerated rate.

  9. Lock in Your Payment With a Fixed Rate Mortgage
  10. Are you currently paying on an Adjustable Rate or Interest-Only mortgage? If you’re worried what will happen when your fixed rate period ends or that balloon payment is due there is no better time than the present to refinance with a fixed-rate mortgage.

  11. Consolidate Credit Card Debt With Your Mortgage
  12. Again this one isn’t for everyone as treating your home like a bank account has risky and dangerous consequences. Depending on how much home equity you have and how good your credit rating, you may be able to roll all of your credit card and consumer debt into your mortgage balance with cash-out refinancing. Enlisting the help of a good mortgage broker could help you find a lender willing to facilitate the transaction. Remember to use a simple mortgage calculator first to see how increasing your loan balance will affect your payments and your ability (or inability) to recoup your closing costs.

What if You Have an Underwater Mortgage?

Underwater homeowners (meaning you owe more than your home is worth) can benefit from the Home Affordable Refinance Program (HARP 2.0), if you qualify.

The biggest stumbling block when qualifying for HARP is that Fannie Mae or Freddie Mac must back your mortgage AND they must have done so prior to June 1st, 2009. If you meet these qualifications and are current on your payments you could qualify for today’s best refinance rates with a streamline like refinance loan.

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How To Refinance Your Mortgage & Save

When you refinance your mortgage you’re replacing it with a new home loan that ideally has a better interest rate and loan terms. Your potential savings will vary depending on the size of your home loan, loan-to-value ratio, and the refinance rates and fees you get. Mortgage rates are still near historic lows so if you’ve been procrastinating or are on the fence about paying for a new home loan there’s no better time than the present.

Should I Refinance My Mortgage?

Using a simple mortgage calculator like the one below makes it easy to calculate how much you’ll save and if refinancing is worthwhile. You can get started by entering your home loan balance, the interest rate you’re being quoted, your ideal term length and annual taxes and insurance (optionally).

Simple Mortgage Calculator

Loan Amount: Years: Mortgage Rate:

Annual Taxes: Annual Insurance:

Monthly Payment =

Generally speaking if you’re able to reduce your mortgage rate by one percent you’ll save around $1,000 annually for every $100,000 you owe. This doesn’t take into account changes in term length or the fees you’ll pay, all important considerations when deciding if you should refinance.

Shortening your term-length from 30 years to 15 years for instance will save you a boat-load of cash in finance charges alone and allow you to recoup your out-of-pocket expenses at a much faster rate.

How to Calculate Your Break Even Point

Calculating your break-even point will help you decide if paying for a new home loan is worthwhile. This calculation is only an approximation because it doesn’t factor in changes in term-length; however, it is still a useful determination.

Start with the new mortgage payment amount you got by using the simple mortgage calculator above. Your monthly savings is the difference between your old payment and the new one. Add up all of your out-of-pocket expenses that you’ll pay closing on the new mortgage and divide by your monthly savings. This will tell you approximately the number of months it will take to break even recouping your closing costs.

Are you satisfied with the amount of time it’s going to take you to break even? If so, paying for a new home loan probably makes sense. Keep in mind that the less you pay closing on your new home loan the more you’ll benefit from today’s low refinance rates.

Types of Mortgage Refinancing

The type of mortgage refinancing you choose influences the interest rates and fees you’ll receive. Getting the best terms for your new home loan depends partly on the type of refinancing you choose.

  • Rate & Term Refinancing

    This is the most common option for many homeowners. With rate & term refinancing the goal is to lower your interest rate and/or change the term length of your home loan. Cashing equity out of your home is usually not an option and the less you pay at closing the better off you’ll be in the long run.

  • Cash-out Mortgage Refinancing
  • Qualifying for cash-out refinancing is becoming increasingly difficult. You’ll need near stellar credit and a favorable loan-to-value ratio just to qualify. Refinance rates and lender fees are higher than what you see with rate & term refinancing.

