How To Lower Your Mortgage Payment By 25%

With refinance rates hovering near historic lows now is the time to take advantage, especially if you’ve been putting it off. Even if you think you won’t qualify there are government refinance programs that can get you approval quickly. Here are several tips to help take advantage of today’s low refinance rates and slash your payments by 25% or more.

According to one survey by mortgage giant Freddie Mac the average homeowner lowered their interest rate by 31% refinancing in the third quarter of 2012. This means opportunities still exist if you’ve been procrastinating or were previously denied.

Refinancing with a 30-year fixed rate mortgage is currently averaging 3.54 percent according to Freddie Mac. Surprisingly there are still millions of homeowners out there paying six percent or more.

If you purchased your home under the conforming loan limit of $417,000, refinancing could lower your payment by an average 25% based on today’s refinance rates reported by Freddie Mac.

Underwater Mortgage No Longer a Barrier

If you’re underwater (meaning you owe more than your home is worth) the government refinance program known as the Home Affordable Refinance Program (HARP) can get you approved. President Obama eliminated the 125% loan-to-value requirement meaning millions more underwater homeowners can qualify. The only catch is that your mortgage must be backed by Fannie Mae or Freddie Mac before June 1st, 2009.

If your mortgage is privately held and you don’t meet the Fannie Mae/Freddie Mac requirement there’s not much you can do until HARP 3.0 arrives as it is rumored to remove this requirement.

How Much Will Refinancing Save You?

Suppose you purchased your home for $300,000 at 5 percent several years ago. If you have 80% equity in your home you’ll owe $240,000. Your original mortgage payment was $1610 and qualifying for today’s refinance rates at 3.54% will slash that to $1083 per month. That’s a savings of $527 per month or 33% lower payments.

Is refinancing your home worthwhile? It is if you can balance your potential savings with how much it’s going to cost you closing on the new home loan. Overpaying closing costs like the loan origination fee or discount points can make refinancing a losing proposition regardless of your refinance rates.

You Can Pay Less For Mortgage Refinancing

Assuming you have a credit score of 720 or better, qualifying for today’s best refinance rates isn’t difficult. If you’re sitting at less than 720 and you find lenders are quoting you higher interest rates than they’re advertising the likely culprit is that credit score. The quickest way to improve your credit score is to pay down the balances on all of your credit accounts below 30% of the limit.

Speaking of your credit, if you’re thinking about refinancing your mortgage the first thing you should do before anything is check your credit reports for errors. You can do this for free by visiting the government mandated website If you want to check your credit score there is a fee; however, if you’re a member of a credit union you may be able to get low cost credit monitoring that allows you to stay on top of your credit score throughout the year.

Should you pay that loan origination fee? There are still no fee refinance offers available but you’re trading higher mortgage rates for having the loan origination fee and other closing costs paid for you. The more you pay at closing or by accepting higher refinance rates you’re getting less benefit from today’s lowest refinance rates.

The good news is that many of the closing costs you find in section 800 of your Good Faith Estimate are negotiable. You can pay less for the mortgage origination fee and avoid junk fees like processing, administrative, and rate lock fees simply by questioning and negotiating to pay less or not at all.

How To Quickly Break Even On Your Closing Costs

The test of how good of a deal you’re getting refinancing your mortgage comes not from getting the lowest interest rate but how much you’re paying at closing. Closing costs can be recouped as a side effect of lowering your payment.

You can approximate your break-even point by adding up all of your out-of-pocket expenses including any discount points you’re paying and diving by the amount your payment is going down. This will tell you the number of months it’s going to take to recoup your closing costs. Keep in mind that this calculation only works if you keep the same term-length when refinancing. If you go with a longer term length, say 30-year from a 15-year mortgage you’re never going to break even recouping closing costs thanks to higher finance costs for those extra years.

