Glossary of Terms - Real Estate
|
(back to top)
|
Different Loan Types
|
15-Year Fixed-Rate Mortgage
|
|
|
You pay off a 15-year fixed-rate mortgage in half the time you pay off the traditional 30-year fixed-rate mortgage. This shorter term makes it possible for you to build up equity in your home faster, which can let you move up more quickly to a more expensive home or save more in preparation for retirement or a child's education. This loan is particularly attractive if you're refinancing your mortgage because you shorten your loan term plus enjoy a lower interest rate - 15-year mortgages are usually offered at interest rates lower than those available with 30-year mortgages. However, higher monthly payments may make it more difficult to qualify for compared to the 30-year fixed-rate mortgage.
Advantages:
Offers a lower interest rate than a 30-year or 20-year mortgage.
Saves you a significant amount of interest over the life of the loan. For example, with a $100,000 loan at 8.25 percent interest, the 15-year mortgage will save you $95,000 in interest payments over the life of your loan, compared to the same mortgage amount for a 30-year term. However, your monthly mortgage payments will be higher.
This shorter-term mortgage allows you to own your home outright sooner.
Details:
Eligible properties include one- to four-family, owner-occupied principal residences; second homes and investment properties; and condos, co-ops, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
20-Year Fixed-Rate Mortgage
|
|
With a 20-year fixed-rate mortgage, you build up equity in your home more quickly and save quite a bit of interest over the life of your loan. As with all fixed-rate mortgages, the interest on your loan never changes, bringing you peace of mind that your principal and interest payments will remain level over time. However, higher monthly mortgage payments may make it more difficult to qualify for compared to the 30-year fixed-rate mortgage.
Advantages:
You pay less interest over the life of your loan, compared to a 30-year fixed rate mortgage. For example, on a $100,000 loan at 8.25 percent interest, the 20-year fixed rate mortgage can save you over $65,000 in interest payments when compared to a 30-year mortgage.
Interest rate payments in the early years of the mortgage are comparable to a 30-year mortgage, allowing for a sizable mortgage interest tax deduction.
Your monthly payments are significantly less than for a 15-year mortgage, allowing you a greater chance to qualify for this type of mortgage.
Details:
Eligible properties include one- to four-family, owner-occupied principal residences; second homes and investment properties; and condos, co-ops, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
30-Year Fixed-Rate Mortgage
|
|
The most popular type of mortgage, the 30-year fixed-rate loan, is most appealing to borrowers who want to stay in their homes for a long period of time and who want to enjoy consistent payments during this period. Other benefits include keeping housing expenses to a minimum while maximizing mortgage interest deductions for income tax purposes.
Advantages:
Can require a low down payment, sometimes only 3 or 5 percent
Consistent monthly payments
Stable payments, monthly payment will not increase
Provides maximum interest deduction for tax savings
Details:
Eligible properties include one- to four-family, owner-occupied principal residences; second homes and investment properties; and condos, co-ops, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
Adjustable-Rate Mortgage (ARM)
|
|
The adjustable-rate mortgage (ARM) became popular in the early '80s, when long-term interest rates were high and people needed a new type of financing to buy homes. These products start out with a lower interest rate, then the interest rate adjusts periodically. If you're confident that your income will increase steadily over the years, or if you plan to move in a few years and aren't concerned about potential rate increases, you may want to consider an adjustable-rate mortgage. With an ARM, your interest rate may move up or down as market conditions change. Interest rate changes typically are subject to two caps, one for each adjustment period and one for the life of your loan. When discussing ARMs with your lender, be sure to ask what the maximum interest rate adjustments can be for any ARM product you consider.
One-Year Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate with an interest rate that adjusts annually after the first year. The rate cap per annual adjustment is usually 2 percent; the lifetime adjustment caps can be 5 percent or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That's because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.
Advantages:
You can get a one-year ARM with a term from 10 to 30 years. The most typical ones are 10, 15, or 30 years.
