What Every Homeowner Needs To
Know About Refinancing
There are probably many "lifesaving" tips people have thrown you to help
you determine the right time to refinance your home. You may have heard
that the interest rate on the new loan must be at least two percent less
than the old loan, or it is not a good decision. Another frequently
quoted, but just as frequently incorrect statement, is that if your loan
is less than two years old, you shouldn't refinance it now.
Neither one of these statements is entirely correct, and it can be
extremely difficult to receive unbiased and accurate information about
the refinancing decision and process. It is our desire to offer you a
clear, concise guide to help you get rescued from that sea of
refinancing confusion. This report has been designed to provide unbiased
information that will help you make an educated decision about whether
or not to refinance your home mortgage.
What Basic Terms Do I Need To Know About Refinancing?
The mortgage industry is continuously changing - it's a challenge just
to keep up. New regulations, government programs and terms are always
being created. Therefore, the first step in understanding the
refinancing process is to learn the language!
ADJUSTABLE RATE MORTGAGE (ARM) - A loan that allows the lender to
adjust the borrower's interest rate and payments at prescribed times and
sometimes with prescribed limits. Lower interest rates are customary.
AMORTIZED LOAN - A loan which is paid off in equal installments
during its term.
ANNUAL PERCENTAGE RATE - The actual interest rate the borrower
pays when all the costs of obtaining credit are included.
APPRAISAL - A report made by a qualified appraiser setting forth
an opinion of estimate of value. The term also refers to the process by
which the estimate is obtained.
APPRAISED VALUE - An estimation of property value made by a
qualified expert.
APPRECIATION - An increase in the value of a property.
Appreciation may be the result of an increased demand for property, any
improvements or additions made, improvements to the neighborhood, etc.
BALLOON MORTGAGE - A mortgage with periodic installments of
principal and interest that, at the end of such a period, do not fully
amortize the loan. The balance of the mortgage due is usually paid in a
lump sum at a specified date, usually at the end of the term of such
periodic installments.
CLOSING - The process that brings a loan into legal existence,
including the signing of all loan documents, their delivery to the
appropriate parties, and the disbursing of at least some of the loan
funds.
CLOSING COSTS - These are costs which are not controlled by the
lender, and are required for anyone purchasing a home regardless of loan
amount or lender. These include expenses such as attorney fees, title
insurance, survey, recording fees, appraisal, and termite inspection.
All of these services are provided by independent professionals who are
not affiliated with your lender. You can usually figure on your closing
costs being approximately one to one & a half percent of your loan
amount.
COMPARABLES - Properties used in an appraisal report that are
substantially equivalent to the subject property.
CONVENTIONAL LOAN - A loan that may or may not require Private
Mortgage Insurance. (Any loan amount with 20% or more down payment will
not require PMI. Any loan amount with zero or 3% - 19% down payment will
require PMI.) This type of loan is subject to the qualifying guidelines
set forth by FNMA (Fannie Mae) or FHLMC (Freddy Mac).
CREDIT HISTORY - This is a "snap-shot" of your past and present
debt, current available credit, and a rating of your debt repayment
history. This is very important to a lender so that they can know if you
are a good credit risk.
CREDIT REPORT - A document completed by a credit-reporting agency
providing information about the buyer's credit cards, previous mortgage
history, bank loans and public records dealing with financial matters.
DEED - The formal written document that transfers the rights of
ownership and possession (that is, the title) from the seller to the
buyer.
DISCOUNT POINT - A unit of measurement used for various loan
charges; one point equals one percent of the amount of the loan.
DOWN PAYMENT - The difference between the loan amount and the
sales price of the home you are purchasing. This is measured in a
percentage; for example, a 3% down payment on a $70,000 home would be
$2100.
EQUITY - The owner's interest, or the amount of cash the owner
has, realized, paid in or invested in real estate.
ESCROW PAYMENT - The portion of a borrower's monthly payment that
is set aside by the lender in an escrow account to pay the taxes, hazard
insurance, mortgage insurance, ground rents and other special items as
they come due.
FHA LOAN - A loan that is insured by the Federal Housing
Authority. This type of loan is geared toward providing moderate to low
income families mortgages, and is subject to the qualifying guidelines
set forth by the Federal Housing Authority.