Suppose for example your out-of-pocket closing costs total $4,000. Refinancing your 30-year mortgage with another 30-year home loan saves you $527 per month from the previous example. In this case it’s going to take you 8 months to break even. In this example mortgage refinancing certainly makes sense based on the savings and speedy recovery of your expenses.

Depending on how much you pay it could take as long as two years to break-even. If you sell or engage in what many financial advisors call serial refinancing you’ll never recoup your out-of-pocket costs meaning you’re losing money no matter how low your refinance rates.

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The Hidden Truth About Mortgage Refinancing

Mortgage Refinancing has the potential to lower your payment and save you a lot of money. The problem is that common mortgage mistakes can quickly push you from the savings column into losing money. Here are several truths your broker won’t tell you about refinancing your home that will save you thousands of your hard-earned dollars.

Mortgage Closing Costs vs. Potential Savings

The goal of refinancing your home is to save money. You save by getting a lower monthly payment from today’s best refinance rates. You lose money by overpaying at closing. The more you pay closing on your new home loan for things like the loan origination fee or discount points the less benefit you’re getting from lowering your mortgage rate.

Makes sense right? The less you pay at closing the better off you’ll be in the long run. A good mortgage broker will explain how your break-even point is calculated and how long it will take you to get there. You can approximate your break-even point by adding up all of your out-of-pocket expenses and dividing the total you’re spending by the amount you’re saving every month. This will tell you (approximately) how long it’s going to take to break-even recouping your closing costs.

It’s worth saying that this calculation is only valid if you keep the same mortgage term length or choose a shorter one. Lengthening your term length, going from a 15-year to a 30-year mortgage for example, means you’ll never break even because of the finance costs you’re paying for those extra years.

What Your Mortgage Brokers Won’t Tell You

There are consequences to refinancing your home that you need to know about. The first consequence is how refinancing affects your home mortgage loan’s amortization. Mortgage amortization is the process of paying down your home loan over time that factors in the interest you’re paying. Home loans are front-loaded with interest meaning that from day one the majority of your payment gets pocketed by the lender as interest.

As a result you’re building very little equity in your home during the early years of your mortgage payments. This gradually reverses over time and you being building equity in your home and stuffing less cash in your lender’s pocket. Once consequence of refinancing your home is that the equity you’re building comes to a screeching halt after refinancing.

Your Mortgage Interest Tax Deduction

Another consequence of today’s low refinance rates is that come April the amount you’ll be able to deduct for mortgage interest is going to be painfully smaller. This could lead to a higher than anticipated tax liability or a smaller than expected tax refund.

It’s worth taking a look at how your tax liability will be affected and planning accordingly to avoid an unpleasant surprise next April.

Watch Out for Hidden Mortgage Fees

If your existing mortgage includes a prepayment penalty it could be expensive getting into a new home loan. Check your loan contract or call your current lender to find out if you’ll pay a penalty for refinancing and if and when that prepayment penalty expires.

Another example of a lender fee that drives up your cost with very little benefit is the discount point. If you spend any amount of time shopping for refinance rates you’ll find that lenders quote refinance rates that include discount points first.

Discount points are a fee you pay in exchange for lowering your mortgage rates. Typically one discount point is one percent of your loan amount and lowers your interest rate by .25%. Is it worth it? Mortgage refinance rates are at historically low levers so paying discount points doesn’t make sense for most homeowners. This fee raises your out-of-pocket expenses lengthening the amount of time it takes you to break even.

The average homeowner refinances every four or five years meaning if you haven’t broken even because you overpaid the loan origination fee or paid unnecessary discount points means you’re losing money no matter how low your refinance rates. It’s best to do your refinance rate shopping with quotes that do not include discount points.

How to Pay Less For Your Next Home Loan

Invest a little time shopping for the lowest refinance rates AND fees and you can pay significantly less at closing than your neighbors. Many of the fees you pay like the broker’s loan origination fee, application fee, processing fee, administrative fee or rate lock fee can be negotiated to pay less or not pay at all.