The one-year ARM is most often indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
Can be used to buy one-family, principal residences, including condos, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
You can get a one-year ARM with a term from 10 to 30 years. The most typical ones are 10, 15, or 30 years.
The one-year ARM is most often indexed to the weekly average yield of U.S. Treasury securities adjusted to a constant maturity of one year.
Can be used to buy one-family, principal residences, including condos, and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
Six-Month Adjustable-Rate Mortgage
This adjustable-rate mortgage (ARM) offers a low initial interest rate for the first six months with an interest rate that adjusts every six months thereafter. The rate caps per adjustment can be 1 percent or 2 percent; the lifetime adjustment caps can be 4 percent, 5 percent, or 6 percent. This type of mortgage may be right for you if you anticipate a rapid increase in income over the first few years of your mortgage. That's because it lets you maximize your purchasing power immediately. It may also be the right mortgage for you if you plan to live in your home for only a few years.
The interest rate is tied to a published financial index. When comparing ARMs that have different indexes, look at how the index has performed recently. Your lender can provide information on how to track a specific index and how to review a 15-year history of the index.
Advantages:
Maximizes your buying power immediately, especially if you expect your income to rise quickly in the next few years.
Lets you select an index that meets your financial needs.
Easier to qualify for due to a low interest rate and a 1 or 2 percent annual rate cap.
Some six-month ARMs let you convert to a fixed-rate loan at certain adjustment intervals - ask your lender which of their six-month ARMs include this option. Your lender can also provide further specifics about this mortgage option.
Details:
You can get a six-month ARM with a term of 10 to 30 years. Typically, they are 10, 15, or 30 years.
Can be used to buy one- to four-family, owner-occupied principal residences including second homes, investment properties, and condos, co-ops and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
| Balloon Mortgage |
|
The balloon mortgage is a type of fixed-rate mortgage. The principal and interest you pay are amortized over a longer period (30 years) than the actual term of the mortgage. At the end of the balloon period, you may pay off the outstanding balance with a lump-sum payment or exercise the option to refinance for the remaining term. The option to refinance is conditional, meaning you have to meet certain conditions (such as a history of timely payments or no second liens on your property).
Advantages:
Ideal if you plan to sell or refinance your home within seven years and want a low monthly payment during that time. The interest rate you pay on a balloon mortgage is usually lower than a comparable 30-year fixed-rate mortgage.
With a refinance option at the end of seven years, you have a "safety net" in case a planned relocation doesn't take place or economic conditions prevent you from moving to a larger home. (You may want to understand all the conditions needed for a refinance before getting this loan.)
You need not re-qualify for this loan when refinancing at the end of seven years as long as the new interest rate is not more than 5 percent above the current interest rate.
Details:
The refinance condition is not automatic - you must exercise the option.
Refinancing conditions may include payment of closing costs and a lender fee, as well as no 30-day late payments in the previous 12 months and no other liens on your property.
You must occupy your property at the time of refinancing.
This mortgage can be used to buy one-family, principal residences, including condos and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
Biweekly Mortgage
|
|
This fixed-rate mortgage is designed for borrowers who wish to accumulate equity in their homes quickly, but need a low down payment and low monthly payments. It is particularly well-suited to borrowers who are paid every two weeks by automatic deposit, because payments must be automatically drafted from the borrower's account every two weeks. If you want stable payments and seek to build equity in your home more quickly, this type of loan may be for you. It is available for most fixed-rate mortgages.
Advantages:
You save the amount of interest paid over the life of the loan, which will help you pay your mortgage more quickly than by making payments monthly.
Your mortgage payment is usually deducted automatically from a deposit account, saving you the cost of postage to mail your payment. Additionally, you may find it's easier to manage your finances by having your mortgage paid at the same time you receive your paycheck.
Details:
Interest is calculated amortizing the mortgage every 14 days, using a 365-day calendar year, resulting in 26 (27 in some cases) payments a year.