  • Government Refinance Programs
  • If your home loan is with the FHA, VA or USDA you can save yourself a lot of hassle with government refinance programs. The FHA streamline refinance program allows you to lower your interest rate with minimal paperwork and fees. The VA offers an Interest Rate Reduction Refinance Loan (IRRRL) with the same type of streamline refinance. The USDA offers a similar streamline refinance program.

    If you’re underwater in your current home loan, meaning that you owe more than your home is worth, you might qualify for the Home Affordable Refinance Program (HARP) if your home loan is backed by Fannie Mae or Freddie Mac.

    The only catch with Government Refinance Programs is that you cannot have late payments and cash-out refinancing is not an option.

Beware Excessive Mortgage Fees

The downside of refinancing your home are the fees you’ll be required to pay at closing. The most common fees you’ll encounter are the loan origination fee and discount points. The origination fee is paid to the person or company arranging your home loan and discount points are paid to lower your interest rate.

You’ll find when shopping for refinance rates that most lenders quote interest rates that include discount points first. Should you pay discount points to get the lowest possible interest rate? Probably not. Paying unnecessary points only raises your out-of-pocket expenses and makes it that much more difficult to recoup your closing costs. Most homeowners do not benefit from paying discount points; however, if you’d like to see how paying the fee affects your payments there is a table on page three of your Good Faith Estimate.

What about that loan origination fee? Most loan officers will tell you that one percent is standard for the origination fee; however, I’ve reviewed small, community based credit unions that charge as little as $400 for their loan origination fee. This is one of the considerations you’ll need to factor in when shopping for the best mortgage deal.

When shopping for refinance rates you’re bound to encounter no out-of-pocket fees or no closing costs options that allow you to either roll your mortgage fees into the loan balance or take higher interest rates in exchange for the lender paying your fees.

If you don’t have the cash on hand to pay your closing costs these can be attractive options; however, you should weigh how this option affects your payments in the long run.

Your Bank vs. Mortgage Brokers

They type of lender that you choose affects the fees you’ll pay. Most lenders are fairly competitive when it comes to refinance rates; however, the real differences come from the fees they charge.

Banks offer convenience generally at the expense of fees. Mortgage brokers have access to home loan offers you might not find on your own but typically charge higher origination fees. Community based credit unions seem to have the best deals that I’ve found, if you qualify for membership.

Shopping smartly from a variety of banks, credit unions, and mortgage brokers will help you find the best deal.

How to Shop Smartly For Your Next Home Loan

  1. Understand Your Existing Home Loan
  2. The first step in getting the best deal is to find out as much as you can about your current home loan. Is it backed by Fannie Mae or Freddie Mac? What is the term length? How much is your home worth? How much do you owe and at what interest rate? Is there a prepayment penalty? The answers to these questions will help you replace your current mortgage loan with a better deal.

  3. Check Your Credit Reports First
  4. Make sure that your credit reports are accurate by visiting AnnualCreditReport.com before requesting mortgage refinance quotes. Avoid applying for new credit card accounts, especially those store charge cards while you’re applying for refinancing. The quickest way to boost your credit score is to pay down the balances on your credit cards below 30% of your limit.

  5. Choose a Mortgage Program & Stick With It
  6. This is one of the most important things you’ll do before refinancing. Do you want an FHA streamline refinance? Do you need a 30-year fixed mortgage rate? Is your goal to refinance with a 15-year term to build equity and payoff the loan balance faster? The point here is pick a mortgage program and don’t let a fast talking loan officer confuse you by quoting mortgage rates and fees across different programs.

    Comparing mortgage quotes from the identical programs is the only way to make a true apples-to-apples comparison of interest rates and fees.

  7. Shop From a Variety of Lenders & Brokers
  8. Shop around for the best refinance rates AND fees from a variety of today’s best mortgage lenders. Make sure you’re getting accurate quotes by providing your Social Security number but limit all of your quotes to a two week (14 days) period. When you limit mortgage lenders to running your credit in a two week period your credit score will only get dinged for one lender inquiry.

  9. Use The Good Faith Estimate Correctly
  10. The new Good Faith Estimate is a mortgage refinance rate shopper’s best friend. Remember to request zero discount point quotes and use the table on page three to see if you’ll benefit from paying this fee. Page two shows you the loan origination fee, any Yield Spread Premium and garbage fees like processing or administrative fees. Use page two as leverage when negotiating with loan officers. Remember that brokers and lenders are a dime a dozen. If one doesn’t want to play ball with you move on to the next.

