Refinancing Your Mortgage
With interest rates at an all time low I thought I would touch on the subject of refinancing. When you refinance your mortgage, you take out a new home loan and use some or all of the proceeds to pay off the existing one. If you obtain a lower interest rate on your new loan than you had on your old one, you'll be saving money!
Qualifying for a new home loan
When a lender makes a decision about a mortgage application, they consider two basic factors: 1) your ability and 2) your willingness to repay the loan.
You ability to repay the mortgage is determined by making sure of your current employment and looking at your total income. Your proposed monthly payment will be compared to your monthly income and debt. Willingness to repay is determined by how you have paid on previous loans. Of course there is always the credit score check. And have you ever wondered what is a good score anyway? Below is some great information on how lenders look at scores. If you want to know what your score is and do it for free go to www.annualcreditreport.com.
*700 and above – Very good to excellent. Lenders will have no problems giving you a loan with a credit score of 700 or above.
*680 to 699 – This credit score puts you in the "Good" category. That one point between good and very good to excellent credit generally makes little difference to lenders so don't sweat it.
*620 to 679 – If your credit score falls into this range, you fall into the "Okay" category. The closer your score is to 679, the better. 620 is consider to be a "par" credit rating and you may be required to provide supporting information such as additional income statements, personal and professional references as well as documentation confirming time at your current job.
*580 to 619 – While you aren't in the "Bad" category yet, you are teetering on the edge if your credit score falls in this range. 620 is the prime rate cut-off, so plan on paying a higher interest rate or work on improving your credit score.
*500 to 580 – You can still get credit in this scoring range, but expect to pay a very high interest rate and look closely at the terms of your agreement. Closely examine how your interest rate is calculated. Some predatory lenders will charge interest rates on car loans that are calculated like credit cards, on a daily average balance. If you see these words in your disclosures for a car loan, put the pen down and walk away.
*499 and below – Yes, even with as score of 499 or below you can still be extended credit, but the interest rates will kill you financially. Take a year or two to pay off your collections or bad debt, clean up your credit and reapply at a later date.
~from Bank Rate
When to Do It
Generally, there are two good times to refinance your mortgage. If you've got an adjustable rate mortgage, one of those times is during periods of rising interest rates. If you refinance to a lower fixed rate mortgage you will avoid the higher costs that you would incur as the adjustable rate mortgage starts going up.
The other time to jump on a refinance is when you'll save money by getting a lower interest rate. You want to make sure that your monthly savings will pay back your refinancing costs while you are still in the home. If you sell the home before the refinancing costs have paid for themselves you won't be saving anything.
The Cost of Refinancing
Your refinancing cost is the total of any points, closing costs, and private mortgage insurance (PMI) premiums that you pay when you take out the new loan. There are times when lenders offer "no points, no closing costs" refinancing deals. Check the terms of the offer carefully to make sure that you understand what's involved.
Points are prepaid fees. One point equals 1 percent of the amount you're borrowing, and any points you're charged are usually deducted from the mortgage proceeds you receive. Mortgage lenders typically charge one point as a loan origination fee. Beyond that, lenders may charge additional points on loans with interest rates below the current market rate. By doing so, the lender makes a little more money up front, and you get a lower interest rate on your mortgage. So, if you're going to stay in your house for a long time and can afford to do so, paying more points in the beginning may get you a better interest rate and save you more money in the long run.
Your closing costs include a variety of fees, such as an appraisal fee, a title search fee, recording fees, and other fees associated with processing and finalizing your mortgage. If your loan-to-value ratio is greater than 80 percent of the appraised value of your property, you may also be required to carry PMI. The premiums for this insurance usually become a portion of your new monthly mortgage payment and thus reduce your savings from refinancing. In addition, you may discover hidden costs. For example, if you're paying less interest on your new mortgage, you'll have less to deduct on your income tax return. If this makes your tax payments higher, your savings will be further offset.
Once you've determined what your refinancing costs will be, you can then determine how long it will take for your refinancing to pay for itself. To do so, divide the total of the points and closing costs that you paid by the net monthly savings that the new loan provides you. Your net monthly savings will be your interest savings less any PMI premiums and tax advantage losses expressed as monthly figures.
For example, assume you refinanced $200,000. You paid two points and total closing costs of $1,800. You got a great interest rate on the loan, so you'll save $80 a month in interest charges. However, your PMI premiums are now $10 per month higher, and you've lost tax savings of $120 a year, or $10 per month. Your refinancing costs are $3,800--two points of $1,000 each and $1,800 in closing costs. Meanwhile, your net savings are $60 per month--$80 per month saved interest less $10 per month increased PMI premiums and $10 per month lost tax savings. If you divide $3,800 by $60, you'll find your refinancing will pay for itself in a little over 63 months.
Who Can Refinance
There are several routes you can take to refinance. You can contact your current lender, search the internet for rates or contact a mortgage broker. When we refinanced a few weeks ago we did all the above. I found that going through a mortgage broker worked best for us and I really liked the personal attention we received as we worked through the process. It can be hard to find someone you trust and feel comfortable with as you make this decision. Make sure you find someone who will take time with you and answer all your questions. If you like the idea of going through a mortgage broker you can call a trusted friend of mine and my mom's (my mom is a real estate broker and used Karen for many years) Karen Guinn at Met Life Home Loans (919)852-2545 or kguinn@metlifehomeloans.com.
I hope this helped shed a little light on a subject that can be overwhelming and sometimes hard to understand.
Sometimes in life you get to witness someone who faces a tragedy with the kind of peace and strength that can only come from God. I must say that this was one of those people. May he be blessed in his ministry and as he delivers his story to others in the future.
One a Day Women's Vitamins - FREE after rebate
Posts