Biweekly mortgages can be used to buy one-family, principal residences, including condos and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
Fixed-Period Adjustable-Rate Mortgages
|
|
This type of adjustable-rate mortgage (ARM) maintains the same initial interest rate for the first three, five, seven, or 10 years of your loan, depending on the term you choose. Your interest rate then adjusts annually, and can move up or down as market conditions change. Be sure to ask your lender about the interest rate caps for both the annual adjustments and for the life of the loan.
Advantages:
Your initial interest rate will be lower than a fixed-rate mortgage, so you may be able to afford more home.
You are protected against interest rate increases for the first three, five, seven, or 10 years of the loan, depending on which type of fixed-period ARM you choose.
You may have the option to convert your ARM to a fixed-rate mortgage at the first, second, or third interest rate adjustment dates.
You have time to improve your financial position (i.e., salary increases) or accumulate additional assets before the interest rate adjusts at the end of the fixed period.
Details:
The lifetime interest rate cap for fixed-period ARMs is typically 5 to 6 percentage points above your initial rate. Your annual cap during the adjustable period is typically 1 to 2 percentage points above or below over the current rate.
Can be used to buy one- to four-family residences including second homes and condos, co-ops and planned unit developments. Manufactured homes are also eligible. (Manufactured housing units must be built on a permanent chassis at a factory and then transported to a permanent site and attached to a foundation.)
|
Fixed-Rate Mortgage
|
|
Fixed-rate mortgages, the most popular type of mortgage, offer the peace of mind that your interest rate will remain the same for as long as you have your loan. If you expect to live in your home for many years, having the same interest rate may be your key concern. If you decide that you like the stable, predictable payments of a fixed-rate loan, you have the option of choosing from a variety of repayment terms: 15, 20, and 30 years are the most common. Typically, the longer the term of the mortgage, the more interest you pay over the life of your loan. However, stretching out your repayment term means your monthly mortgage payments will be less than they would be with a comparable shorter-term mortgage.
|
Home Equity Conversion Mortgage (HECM)
|
|
A Home Equity Conversion Mortgage (HECM) is a type of home loan that lets homeowners aged 62 or over with little or no remaining balance on their mortgage convert their equity into cash. The equity can be paid to the homeowner in a lump sum, in a stream of payments, draws from a line of credit, or a combination of monthly payments and line of credit.
Whatever payment plan you select, you do not have to repay any part of this reverse mortgage until you sell the home, vacate it for another reason, or violate the loan's terms and conditions. At that time, you pay the loan balance, plus any accrued interest. Any proceeds above that amount go to you or to your estate.
Developed by the Federal Housing Administration (FHA), the HECM mortgage provides a cash growth feature not found with some other reverse mortgages - check with your lender to see how this works based on your personal needs and your payment plan.
Advantages:
The funds are yours to spend in any way you choose.
There are no monthly payments with a HECM.
Your loan funds do not affect Social Security or Medicare benefits. (If you receive Supplemental Social Security or Medicaid, these benefits may be affected.)
You do not have to pay back the loan until you sell your home or no longer use it for your primary residence. Then, you or your estate will repay the cash you received from the HECM, plus interest and other finance charges to the lender. This means that the remaining equity in your home can be passed on to your heirs through the sale of the property.
You will never owe more than the value of the home at the time of repayment, even if the loan balance exceeds the value of your property. This means no debt will ever be passed along to the estate or your heirs.
Details:
You and any co-borrowers must be at least 62 years old.
You must own your home outright - or carry a small mortgage balance.
Eligible properties include a single-family home, a two- to four-unit dwelling, a condominium or a manufactured home. All housing types must meet Federal Housing Administration (FHA) guidelines. (Ask your lender if your property qualifies.)
Your home must be your principal residence, which means you must live in it more than half the year.
You must attend pre-application reverse mortgage counseling before you apply for the loan.
You must keep applicable taxes current, as well as maintain insurance coverage on your home.
The amount you can borrow with a HECM depends on the age of the youngest borrower(s), the interest rate, how much your house is worth, and the maximum claim amount. In general, you can get between one-third and one-half of your equity as a line of credit or as a lump sum payment.