    Keep your loan officer honest by reconciling the Good Faith Estimate with the HUD-1 Settlement Statement provided prior to closing. The HUD-1 is the final word on your refinance rate and fees.

The most common mortgage mistake is not doing your homework prior to paying for a new home loan. Shopping smartly for the best refinance rates and fees will ensure you break-even quickly and get the most benefit from your lower interest rate.

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You can learn more about paying less for your next home loan from today’s best mortgage companies by checking out my free Underground Mortgage Videos.

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Get The Lowest Refinance Rates Without Overpaying

Getting the lowest refinance rates means you’ll lower your mortgage payments while stuffing less cash in your lender’s pockets. The problem is that focusing only on refinance rates often gets you the most expensive out-of-pocket fees. Here are several tips to help you avoid common mortgage mistakes when shopping for the lowest refinance rates from today’s best mortgage lenders.

Don’t Pay For The Lowest Refinance Rates

The most frustrating part about shopping for a mortgage lender is finding trustworthy refinance rate quotes. Part of the problem is that many homeowners approach loan officers by “fishing” for refinance rates. If you go into the negotiation asking for 3.5% many shady loan officers will smile and tell you “Sure, I can get you that refinance rate” while loading you up with discount points and fees.

If you’re not paying attention it’s very easy to pay too much for things like the loan origination fee, administrative fees, mortgage loan processing, underwriting and commitment fees. Many of these are pure garbage and do nothing but boost the lender and broker’s profits at your expense. Some loan officers refuse to waive fees because the lender will take that amount out of their commission. Remember that fees vary from one lender to the next and shopping around can help you pay less at closing.

How to get an honest refinance rate quote

Most lenders quote refinance rates that include discount points. You can find the origination fee and any discount points in section A on Page 2 of your Good Faith Estimate. The third party charges you’ll encounter like title insurance, attorney fees or escrow don’t matter when shopping for refinance rates. These fees are out of your lender’s control and cannot be negotiated. The first fees you need to look at when comparing quotes from today’s best lenders are found in box 1 and 2 of section A.

This is where you’ll find discount points and the loan origination fee along with any Yield Spread Premium. If you’d like a sample of the new Good Faith Estimate to look at you can download one from the HUD website using this link: Sample Good Faith Estimate

Every now and again I get a snotty comment from someone chastising me for talking about Yield Spread Premium. “YSP is illegal now” they’ll say, “You should do your homework.” Fact is that Yield Spread Premium is NOT illegal now and is the first item disclosed in box 2.

The credit or charge for the interest rate of % is included in “Our origination charge.” (See item 1 above.)

The credit they’re talking about here for taking a higher interest rate IS Yield Spread Premium and when present is being used to pay the loan origination fee in box one…but I digress.

Oh by the way, don’t let a pushy loan officer distract you with the “Total Estimated Settlement Charges A+B” on the Good Faith Estimate, you’re interested in section A.

Getting an honest quote for the lowest refinance rates boils down to the type of quotes you’re requesting. Try to get quotes with the same lock period from identical programs with zero points from different lenders. Requesting quotes from identical programs, conventional 30-year fixed to conventional 30-year fixed for example, is the only way to make an apples-to-apples comparison of different refinance rate quotes.

Go hunting for the lowest refinance rates, not fishing

Before you do anything else make sure you choose a program and stick with it. Don’t let a fast talking broker confuse you by quoting refinance rates across different programs. Don’t approach a broker asking for a specific refinance rate, that’s fishing which as you know gets you higher fees. In the end if you’re fishing for the lowest refinance rates the lender will be reeling you in, not the other way around.

Paying for refinance rates is rarely a good idea. What’s the point in getting 4.0% instead of 4.125% if you have to pay thousands of dollars to get there?

Avoid basing your decision on the Annual Percentage Rate alone. APR is simply the most manipulated marketing tool in your lenders arsenal. More often than not the mortgage with the lowest APR comes with the highest out-of-pocket expenses thanks to the way lenders factor in discount points.