Some of these fees are simply junk fees that do nothing but drive up your out-of-pocket costs. Comparison shopping and careful negotiation can literally save you thousands of dollars.

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You can learn more about getting the best deal on your next home loan while avoiding lender junk fees and points by checking out my free Underground Mortgage Videos.

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Here’s a quick sample to get you started refinancing with today’s best mortgage lenders without overpaying…

The “Should I Refinance” Rule of Thumb

If you’re considering mortgage refinancing you may have heard of the two percent rule of thumb. This mortgage refinance rule states you should only take out a new home loan if the interest rate is two percent lower than your existing rate. Is this the best approach for answering the question should I refinance my mortgage or are you leaving cash on the table? Here’s a better way to base your mortgage refinancing decision and help you avoid paying too much in the process.

The Should I Refinance Rule of Thumb

Refinance rates are hovering near four percent, the lowest levels in sixty years. If you’re currently paying six percent or more on your home loan then the two percent rule applies to you but what about everyone else? If you’re paying 5%, even 4.5% you can still benefit from mortgage refinancing. Answering the question “Should I Refinance” based on a two percent drop in your interest rate is walking away from a lot of money.

Here’s how to make an informed decision if mortgage refinancing is right for you without leaving cash on the table.

This example illustrates the problem with the “two percent rule.”

  • Mortgage Loan Amount: $400.000
  • Term Length & Rate: 30-year fixed-rate @ 5%
  • Refinance Mortgage Rate: 4.25%
  • Refinance Closing Costs: $4,000

In this example the monthly payment at 5% is $2,147. Refinancing with today’s best mortgage lenders could get you an interest rate as low as 4.25% which lowers your payment to $1,967. This is a savings of $180 per month BUT mortgage refinancing will cost you four grand. Is it worthwhile?

Debunking The Two Percent Rule

In this example it’s going to take about 23 months to break-even recouping your out-of-pocket expenses. (divide $4,000 by the $180 you’re saving each month)

This is a reasonable amount of time to recoup your closing costs so if you’re answering the question should I refinance in this way it makes sense. In this example we were refinancing a large home loan, $4,000. If you’re refinancing a lesser amount you’ll still want to run the numbers before answering the question should I refinance because the amount you’ll be saving each month will be less and it will take longer to break even.

If you decide to sell your home or refinance again before recouping your closing costs you’re going to lose money no matter how low interest rates fall.

How to Avoid Unnecessary Points & Junk Fees

As you can see your closing costs decide how long it’s going to take to break even recouping closing costs and therefore how good of a deal you’re getting. One strategy for getting the most benefit from mortgage refinancing is to pay as little as possible at closing. Sure there are no free refinance options; however, you’re giving up low refinance rates in exchange for having your closing costs paid.

The best way to maximize your benefit from low refinance mortgage rates is to avoid paying discount points and lender junk fees. Discount points serve to lower your interest rate. Why pay a fee when rates are at the lowest levels in sixty years and discount points only push your break-even point further away?

Lender junk fees like application and processing fees or overpaying the origination fee do the same thing. You shouldn’t be paying more than one percent for the loan origination fee and I’ve even seen some small credit unions charge as little as .28 percent. Shopping for both refinance rates and fees will make sure you’re breaking even in the least amount of time and maximizing your benefit from the new home loan.

Shorten Your Term Length Whenever Possible

Once you’ve answered the question Should I Refinance, another strategy for saving money is to lower your term-length. The term of your home loan is the amount of time you have to repay the mortgage and along with your refinance rates determines your payment amount.

One common mistake is going from a 15-year to a 30 or even 40-year mortgage. If you do this the calculation we’ve been using to find your break-even point is no longer valid. In these cases you’ll never break even and will be losing a boatload of cash because on the interest you’re paying for those extra years.