The balance of funds advanced against the equity in your home is due and payable when you relinquish your home as a primary residence, or if the borrower(s) pass away. You may have to pay off the debt if you fail to pay property taxes or insurance or if you do not maintain your property.
|
Home Improvement Mortgages
|
|
Would you like to fix up an older home? Have you found a house that's almost perfect but lacks the master bedroom and bath you want? Are you thinking about remodeling your kitchen, or repairing the roof, gutters, and siding? By choosing to buy and fix up a home or by renovating your current home, you can make your dream house a reality. And with the right financing, you can do it economically. If you've decided to purchase and improve an older home or plan to enlarge, upgrade, or repair your existing home, you'll have to decide how to finance the work.
|
Low Down Payment Mortgage
|
|
Recognizing that saving enough money for a down payment can be a major stumbling block to buying a home, lenders have developed a wide array of low down payment mortgages. These products are ideal if you have limited funds for closing costs as well. All these mortgages let you borrow up to the amount of the current loan limit toward the purchase of a one-family home that you intend to make your primary residence. The loans are generally designed for home buyers with very good credit histories; other low down payment loans offer more flexible qualifying requirements and may be particularly helpful if you have a limited income.
|
Reverse Mortgage
|
|
Unlike a traditional mortgage that you pay back each month, reverse mortgages provide payments to you. They, in effect, "reverse" the direction of the mortgage payments. With reverse mortgages, no repayment of the loan is required until you no longer occupy the home as your principal residence. At that time, the loan is due and payable. If you and any of your co-borrowers are at least 62 years old and own your home free and clear of a mortgage or have very little mortgage principal outstanding, reverse mortgages may be for you. They provide an excellent opportunity for older Americans to enjoy extra security and financial support. To provide additional housing options for older homeowners, HUD insures reverse mortgages under the Home Equity Conversion Mortgage (HECM) program.
|
Rural Housing Loan
|
|
Borrowers in rural areas have easier access to affordable housing, due to partnerships with the Rural Housing Service on its Section 502 Guaranteed Rural Housing Loan and its Rural Direct Leveraging Loan. The loans are backed by the Rural Housing Service, a division of the U.S. Department of Agriculture.
To learn more: Contact the nearest RHS office for information on qualified areas within your state and names of participating lenders. The RHS Web site may also provide additional information.
Advantages:
No down payment is required for low- and moderate-income buyers.
Affordable monthly mortgage payments.
Often times, below market interest rates are offered on the Rural Direct Leveraging Loan.
No cash reserves required in your savings account when you go to closing.
You need less cash up-front than you would for FHA loans.
Details:
The borrower's income is limited to 115 percent of the area median income for the guaranteed loan and 80 percent of the adjusted median income for the Direct Leveraging Loan.
Single-family, non-farm, owner-occupied principal residences, including new manufactured housing units, are eligible.
Eligibility is limited to rural areas, which generally have a population no more than 10,000. In areas far from major metropolitan cities, the town population limit (where the property is located) may be as high as 20,000.
|
(back to top)
|
Refinancing Information
|
All About Points: What You Should Know
|
|
So you're thinking about refinancing. Why not? The rest of America can't seem to get enough of refinancing, and with good cause. Last year, the Federal Reserve dropped interest rates 11 times, and mortgage rates dropped lower than they'd been in 30 years. The trend continues with rates holding pretty steady. The bottom line is -- how can you save money on your home for the life of the loan?
Lower Your Rate with Points
A point, defined as charges paid to the lender, usually paid at closing, equals one percent of the loan amount. If you have a $250,000 house, one point is $2,500. If you're planning to refinance your home at say 6%, for example, you may want to consider making your interest rate even lower by paying one point. Reducing the interest rate by paying these points is called "buying down" the rate because you're paying interest up front. Points are also referred to as "prepaid interest". In some instances, a lender may finance the points so you will not have to pay them up front. If you do have to come out of pocket for the points at closing, you would just add it to the other closing fees for the loan.
