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.

httpv://www.youtube.com/watch?v=be9md0A0_2c
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Here’s a quick sample to get you started refinancing with today’s best mortgage lenders without overpaying…

When Mortgage Refinancing Isn’t The Answer

One of the most common mortgage mistakes is neglecting to answer the question “Should I Refinance My Mortgage?” You might be surprised to find that the answer to your question is simply “No.” Sure refinance rates are near their lowest levels ever but that doesn’t always justify the expense. Here are five reasons to avoid a costly mistake from mortgage refinancing at the wrong time.

The Downside of Mortgage Refinancing

Most people get so hung up on the possibility of saving cash by refinancing that they don’t consider the downside of taking out a new home loan. The downside exists and can quickly turn low refinance rates into an expensive mistake.

Here are five reasons to avoid refinancing your home mortgage loan:

  1. You’re Not Long For Your Home
  2. It’s easy to say I’m comfortable in my home and am staying put. Next thing you know you’re whammied with a new job, promotion, or are getting married and it’s time to sell. Granted you can’t plan for situations like this but if the possibility of moving is on the horizon you might want to reconsider refinancing.

    The reason you need to be staying put when refinancing is that it takes time to reach your break-even point for out-of-pocket expenses. Breaking even means you’ve reached the point where your savings eclipse the closing costs you paid getting a new home loan. Typical closing costs including your broker’s loan origination fee will run you 2-4% of your mortgage balance and this isn’t an expense to take lightly.

    Suppose you’re refinancing $250,000 and saving .5 percent on your interest rate. If your payment is going down $80 a month but it’s costing $4,000 to close it’ll take you 50 months, just over four years before you’ll benefit from that lower payment. Sell or refinance again before that time is up and you’re losing money.

  3. Your Closing Costs Are Too Expensive
  4. This mistake is along the same lines as the first reason. You might qualify for a ridiculously low refinance rate but have to pay a huge broker origination fee or discount points to get there. If you don’t have the cash on hand to pay your out-of-pocket expenses it might be tempting to accept higher refinance rates to have the lender pay the broker fee and closing costs for you.

    Keep in mind anything that raises your out-of-pocket expenses or increases your refinance rates reduces your benefit from mortgage refinancing. If you roll these costs into your loan balance you’re reducing your home equity increasing your risk of being underwater. You need to decide if the deferred savings you’re getting are worth the cash it’s costing you to get there.

    One of the most commonly overpaid mortgage expenses is the loan origination fee. This is paid to the person arranging your home loan and even if the lender pays it you could still be overpaying based on the increase in your interest rate. There are no free lunches when it comes to home loans so if a broker is telling you someone else is paying for you take a hard look at what you’re giving up in exchange.

  5. Your Credit Score Isn’t What It Should Be
  6. If you’re finding the refinance rate quotes lenders are giving you are higher than what they are advertising the likely culprit is your credit score. If you’re sitting in the 600 range mortgage refinancing is simply not a good idea. It’s not that there aren’t lenders out there that will approve you, just that you won’t qualify for the attractive refinance rates offered to homeowners with higher credit scores.

    You might be tempted just to bite the bullet and refinance with the interest rate you’re offered; however, investing a little time in improving your credit score will pay dividends well beyond your mortgage loan.

    The first step to improving your credit score is to visit the website AnnualCreditReport.com. Congress passed a law stating the three credit reporting agencies (Experian, Equifax, and TransUnion) are required to give you a free credit report every year. You won’t get a credit score with these reports but will have the option to purchase one if you like.

    Once you have your three credit reports check them carefully for errors. If you find mistakes you’ll need to dispute the error in writing with each credit bureau. Be sure and allow enough time for the correction to be reflected in your credit score before submitting your mortgage refinance application.

  7. You’re Choosing a Shorter Mortgage Term Length
  8. Refinance rates on 15 and even 10-year mortgages are at rock-bottom levels. You might be tempted to stuff what’s left of your 30-year mortgage into a 10 or 15-year refi. This will save you a ton of money in finance charges over that 30-year fixed home loan but it might not be the smartest move.

    Paying a couple hundred dollars more every month might not seem like a big deal while you’re doing the paperwork but it can cause a real burden on an already stressed budget. If you hit a rough patch down the road you won’t have the ability to scale back your payment. Can you spare the cash in your monthly budget to afford that higher payment amount? (Now and how about later down the road?)

