House 2Making the final decision to pursue a refinance of your current mortgage loan should be reviewed with care.  I promised a full detailed article regarding the Home Mortgage Refinance, so here it is.

I am going to give you some facts to consider before making that decision. A refinance will or can change the present term of your loan.  You may choose a longer mortgage term or shorter term whichever you need. The rate will change and you may have to add in the closing cost that will increase the balance of your loan. Refinancing your home should be considered with great care and I will list some of the concerns to ponder.

There is always a bank or mortgage company advertising to get those who have not already refinanced their home mortgage to do so.

These are things to consider before doing a Home Mortgage Refinance:

  • can you reduce your current rate of interest by at least 2%
  • can you pay the closing cost out of pocket
  • can you lower the term of your current loan to say 20 or 15 years if it is 30 year term
  • do you now have mortgage insurance/MI
  • do you have a 2nd mortgage
  • will this help you reduce your mortgage PITI (principle, interest, taxes & insurance)
  • is your property value the same as when purchased or more

Breaking down Home Mortgage Refinance criteria:

Rate of interest: if you cannot lower your interest rate at least 2%, you are probably not going to benefit your current situation or your future situation unless you are refinancing your loan to lower the term only.  Now, many people have already refinanced the higher rates loans and gotten them down to 4 or 5%.  But, they decide they want to get a home mortgage refinance to lower the term; or lengthen their current term to decrease the payment.  Still much to be consider here for the benefit.

Closing Cost: if you cannot pay your closing cost for the refinance transaction out of pocket (and most cannot or will not) you can add it into your loan balance.  Calculate the difference with Texas Instruments TI-84 Plus Graphing Calculator . The downside of this is that you will have loan amount higher than the balance you now owe by at least 3% (+-) of the new mortgage principal balance. If you use a Broker who will shop for your mortgage for you; you will pay more than 3% normally. It could be as high as 5%.

When you are adding back all of this cost, it will take you longer to pay off this mortgage and recap the closing cost you have added into your loan, depending upon how long you have had your current mortgage and how much CC. It will take you a number of years to pay the closing cost you are adding into the loan amount over and above your current balance.

Lower the term: You are always doing yourself a favor if you can lower the term on your loan. If you have a 30 year mortgage  it is best to go lower at 25, 20 or 15. Yes the payment; will be higher because the term is shorter, but you will also get your principal paid off much earlier, and your equity rises quickly. This will depend upon if you can afford a higher payment in your debt to income ratio. A lot of times borrowers cannot afford the higher payment. Calculate the difference here.

Mortgage Insurance: If you have a loan to value > 80% of the appraised value at refinance, you must carry MI. This makes your mortgage payment higher but protects the Mortgage Lender in case of default. If you are fortunate enough to have additional money in savings you can pay down your mortgage to 80%, you will eliminate MI.

2nd Mortgage: if you have a second mortgage lien, (home equity loan or other 2nd lien), this loan will have to be considered in the loan to value ratio. If your value is the same or has increased, you may be able to add this loan into your new mortgage loan and have only one payment. You do not have to add this 2nd lien in but it must be subordinated to the first, and meet the applicable value ratios.

Will a Refinance help you: If you are not benefiting from this transaction by decreasing either your interest, term or adding in your 2nd mortgage in (if applicable), it is not that sensible to refinance. If you cannot pay the closing cost out of pocket instead of adding it into your present balance, you are raising the balance.

Current Appraised Value: If the value of the dwelling has declined you may not be able to refinance. It will depend upon the housing market in the area where you live. If your value has stayed the same or increased then your equity position is greater. If there has been a lot of foreclosure in your immediate area (subdivision), you may have some problems with your value. This will make the value of your loan less. It is not something we want to talk about but it is evident in the market today.

A lot of people want the lowest rate they can get and that is a good thing to do in the right situation. If you have a 7% interest rate and can lower it to 5%, you are going to benefit if you are not increasing your loan balance substantially. A 20 to 15 year term will give you a slightly better rate of interest but will increase your payment amount.

For those borrowers who received a much higher rate with a Subprime loan, hopefully your value has not declined and you can refinance to a much lower rate. There are many things which have to be considered and some of those things are; why you got the Subprime loan. Is your credit better now, if that was one of the issues? My advice is not to let anyone talk you into a refinance if it is not going to be to “your” advantage.

Find a Loan Officer you trust and talk to them and ask the right questions.   If you talk to a mortgage professional and they cannot answer your questions, you need to find someone else who can. A professional should be able to tell you the pros and cons of refinance at the drop of a hat. Of course this depends upon your loan balance, the current value of your home as it is today; not when you purchased your home.  But if someone tells you that your closing cost is 6% or more, something is wrong.  Except for FHA loans.  Ask questions and get answers before refinancing your loan.

Most Banks can give you closing cost within the 3% (-+) range. I said most. Sometimes it can be less if they will eliminate the origination and you should only have discount points if you are buying down the rate.  0/0.  No origination fee/no discounts. You will have the normal other fees.

These are the main points to consideration when you are thinking about the refinance of your home loan.

Sincerely,

Linda Todd

P. S.  Please note if you have any questions; please feel free to ask.  Having worked in mortgage lending for most of my career; I try to keep updated on all things Mortgage.  If I do not know, I will find out.

 

7 thoughts on “Home Mortgage Refinance”

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