FIXED-RATE MORTGAGE - The type of loan where the interest will
not change for the entire term of the loan.
GOOD FAITH ESTIMATE - Provides a breakdown of the estimated
closing charges.
HOME EQUITY LOAN - A loan under which a property owner uses his
or her residence as collateral and can then drew funds up to a
prearranged amount against the property.
INTEREST RATE - The percentage of interest charged on the amount
of money borrowed. This rate will vary slightly from lender to lender,
and will vary according to the type of mortgage chosen (30 year fixed, 3
year adjustable, etc.). Now is an excellent time for mortgage interest
rates, as 1996 has ushered in consistently low rates that are in fact
the lowest in over 30 years!
LOAN-TO-VALUE RATIO (LTV) - The ratio, expressed as a percentage,
of the amount of a loan (numerator) to the value or selling price of the
property (denominator). Usually, the higher the percentage, the greater
the interest charged.
MORTGAGE BROKER - A mortgage broker is different from a single
lender/bank, in that they represent many different lenders in much the
same way a travel agent represents many different airlines. Most people
don't call a single airline and expect to get a complete picture of all
available flights and prices, and yet some people will call a single
lender/bank and end up choosing the wrong type of financing which can
literally cost them thousands of dollars. A mortgage broker's knowledge
and complete view of all financing options can enable people with low
income, self-employment, commissioned income, or even credit problems to
obtain excellent financing. A mortgage broker's compensation as your
consultant (much the same as a travel agent) is a finders fee paid by
the lender. These lenders always offer better rates and superior
prepayment privileges and often shave as much as a half percent point
off the normal market rate.
ORIGINATION FEE - The fee that the lender charges the borrower to
cover the cost of issuing a loan commitment. It pays for processing the
loan which includes collecting information about the borrower's
ceditworthiness and the property. The fee is usually computed as a
percentage of the mortgage loan. It usually does not include fees for
appraisals, credit reports, inspections and loan document preparation.
POINTS - An amount equal to one percent of the principal amount
of a note. Loan discount points are a one-time charge assessed at
closing by the lender to increase the yield on the mortgage loan to a
competitive position with other types of investments.
PRE-PAID COSTS - These are the costs that cover your escrow
account for the future payment of interest, property taxes and
homeowners insurance. Property taxes are set by the appropriate
government taxing authority and, unfortunately, are not negotiable.
Depending on the regulatory agency, (FHA, Fannie Mae, etc.) you will be
required to pre-pay anywhere from 2 to 11 months of property taxes at
closing. Premiums for homeowners insurance are set by the insurance
company you select, and you are required to pay your first year
homeowners' insurance plus two additional months at closing. You can
usually figure on your pre-paid costs being approximately one to one & a
half percent of your loan amount.
PRIVATE MORTGAGE INSURANCE - This insurance is required for most
loans that have a down payment of 20% or less. Private Mortgage
Insurance insures the lender in the event that you default on your
mortgage payment and the lender is forced to sell your property at a
loss.
THDA FUNDING - The Tennessee Housing Development Agency is a
state subsidized program funded by proceeds of federal tax exempt bonds,
otherwise known as Mortgage Revenue Bonds. Recipients are first time
homebuyers with a limited income, looking for modest housing.
TITLE - The evidence of the right to or ownership in property. In
the case of real estate, the documentary evidence of ownership is the
title deed, which specifies in whom the legal state is vested and the
history of ownership and transfers. Title may be acquired through
purchase, inheritance, devise, gift or through the foreclosure of a
mortgage.
TITLE INSURANCE - An insurance policy which protects the insured
(purchaser or lender) against loss arising from defects in title.
UNDERWRITING - In mortgage lending, the process of approving or
denying a loan based on an evaluation of the property and the
applicant's creditworthiness and ability to repay the loan. The
underwriter analyzes the risks involved and selects an appropriate loan
term and interest rate.
VA LOAN - A loan that is insured by the Department of Veteran's
Affairs. This type of loan is available only to veterans, and is subject
to the qualifying guidelines set forth by the Department of Veteran's
Affairs.
When Should I Refinance my Home Mortgage?