  9. You’re Choosing a Longer Mortgage Term Length
  10. Remember that calculation from earlier for figuring out your break-even point on out-of-pocket expenses? That calculation is only valid if you choose a home loan with the same term length or go shorter. If you refinance with a longer term length it’s going to be impossible to break even recouping your closing costs due to higher financing of those extra years.

    This is true of mortgage refinancing a 15-year home loan with a 30-year or even a 40-year mortgage. While it’s true that you’re getting a lower monthly payment by spreading your mortgage out over more time, you’re also increasing the total interest you’re paying over the duration of your mortgage.

    Another problem with mortgage refinancing regardless of the term-length you choose is that since you’re getting a brand new home loan you’re resetting the clock your mortgage amortization schedule.

    Amortization is the process of paying down your home loan. Because mortgage loans are front-loaded with interest in the early years the majority of your payment goes to paying the lender before paying down your principal balance. This gradually reverses over time and more of your payment goes to building equity. Once you refinance you reset this amortization clock and you’re back to stuffing cash in your lenders pockets.

Have You Decided Mortgage Refinancing Is The Right Move?

If you’ve decided to go forward with mortgage refinancing there are steps you can take to get the maximum benefit from today’s low refinance rates. The less you pay for the loan origination fee and other closing costs while avoiding discount points the sooner you’ll break even recouping those out-of-pocket expenses.

The mortgage fees you can negotiate to pay less are found on section 800 of your Good Faith Estimate. Here you’ll find your loan origination fee and lender junk fees like administrative and processing fees.

Negotiate these fees down or away and you’ll get the maximum benefit from a new home loan with today’s best mortgage lenders.

Click Here For More Details…

You can learn more about paying less for your next home loan by avoiding lender fees and discount points by checking out my free Underground Mortgage Videos.

httpv://www.youtube.com/watch?v=be9md0A0_2c
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Here’s a quick sample to get you started refinancing with today’s lowest refinance rates…

Compare Mortgage Rates: 15 vs. 30 Year Fixed

Mortgage Refinance rates are at extremely low levels for both 15 and 30-year mortgage loans. How do you compare mortgage rates to decide which home loan is best for you? Here are the pros and cons comparing 15 and 30 year mortgage refinance rates to help you make an informed decision on your next home mortgage loan.

How to Compare Mortgage Rates

15 year refinance rates are an extremely popular option for mortgage refinancing with interest rates dipping below 3 percent according to a recent lender survey. Refinancing your home with 15-year mortgage rates can save you a bundle from lender finance charges despite slightly higher monthly payments.

If you choose to refinance with 15-year mortgage rates you can expect to pay several hundred dollars a month more than if you had a 30 year term length. The payment on a $200,000 home loan, even with interest rates as low as 2.89% for a 15-year fixed rate home loan, would be $1,370. The same $200,000 home loan with today’s 30-year fixed mortgage rates of 3.6% would be $910 per month. That’s a difference of $5,520 per year.

If your budget can’t handle paying an extra $460 per month on a 15-year mortgage you might not even be considering refinancing this way. The upside of 15-year mortgage rates is that in the previous example the interest paid is about $47,000 instead of $128,000 with 30-year mortgage rates. As you can see the savings realized by shortening your term-length can be significant.

The risk with a 15-year mortgage on a tight budget is that you’ll hit a snag with your finances and miss a payment. The financial ramifications of missed mortgage payments go much further than just a hit on your credit score. Late payments exclude you from government refinance programs like the Home Affordable Refinance Program (HARP 3.0).

Another downside of low refinance rates is the hit you’ll take on your housing interest tax deduction. Most homeowners don’t think about the impact of refinancing with today’s ultra-low interest rates until tax time when they see how much their tax deduction has gone down. This could result in increased tax liability in the spring.

30 Year Refinance Rates Are Cheap Too

Compare mortgage rates on 30-year fixed rate home loans and you’ll find they are currently three-quarters of a point higher than their 15-year counterparts. These are the lowest levels for 30-year refinance rates ever. If you need the security of a low payment that won’t change over time, 30-year mortgage refinancing could be the best choice.