Before you refinance, compare different lender rates and points. Usually, a lower rate indicates more points. For example, a lender may charge six and three quarter percent interest with one point. Generally, each point that you pay will reduce the interest rate offered by the lender by about one-eighth to one-quarter of one percent.
When to Use Points
If you plan to move within two years of refinancing, paying points might not be a good idea. It takes about 5 to 7 years to recover the cost of points paid at closing. James Morgan has a 30-year fixed mortgage loan for $100,000. James has an interest rate of 6 3/4% with one point and his monthly payment is $645. If he did not pay the point, his interest rate would be 7% and his monthly payment would be $661.17. So the point saves him $16.17/month. In five years, James will have recouped the point he paid to get the lower rate. Because he will continue to pay lower payments each month after that, James will benefit from lower monthly payments. But if he moves after two years, he will not recover his costs.
|
Tax Tips
|
|
Note: The following includes an overview of tax laws that is not intended as legal advice. You should consult a tax advisor to get answers to your specific tax questions.
If you itemize on your tax return, you should be able to deduct the points you pay either upfront in the year you pay them or each year during the life of the mortgage. You may be able to deduct points paid at closing and in the year they are paid by meeting the following requirements:
Cash Accounting - You report income yearly and deduct expenses you've paid for that year.
Permanent Address - Your loan is secured by your primary address
Status Quo - Points are a standard practice where you live
Origination points - The points were not lender fees (i.e. amounts paid to originate and process your loan)
Homeowners who will claim itemized deductions on their tax returns and who purchased last year should be eligible to deduct all the points paid at closing, even if the seller paid the points. If the points on your loan are not deductible in the first year, you can generally deduct them over the life of the loan. In addition, the IRS has ruled that you can deduct the points on future returns even if you are claiming a standard deduction.
|
Is Now The Time To Refinance?
|
|
With mortgage interest rates at their lowest point in years, the time may be right for you to refinance your existing mortgage. What is involved in the process? Will your monthly mortgage payment be lower? Will it be worth the cost of refinancing? With possible rate increases on the horizon, the time to consider refinancing is now.
|
The Refinance Process: Is It Right for Me?
|
|
To determine whether a refinance might be right for you, you should begin to think about the following questions:
What are your reasons for refinancing?
How long you plan to stay in your home?
How much equity you have built up in your home?
What is the interest rate of the existing mortgage?
What is the interest rate of the new mortgage?
What costs are associated with refinancing?
What is your current income and credit status?
To be eligible to refinance, a lender usually requires that you have at least 10 percent equity accumulated in your property.
|
Why Refinance?
|
|
A refinance of your current loan may make sense for several reasons:
You may want to get a mortgage with a lower interest rate to reduce your monthly payment.
You may want to borrow additional funds for home improvements, education bills, or other needs. This is often referred to as a "cash-out" refinance.
You may want to switch from one type of loan product to another: for example, from an adjustable-rate loan (ARM) to a fixed-rate loan. This may make sense if interest rates have fallen since you took out your ARM and you now want the assurance that your mortgage payment will remain the same for the life of your loan.
One common type of refinance is when you have an adjustable-rate mortgage and you refinance to a fixed-rate mortgage. Your mortgage payments with an ARM adjust with changes in market rates; so when interest rates go up, your monthly payments likely go up at the next rate adjustment period. But with a fixed-rate mortgage, your interest rate stays the same for the entire term of your loan. The predictability that comes with locking in the same interest rate for as long as you live in your home is one reason why changing from an adjustable-rate mortgage to a fixed-rate loan is one of the more popular refinancing choices -- especially when interest rates are falling.