Put very simply, the decision to refinance a home should be based on
whether you will own the property long enough to recapture the expense
connected with the new loan. The way to figure this can be as easy as
subtracting the proposed new house payment from the existing payment to
find out what the monthly savings will be. Then, divide the monthly
savings into the cost of refinancing to determine how many months it
will take to recapture that cost.
There are some situations in which a refinancing decision should
invariably be made. If you are able to negotiate a "no-cost" mortgage
(you pay no points or closing costs), and if the new mortgage rate is
lower than your existing rate, than refinancing your loan would
certainly be of financial benefit to you. If the remaining mortgage
balance, including points and closing costs, can be refinanced at a
reduced monthly payment, and still be paid off within your existing
mortgage payment term, then refinancing would be highly advisable. If
you need extra cash for a home equity or auto loan, and the mortgage
rate is lower than alternative loan rates, then refinancing is probably
the best choice. Lastly, you can generally count on it being time to
refinance when your new mortgage rate is at least one to two points
lower than your existing rate, and you plan on staying in your home for
at least three to five years.
What Refinancing Myths Do I Need to Watch Out For?
One widespread myth that needs to be dispelled, is the idea that lowered
monthly payments are the financial yardstick that wise refinancing is
measured by. Monthly payments are only comparable if they are based on
the same loan duration! In fact, lowered monthly payments can be
achieved even at a higher mortgage rate, if the new mortgage has a
longer term than the remaining years of the old mortgage.
Another common misconception about refinancing is that if the new rate
is not at least two points lower than your existing mortgage rate, then
refinancing is not worth the time and trouble. In many cases, especially
if you are planning to stay in your home at least three to five years,
even a one point reduction can make an enormous difference in your
overall home mortgage cost. In addition, with the constant technological
advances in the mortgage industry, obtaining a mortgage loan or
refinance is now faster and easier than ever before. If you have any
confusion or apprehension about your refinancing decision, most mortgage
brokers will consult with you at no charge or obligation.
What Exactly Do I Need To Consider About Refinancing My Home?
To accurately sum up your refinancing decision, you need to thoroughly
consider the following five factors:
1.The amount of reduction in the mortgage interest rate
2.The amount of reduction in the monthly payment
3.Any prepayment penalties on the old mortgage
4.The amount of closing costs, including any points, loan origination
fees, application fees, inspection fees, appraisal fees, title
insurance,
mortgage insurance, etc.
5.The number of years you plan on retaining your home
What Will Actually Be Involved When I Refinance My Home Mortgage?
When you refinance, the proceeds from your new mortgage loan are used to
pay off your old mortgage. Even if you use the same lender this is true.
You are not simply re-negotiating the terms of the old mortgage, such as
reducing the interest rate.
You will receive back the old note that you signed, the mortgage
contract, and your lender will file a Mortgage Record Change. You will
sign a new note and mortgage contract which your new lender will record.
No money will pass through your hands, unless you borrow more than your
old mortgage balance. However, you must pay for points and closing costs
unless you finance those as well as the old mortgage balance.
You need to expect that your home will have to be appraised again, and
possibly inspected. Your credit history will be reviewed again, and
there will probably be changes in your mortgage and title insurance.
Of course money doesn't just grow on trees, but if it is truly the right
time for you to refinance, then with the money you will be saving after
twelve to eighteen months, you should begin to feel like your money
trees are in full bloom!
What Should I Do If I'm Still Not Sure I Should Refinance My Home
Mortgage?
If after reviewing this report you are still not sure whether or not you
should refinance your home, then it is time to call on someone trained
specifically to help you interpret your individual mortgage situation.
Many mortgage brokers will meet with you at no cost to consider your
refinancing needs, and a good place to start is with CLA Mortgages
Services.
The Personal Loan Consultants at CLA Mortgage Services are trained to take
care of all those details for you, and they will gladly meet with you at
your convenience to discuss your specific refinancing situation. This
consultation is absolutely free, and there will be no obligations or
salespeople hounding you if you decide that it is not the right time for
you to refinance.
Remember that refinancing your home mortgage does not need to be a
tedious, overwhelming task. Give CLA Mortgage Services a call at 1-800-761-9940, and let us show you just how quick and hassle-free creating
increased cash flow through your home mortgage refinance can be!