If the higher payment isn’t an issue how do you choose which type is right for you? Choosing 15-year mortgage refinancing is like making four extra payments a year, building equity in your home at a much faster rate. If you’re underwater in your existing home loan, 15-year refinance rates can help get you right-side up quickly,

Common Mortgage Refinancing Mistakes

When choosing a term-length for your next home loan one common mortgage mistake is lengthening the term. The test of how good of a deal you’re getting comes not from getting the lowest refinance rates but how long it’s going to take to recoup your expenses. Choosing a longer term-length, going from 15 to 30 years for example, makes it impossible to break even. Lengthening your term-length is a losing proposition for mortgage refinancing no matter how you look at it.

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You can learn more about getting the best deal on your next home loan without paying unnecessary points or fees by checking out my free Underground Mortgage Videos.

httpv://www.youtube.com/watch?v=be9md0A0_2c
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Here’s a quick sample to get you started with today’s best mortgage lenders without paying unnecessary points or fees…

No Closing Cost Refinance

No closing cost refinance offers allow homeowners short of cash take advantage of today’s low mortgage rates. Sounds good, but if lenders offer no closing cost refinance loans then why isn’t everyone refinancing this way? There is of course a catch which could wind up costing you thousands of dollars unnecessarily. Here are the pros and cons of no closing cost refinance offers to help you make an informed decision for your next home loan.

How Does No Closing Cost Refinance Work?

There’s no free lunches for pretty much everything these days and this is doubly so when it comes to mortgage refinancing. No closing cost refinance loans still have closing costs, every mortgage has fees regardless of what you’re doing; however, in this case the lender is paying your underwriting and loan origination fees for you.

Why would a lender pay your mortgage fees for you? They do this because you’re accepting higher than market refinance rates, meaning your payments will be higher than necessary for the entire duration of your home loan. This markup of your interest rate is called Yield Spread Premium. The cash lenders pay can be used to pay your broker’s fee or in the case of no closing cost refinance offers all of your fees.

Yield Spread Premium is Alive & Kicking

Many homeowners incorrectly think the use of Yield Spread Premium was outlawed in the United States. This is simply not the case. The only thing that changed was that if your mortgage broker accepts lender paid compensation in the form of Yield Spread Premium they cannot also charge you the loan origination fee. This “double-dipping” is partially what earned mortgage brokers a reputation for being money-grubbing used car salesmen.

How does Yield Spread Premium work? It’s a pretty simple concept to wrap your head around. For every .25 percent you agree to pay above par refinance rates the lender pays one percent of your home loan towards the origination fee and closing costs. Since your monthly payment is based on your mortgage rate and term length any amount of Yield Spread Premium on your loan is going to result in higher payments.

Is No Fee Mortgage Refinancing Worthwhile?

For some people who simply don’t have the cash to take advantage of today’s low refinance rates it can be worthwhile, especially if you’re paying six percent or higher on your existing mortgage. Here’s an example to illustrate what the markup does to your payment on a typical mortgage refinancing transaction.

Suppose you’re going to refinance your home for $300,000. Your current home loan has an interest rate of 6 percent and a monthly payment of $1,798. Considering 30 year fixed refinance rates are currently right around four percent mortgage refinancing makes sense for any homeowner in this situation. In this example we’ll use $6,000 as estimated closing costs including the origination fee, appraisal, attorney fees and underwriting fees. In order to cover $6,000 in mortgage fees you’d have to accept half a point in Yield Spread Premium to get your fees paid. In this case refinance rates of 4.5 percent would get the job done; however, what does this markup do to your payments?

If you paid your own closing costs and closed with refinance rates of 4 percent your monthly payment would be $1,432. The no closing cost refinance at 4.5 percent gets you a payment of $1,520 per month. That’s a difference of $88 per month or $1,056 per year. After five years you’ll have paid $5,280 for $6,000 in closing costs. Considering that the average homeowner refinance every 4-5 years in this example the no closing cost refinance offer makes sense if you ditch the mortgage after five years. Keep this home loan for any longer than five years and you’ll start losing money.

Should you take one of these no closing cost refinance offers? On paper they can seem like a good deal when you run the numbers, especially if not having cash would prevent you from lowering your payments with today’s ridiculously low refinance rates. Just make sure that your loan contract doesn’t include a prepayment penalty as this would make getting out of the loan a losing proposition down the road when you’re ready to sell or refinance again.