Finally, lock your refinance rates smartly. Time is money when it comes to closing and the longer you lock the higher your refinance rates will be. Have a discussion with your loan officer about how long the lender is averaging to close refinancing and factor this into your decision.

Remember those junk fees we talked about for things like processing, rate lock and administrative fees? While you’re having a discussion about the rate lock period is a good time to discuss junk fees as well as the loan origination fee. If your loan officer is unwilling or unable to waive or negotiate to pay less consider taking your business elsewhere.

Sounds simple enough right? Your loan officer is not your friend (unless they really are) so don’t let them confuse you with slick marketing tricks like quoting across different programs with different fees and lock periods.

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You can learn more about getting the lowest refinance rates from today’s best mortgage lenders without overpaying by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to help you find the lowest refinance rates without paying too much at closing…

Beware Free Credit Report Dot Scam

If you’re thinking about mortgage refinancing the first thing you should do before all else is check your credit reports. Don’t waste money buying credit reports or signing up for one of those credit monitoring services just to get a “free credit report.” Here are several tips to help you check out your credit prior to refinancing without wasting any of your hard earned cash.

Credit Reports Are Free…Period

Legislation in the United States known as the Fair and Accurate Credit Transactions Act passed in 2003 was intended to help you protect your credit and help prevent identity theft. This law requires the three credit reporting agencies that maintain your credit reports to provide you one free copy of your credit report every year. There are no fees or services to try…this is not to say the credit agencies won’t try and up sell you with a credit score ; however, you really don’t to pay for that either.

Free Credit Report dot what? It seems the Federal Trade Commission has grown a sense of humor. Remember those annoying “Free Credit Report” commercials on TV? Check out the FTC’s spoof of one misleading website’s commercials:

All you need to get a truly free credit report from Equifax, Experian, and TransUnion is to visit the website AnnualCreditReport.com The website is secure and sports the latest encryption; however, if you don’t feel comfortable entering all of your personally identifiable information including your social security number into a website you can get the same reports sent to you by calling 1-877-322-8228 or mailing a written request to:

Annual Credit Request Service
P. O. Box 105281
Atlanta, GA 30348-5281

It’s important to review your credit reports (make sure you check all three) every year in order to catch mistakes or identity theft should you become a victim. Mistakes in your credit report can result in higher interest rates or fees such as security deposits unnecessarily. Millions of Americans in the United States become the victim of identity theft every year. In fact, your chances of becoming a victim are statistically one in twenty.

Before you think about applying for a home loan or refinancing your existing mortgage go over all three credit reports with a fine-tooth comb. If you find mistakes in your credit reports each credit agency has a procedure for disputing errors. Correcting errors in your credit reports is free by the way…don’t let someone con you into purchasing their magical credit repair “kit.” More information about identity theft and protecting yourself is available free of charge on the FTC website at ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357).

Verbal Interest Rate Lock

If you are in the process of refinancing your home mortgage there are a number of costly pitfalls that can lead to overpaying thousands of dollars.

Rate locks are commonly misunderstood by many homeowners and not locking properly can lead to an expensive mistake. Here are several tips to help you avoid paying too much for your next home mortgage loan.

Verbal Interest Rate Lock

When it comes to locking in your mortgage rate there is one simple rule. If you haven’t got it in writing, you haven’t got it at all. When it comes to mortgage loans, verbal agreements just don’t exist. You must get it in writing AND the rate lock confirmation HAS to come from the lender, not your mortgage broker. Here’s why.

Many mortgage brokers try and pass off rate lock confirmation written on their own company letterhead. If you have a document from your mortgage broker confirming rate lock, then you do not have written confirmation of the lock. Mortgage brokers do this to conceal the commission they are getting from the lender for marking up your mortgage rate. Lenders pay a premium to mortgage brokers that lock and close home loans with higher than market interest rates. This commission paid to your mortgage broker is known as Yield Spread Premium and can unknowingly cost you thousands of dollars per year.