Here is another scenario. You might want to change from one type of ARM to another ARM to get a better combination of rate and term: for example, from a one-year ARM to a 5/1 ARM (in which the new rate remains fixed for the first five years and then adjusts annually). You should compare the financial index, margin, and any rate caps in your existing ARM with current market rates before you decide to refinance to another type of ARM. It is important to understand how often your mortgage will adjust and how much your payment can change with each adjustment and over the life of the loan. Also, be sure to ask whether any conversion terms apply or if there are costs to convert to another type of mortgage.
Another reason to refinance is to use the equity in your home, perhaps for a major purchase, a child's education, or even debt consolidation. You have been building equity in your home since you first started making monthly mortgage payments. A portion of your payments is used to pay principal -- helping you build equity -- and the rest is used to pay interest, taxes, and insurance. With this type of refinance -- often referred to as a "cash-out" refinance -- your new loan lets you draw on the equity in your home and provides an easy way to get cash you may need for other purposes.
|
Refinancing: Beneath the Surface
|
|
Refinancing can do a lot for you. From lowering your mortgage and interest rate, to getting a shorter loan term, to absolving your spouse from the deed, to trading an ARM for a fixed rate, to protecting yourself in case of a job layoff, refinancing can be used as a serious strategy for long term savings.
Strategy #1 - Don't Wait to get Lower Rates
Refinancing generally becomes cost effective when current interest rates are lower than your current mortgage rate. This strategy may lower your monthly payments as well as the interest over the life of the loan. For example, say you have a $300,000 30-year loan at a fixed rate of 7%. You refinance at 6.5% which will save you approximately $100.00 a month, and about $35,000 in interest over the life of the loan.
Strategy #2 - Less is More
By reducing your loan term from 30 years to a 10, 15 or 20- year loan, not only can you speed up the equity process, but you can lower the total interest rates and pay more towards the principle. Robert Benson moved into his house 6 years ago with a salary of $23,000. Robert now owns his own business and makes $60,000. By shortening his loan term, he will pay a slightly higher mortgage, but he can afford it. He will also be able to pay off his home loan before he retires.
Stragegy #3 - Separate When You Separate
If you are divorced, you can remove your ex-spouses name from the deed by refinancing, because, in a refinancing, the old loan is paid off and you get a new one. Consider Gretchen and Byron Martin, who divorced 6 months ago. Byron leaves the house to Gretchen, who is able to afford the mortgage by herself. Now Gretchen can refinance and change her interest rate from 7.5% to 6%. Refinancing will also make her solely responsible for the property.
Strategy #4 - Take the Surprise out of an ARM and get it FIXED
When interest rates run high, many owners take advantage of an Adjustable Rate Mortgage (ARM) which tend to offer great introductory interest rates. However, the key word is "adjust". Your interest rate could change considerably after a specific time period. Trading in your ARM for a fixed rate is another effective refinance strategy. Jason and Renee moved in their house 5 years ago. They were offered a loan with a fixed interest rate of 8%. Instead, they opted for a five-year arm of 5.59%, which was due to adjust in five years. After their initial 5-year rate period expires, their mortgage rate, which resets based on the one-year Treasury rate, could increase by two points a year or more. Since they plan to stay in their house, it makes sense for them to refinance now to get a new loan with a fixed rate of 6%.
Stragegy #5 - Don't Let A Layoff Force You to Layoff Mortgage Payments
With such a volatile economy, layoffs and pay reductions have become common. One of the ways you can protect your home after being laid off, is to refinance for more than the balance and put the difference in a safe place. This strategy is called "cashing out". Linda, who works in Human Resources for her company, found out they were going to lay off 70 people. She wondered if she would be one of them. With no children and no car note, Linda only worried about her mortgage. She pays $1,538 a month on a $200,000 30 year-fixed loan at an 8.5% interest rate. She refinanced at 7.5%, and is able to borrow an extra $20,000 to put aside just in case she's one out of 70.
|
Refinancing: Myths vs. Facts
|
|
There are times in the mortgage industry when the market dictates certain advantages: Whether it's a good time to buy or sell a home for instance. You may have several reasons for wanting to pay off your old loan and secure a new loan through refinancing. Listed below are a few popular myths/misperceptions about refinancing.