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

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Here’s a quick sample to help you find today’s best mortgage lenders without falling for unnecessary discount points or fees…

Buying Down Your Interest Rate

Did you know there’s a way to buy down your interest rate on your home mortgage? It doesn’t matter if you’re purchasing or mortgage refinancing, if you’ve got the cash buying down your interest rate is an option. The question becomes should you consider buying down your interest rate? After all, the more cash you’re paying out-of-pocket, the less benefit you’re getting from today’s low rates. Here’s what you need to know to make an informed decision for your next home loan without leaving cash on the table.

Buying Down Your Interest Rate With Points

Many homeowners have a singular thought when it comes to their home loan…get the lowest interest rates possible, often at the expense of fees. This refinancing strategy isn’t necessarily a mistake, if you plan on keeping your home and never refinancing.

You can buy down your interest rate when refinancing by asking your loan originator for different interest rates and points. Most lenders quote various rates including points by default; however, working with a good broker can often help you get a better deal.

What are points? Discount points are simply a fee you pay the lender for buying down your interest rate. One point is one percent of your home loan amount and reduces your rates by .25% in the form of prepaid interest.

Most lenders quote refinance rates that include points automatically; however, zero or no point mortgages are a popular option. You might be asking yourself since mortgage rates are near sixty-year lows does it make sense to pay discount points?

Should You Buy Down Your Mortgage Rates?

Choosing the best option for your next home loan can be tricky, especially when it comes to taking cash out of your pocket. If your broker will give you a copy of the lenders rate sheet it might help you make an informed decision based on that lender’s par rate.

Par Mortgage Rate Definition: Interest rates that do not include markup for the broker’s commission or discount points

Suppose you’re considering NFCU Mortgage Rates and the par rate is 4.75 percent but you’re after 4.5 percent. Paying one discount point at closing has the effect of buying down your interest rate to 4.5 percent.

Your Mortgage Broker’s refinance rate sheet looks something like this:

Mortgage Rate vs. Price (Discount Points)

  • 5.375% – (0.375) Yield Spread Premium
  • 5.25% – 0.00 Zero Point Option
  • 5.125% – 0.25 discount points
  • 5.00% – 0.50 discount points
  • 4.875% – 1.00 discount points
  • 5.75% – 1.75 discount points

Each mortgage rate quoted has a price paid at closing in the form of points. In this example the par rate is 5.25 percent and the highest rate at 5.375 includes Yield Spread Premium. Higher discount point options have lower interest rates but higher costs. The more you want to buy down your interest rate the more it’s going to cost you at closing.

One common mortgage mistake when refinancing is to go after the lowest possible interest rate at the expense of fees. While it’s true that paying discount points will get you lower refinance rates and a lower payment it makes recouping your out-of-pocket expenses more difficult.

Here’s an example to illustrate how discount points lowers your monthly payment on a $250,000 mortgage:

  • Refinancing with a par mortgage rate of 4.5% gets you a payment of $1,113 per month.
  • Refinancing with one discount point gets you 4.25% and a payment of $983 per month.
  • Cost for buying down your mortgage rate: $2500
  • Monthly payment savings: $130

Is it worth paying discount points for buying down your interest rate? The more you pay out-of-pocket at closing the less benefit you’re getting from today’s low refinance rates AND the longer it’s going to take to break even recouping your expenses. In this case it’s going to take you 20 months just to break even on the points, even longer for your closing costs.

If you’re not able to break even recouping your closing costs before you sell or another mortgage refinance you’re wasting your money buying down your interest rate. You should note that approximating your break-even point by dividing your cost by the monthly savings is only valid if you keep the same term length or shorten your mortgage’s term. If you lengthen your term length by going from a 15-year to a 30 or even a 40-year mortgage it’s going to be impossible to break even given the finance costs of those extra years.

Does buying down your interest rate make sense in today’s market? You can do the math for yourself; however, given that the average homeowner refinances every four or five years discount points are a waste of money for most homeowners.

Click Here For More Details…

You can learn more about getting the best deal on your next home loan without paying lender junk fees by checking out my free Underground Mortgage videos.

httpv://www.youtube.com/watch?v=be9md0A0_2c
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Here’s a quick sample to get you started outsmarting your lender on your next refi…