Shortening your term-length allows you to build equity in your home at an accelerated rate and saves you thousands of dollars per year in finance charges. Government programs like HARP 2.0 encourage shorter term-lengths for this very reason. This is why you should consider a 15-year or even 10-year mortgage if you can afford the higher payments.

If you need help with the math when answering the question should I refinance, leave a comment below and I’ll be more than happy to lend a hand.

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You can learn more about saving thousands of dollars on your next home loan by avoiding junk fees and markup by checking out my free Underground Mortgage Videos.

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The New HARP Program

Are you underwater in your existing mortgage and haven’t been able to take advantage of low refinance rates offered by today’s best mortgage lenders? The Home Affordable Refinance Program was judged a failure because of its restrictive loan-to-value ratio requirements; however, new rules created by President Obama’s executive order have gone into effect and you might want to give HARP a second look. Here are the basics you need to know about HARP 2.0 that could save you thousands of dollars getting you qualified for mortgage refinancing.

New Rules Changed for the Better

HARP 2.0 has been rolled out for several months now; however, HUD recently automated the process for lenders. Under the old systems underwriting had to be processed manually bogging underwater homeowners down in unnecessary red tape. New software and easy qualifying should allow millions of underwater homeowners to qualify for low mortgage refinance rates previously out of reach.

Under the new HARP program the value of your home doesn’t matter. It doesn’t matter how underwater you are. The old HARP program had a restrictive 125% loan-to-value limit. This meant the amount you owe could not be more than 125% of the value of your home. The new rules eliminate loan-to-value from the equation completely.

The new HARP program may also not require you to pay for an appraisal. The new underwriting process allows for automated appraisals. If the lender you’re working with allows automated appraisals they will estimate your home’s value electronically not requiring you to pay for a new appraisal. Since there is no loan-to-value requirement under the new HARP program the current market value of your home is not an issue. This is good news because paying for a new appraisal could cost you as much as $500. This is an expense lenders are not willing to waive.

New HARP Program Fees Reduced or Waived

If you choose to refinance your home with a term-length less than twenty years Freddie Mac and Fannie Mae will waive their delivery fees on your new home loan. Term length is the amount of time you have to repay the mortgage and along with your refinance rates determines your monthly payment. These fees are being waived to encourage mortgage refinancing with home loans that build equity at an accelerated rate to help get you right-side-up in your new home loan.

Lender fees for high-risk homeowners have also been discounted. Because the refinance mortgage rates you qualify for are risk based being underwater will result in paying higher interest rates than if you were right-side-up. The rules limit risk-based price adjustments to keep mortgage refinancing beneficial for underwater homeowners. This means you’ll qualify for refinance rates close to what the top mortgage companies like Amerisave and Navy Federal Credit Union are offering.

Less Risk For Lenders Too

HARP 2.0 offers incentives for lenders to participate. The government does this by not holding lenders accountable for losses from the underwater mortgage. Lender participation is voluntary so the government has attempted to sweeten the deal for lenders to encourage them to participate. Because it is voluntary for lenders you may encounter lenders not participating or unwilling to approve your application. If this happens don’t get discouraged; simply move on to the next lender until you find one willing to approve your mortgage refinancing.

Under the new rules you’re not required to stick with your old lender. Because there are fees associated with any refinance mortgage loan it will be in your best interest to shop around for the best deal. You may even find your current unwilling to approve your application under HARP. Remember participation is voluntary for lenders and some banks have said they will only approve applications for their existing customers.

The New HARP Program Rules

There are several HARP requirements that did not change under the new program. The biggest roadblock you’re likely to encounter is that your current home loan must be backed by Freddie Mac or Fannie Mae. If they don’t have your mortgage then you’re done…HARP is not an option for you. HARP is a government program that requires government backing of your mortgage in case of default.

In addition to the Fannie/Freddie requirement the government must have acquired your home loan before 6/1/2009. If Fannie and Freddie back your mortgage you must also be current on your payments for the past six months and can have only one late payment during the six months before this period. Qualifying is time-sensitive and eligibility will close December 31st, 2013 so if you qualify, don’t procrastinate.