Myths and Facts
Myth #1 Refinancing simply means making a few changes to my mortgage.
Fact #1 Refinancing is the process of acquiring a brand new mortgage, and using the money to pay off or close your old mortgage.
Myth #2 When the Federal Reserve cut the rates again, I'll get a super deal.
Fact #2 Federal rate cuts don't always mean mortgage rates will be lower. Generally, Fed rate reductions are figured into mortgage rates weeks before an anticipated rate cut occurs through Treasury yields.
Myth #3 It's going to cost me too much to refinance.
Fact# 3 Probably not. Because this is such a competitive environment for refinancing, you may be able to convince a mortgage company to waive some of the application, appraisal and legal fees, which can run you up to $3,000. Also, work with your lender to figure out how much you can save each month. With a good deal, you will be able to recover your refinance costs in a couple of years and save thousands of dollars in interest over the life of the loan.
Myth #4 There are always penalties for paying off my loan early.
Fact #4 Some states prohibit penalty points for paying off an original loan before amortization. The cost of a refinance depends on the number of points, interest rates and other costs for securing the loan.
Myth # 5 The only time to refinance is if current interest rates drop a full 2% below my rate.
Fact # 5 As the amount of loans increase, and the cost of refinancing stays relatively stable, a mortgage rate ranging from 3/8 to 1/2 a percentage point may make sense to refinance, and save you thousands of dollars. For example, a fixed 30 - year $200,000 loan, borrowed at 7% compared to 7.5%, will save more than $24,000 throughout the life of the loan.
Myth #6 It's ok for me to refinance with less than perfect credit.
Fact #6 Although you may be eligible for a refinance due to the amount of equity in your home, where you stand with your credit could make a substantial difference in the rate you will be offered.
|
Refinancing: Popular Questions
|
|
Buying a house is probably one of the largest purchases you'll ever make. Refinancing is probably one of the smartest strategies you can accomplish to save thousands of dollars in your investment. Although there's a lot of general information about refinancing, it's good to know the specifics. Here are answers to some commonly asked questions:
Popular Questions
When does it make sense to refinance? People usually refinance for 3 basic reasons:
To lower their interest rate - Will save thousands of dollars over the term of the loan.
Extend/Change the term of their mortgage - Switch mortgage products (i.e. Adjustable Rate Mortgage to a Fixed Rate or change the term of the loan from 30 years to 15 years to save thousands of dollars in interest).
To get cash out - Leverage the value in your home by using the cash received at closing for a large purchase, such as college tuition or renovation.
What factors should I consider before refinancing? There are a few things to consider before you begin the process of refinancing:
Your reasons for refinancing.
Your current interest rate.
The interest rate of the new mortgage (should be 1 to 2 points lower than current rate, say from 8% to 6%).
The total cost of refinancing (includes title, appraisal, legal, inspection, origination, settlement fees, discount points, etc.).
The equity you have in your home (at least 5% to qualify).
The length of time you plan to stay in your home (is it worth it to refinance, when it's going to take 3 years to recover your costs and you plan to move in two?).
Credit (in good standing).
Current Income.
Tax Benefits (know IRS refinance rules).
Time it takes to recover your refinance costs (up to three years).
What are the different types of refinancing? There are several refinance options available to suit your needs:
Traditional - With this type of financing, you will pay off your existing loan and secure a new one at a lower interest rate. Refinancing is structured to save you thousands of dollars over the life, or term, of the loan.
Accrue Equity more Quickly - In an attempt to build value (equity) faster, you can refinance a 30-year mortgage with a 15 or 10 year loan. This will lower your total interest and accelerate the equity in your home. Equity is defined as the value of your home minus what you have left to pay on your mortgage.
Cash Out - With this refinancing option, you can leverage the equity in your home, and receive the cash when you close on your loan.
Low Cost Refinancing - You may be able to get some of the fees and closing costs waived, which will reduce your up front fees. By negotiating with your original lender, you may be able to get a reprieve on point reduction, title search, application or credit check fees.