Bottom line, if your mortgage broker tells you that you have verbally locked your interest rate or they give you a bogus written confirmation typed up on their own letterhead, your mortgage broker is hiding the fact that they’re ripping you off.

Mortgage Yield Spread Premium

Mortgage brokers are compensated for their work by charging you an origination fee for arranging your home loan. They can also receive a commission from the lender for marking up your mortgage rate. For every .25 percent that you agree to overpay when refinancing your mortgage loan, the broker receives a commission of one percent of your loan amount for overcharging you. This markup of .25 percent may not seem like much; however, many brokers charge as much as .75 percent (or more) and over the course of a year this can have a dramatic affect on your mortgage payments.

Here’s a simple example to illustrate how commission based markup of your mortgage rate results in paying too much. Suppose for example you are refinancing your home for $315,000. Your broker quotes you a mortgage rate of 5.75 percent and charges you a fee of 1.5 percent for arranging your loan. On paper these numbers should good; however, consider the 1.5 percent or $4,725 that you’re paying the mortgage broker for “getting you a good deal.”

What your mortgage broker isn’t telling you is that your lender qualified
you for a 5.0 percent mortgage rate but your broker marked it up to 5.75 percent to get a 3.0 percent commission from the lender. That means your broker pockets your $4,725 AND $9,450 from the mortgage lender…that’s a total of $14,175 for overcharging you on your home mortgage loan.

How does this .75 percent affect your mortgage payment amount? Plug the numbers into a simple mortgage payment calculator and you’ll see that in this example the payment amount for a 30 year, fixed-rate mortgage loan of $315,000 at 5.75 percent will be $1,840 per month. If you had the mortgage rate you deserve at 5.0 percent your monthly payment would only be $1,690. That’s a savings of $150 per month or $1,800 per year!

Now you know that a verbal interest rate lock is not the right way to refinance because your mortgage broker is using it to conceal the Yield Spread Premium on your home loan. How can you avoid this costly and unnecessary markup of your mortgage interest rate?

How to Avoid Overpaying Your Mortgage Broker

To avoid paying Yield Spread Premium when refinancing your home loan you simply need to find the right mortgage broker for the job. There are honest brokers out there willing to refinance your home for a flat one percent origination fee without charging Yield Spread Premium on your loan… you just need to find the right one. You don’t have to be a financial guru to pull this off either; learn the lingo and a few tips for negotiation with your mortgage broker and you can walk away with the deal I’m describing for your next home loan. My underground mortgage videos show you how to do just this…all of the information you need to save thousands of dollars on your next mortgage in one easy to follow video tutorial.

So who is the right mortgage broker? It’s probably not going to be the brokers with the full page advertisement in your phone book or the one with a company hummer plastered with their logo. Mortgage brokers with advertising budgets, expensive sales staff, posh office spaces, and company hummers all have enormous operating expenses and will most likely be unwilling or unable to negotiate the type of deal you’re looking for when refinancing your home mortgage.

The right person for the job is a small time self-employed mortgage broker often working from home. This person will have been working as mortgage broker for at least ten years. This kind of mortgage broker will be much more likely to agree to refinance you home for a one percent origination fee without bringing Yield Spread Premium into the picture. You’ll also need to know which fees are garbage and need to be avoided… fees like mortgage broker courier fees for example. You’ll need to know where to spot and how to recognize these junks fees; here’s a tip, you won’t find them on your Good Faith Estimate.

Good Faith Estimate

Speaking of the Good Faith Estimate (GFE), don’t put much faith in this document. The GFE has become little more than a marketing tool used along with the Annual Percentage Rate (APR) to lure unsuspecting homeowners into overpriced mortgage loans. Truth in lending laws require that lenders provide you these documents; however, there are very few standards for what mortgage lenders are required to disclose. Fortunately your lender is required to give you one document prior to closing that will reveal everything your mortgage broker may be working so hard to conceal…

You can learn more about mortgage refinancing without the unnecessary markup of your mortgage rate and lender junk fees by registering for my Underground Mortgage Videos. Register today and you’ll have immediate access in the password protected member’s area to all the mortgage videos without downloading anything to your PC or Mac.