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You can learn more about getting today’s lowest refinance rates while avoiding unnecessary points and fees with or without the new HARP program by checking out my free Underground Mortgage Videos.

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Cash-Out Mortgage Refinancing or Home Equity Line of Credit?

If you’re thinking about borrowing against equity in your home there are several options for cashing-out. Mortgage Refinancing will get you a new home loan at today’s low refinance rates; however, you’ll be required to pay significant fees at closing. Lenders are bringing back the Home Equity Line of Credit (HELOC) after suspending these loans after the housing meltdown. Here are several tips to help you decide if mortgage refinancing or a Home Equity Line of Credit is right for you.

The Home Equity Line of Credit Returns

It’s been a couple of years since the Home Equity Line of Credit has been available as a means of cashing out equity from your home. Part of the problem with these loans is that the majority of homeowners that had them found themselves under water following the crash of the housing market. It’s still difficult to qualify for a HELOC because lenders have hefty requirements to qualify, unlike in the past where many lenders actually encouraged you to treat your home as a piggy bank.

Cash-Out Mortgage Refinancing Has Advantages

There are a few situations where cash-out mortgage refinancing is a smart financial move. If you’re leery about treating your home as a piggy bank you’re in good company; however, there are justifiable reasons for needing the cash, lifestyle purchases notwithstanding. Refinance rates are at 60-year lows and the interest you’ll pay borrowing against your home is fully tax-deductible.

Cash-out mortgage refinancing rates are typically lower than HELOC rates meaning your payments will also be lower. Currently refinance mortgage rates for 15 and 30 year fixed-rate home loans are below four percent. HELOC interest rates are currently right around 4.6% while other home equity loans are averaging six percent. Mortgage refinancing has another advantage in that you’re getting a lower monthly payment allowing you to recoup your out-of-pocket expenses.

Many analysts believe refinance mortgage rates can only go up from present levels meaning if you don’t take advantage now you might never see rates this low again. Cash-out mortgage refinancing is an affordable option from today’s best mortgage lenders like Amerisave and Quicken Mortgage. HELOCs have several disadvantages as most come with variable interest rates meaning your payments will change over time.

These loans typically start with a lower teaser rate that resets to a higher rate taking your payment along for the ride. It goes without saying; however, with a HELOC you’ll have a second payment to make in addition to your regular mortgage payment. This second payment could create challenges for homeowners with already limited budgets.

Another problem with the Home Equity Line of Credit is that technically it is a 2nd mortgage, meaning there is a second lien on your home.

This is a risky proposition for lenders because in the event of foreclosure they won’t see a dime until the primary mortgage is paid. With home values still declining in many areas of the country lenders would be left without sufficient equity to cover the primary mortgage, making qualifying for these loans difficult even with stellar credit.

The requirements to qualify for a HELOC are a loan-to-value ratio of 85 percent in most markets. If you’re turned down for the Home Equity Line of Credit most lenders would still consider you for cash-out mortgage refinancing, which could be a better option.

HELOC Advantages

The main advantage of a Home Equity Line of Credit over cash-out mortgage refinancing is the fee will be much lower. HELOCs are also helpful if you’re not sure how much cash you need to borrow against your home. If you’re approved for a $15,000 line of credit but only spend $7,000, you’re only going to be charged interest on what you’ve borrowed.

The ease of access to your equity could be a disadvantage for many homeowners lacking the financial discipline not to overspend. The housing market has not fully recovered making HELOC loans out of reach of most homeowners; however, if you qualify there are situations where this type of home equity loan makes sense. For everyone else cash-out mortgage refinancing is a good alternative, providing you’re able to recoup your expenses.

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You can learn more about your cash-out mortgage refinancing and HELOC options, including strategies for avoiding unnecessary fees and markup by checking out my free Underground Mortgage Videos.

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