No-cost Refinancing - This type of refinancing will save you out-of-pocket costs during closing. However, it's important to note that you may pay a slightly higher interest rate.
Mortgage Product Change - You may be able to benefit from switching mortgage products. For instance, say you originally financed with an Adjustable Rate Mortgage (ARM) when rates were higher. Typically, ARMS have lower interest rates than fixed loans for the first few years. But, now that you've been in your home a while, you may prefer a mortgage that is more stable than an unpredictable ARM. Consider refinancing to a fixed rate loan, which will remain the same until you've paid off your mortgage.
How many rate quotes should I get? It's important to remember, refinancing involves more than a good rate, there are several built-in costs and fees you should be aware of. You want to be able to compare the Annual Percentage Rate (APR), which indicates the total credit cost of the refinancing. Take a look at the fixed rate comparison chart to see the types of questions you should ask every lender you call.
How much will a refinance cost me? Your total expenses for a refinance depends on the number of points, interest rate, and associated costs of preparing the loan. In an effort to provide you with a low rate, a lender may charge discount points that average three to six percent of the borrowed amount. If you have a $100,000 mortgage, 3 to 6% will cost you $3,000 to $6,000 to close.
Can I change my mind? Yes. You have three days to change your mind about the loan. Officially, it is called your right to recision. According to federal law, you are allowed to cancel the refinance process after settlement, receipt of your Truth In Lending (TIL) statement, or receipt of your cancellation notice. You are required to put your recision in writing.
|
Refinancing Essentials: The Basics
|
|
What Costs Are Associated With a Refinance?
Would you like to get more value in your home by getting a loan with a shorter payoff term?
Are you thinking about refinancing your mortgage, but feeling unsure about the process?
If you answered yes to any of these questions, then you may well be a candidate for refinancing your loan.
What is Refinancing?
When you refinance, you pay off your old loan and get a new one. Just as you did for your original loan, you'll pay settlement costs, related fees and discount points when you close. Refinancing is designed to help you save money over the life of your loan with lower interest rates, or to take advantage of the difference in cash from the value you've earned in your home, or equity.
What does it cost?
Just as every snowflake is different, so are the associated costs for refinancing, depending on interest rates, points, and other required costs. For a traditional refinance, you may have to pay in the range from 3% to 6% of the principle on your mortgage. Here are a few items you should expect to pay for:
Fees relating to your loan
A fee to have your property re-appraised (unless you refinance with the same lender)
A credit report fee
A loan application fee, which covers the lender's cost to process your application
A loan origination fee, which covers the lender's work in evaluating and processing your loan, generally expressed as a percentage of your loan.
Other fees, depending on the type of mortgage refinancing you are seeking, may include private mortgage insurance (PMI) a VA loan guarantee, or FHA mortgage insurance.
Pre-payment penalties, which some mortgages carry for paying off the loan before the term has expired.
Discount points lower your interest rate. Each discount point equals one percent of the loan amount. For example, one point on a $150,000 mortgage equals $1,500. Points are paid up front at closing.
Closing costs
A fee for a search of the public records of ownership of your property
A title insurance policy, which protects the lender for any loss due to a discrepancy in the title. (You may be able to have your settlement company reissue your current title policy at a reissue rate, saving you some of the cost to have this service performed.)
A new survey of your property to confirm that no changes to the land or physical structures have been made that would affect its potential sale.
Attorney's fees and most of the other fees associated with closing.
Many lenders offer a "no-cost" refinance in which the fees and other costs are absorbed in the new mortgage. This means that you may have limited or no out-of-pocket costs at closing, but the lender may increase the interest rate or add the cost to the principal amount you borrow thus increasing your monthly payment.
Note that if you choose to pay points, generally these are tax deductible over the life of the loan unlike the total deduction you may take when you first purchase the home. So if you refinance with a 30-year mortgage and pay $1,500 in points, you likely will be required to deduct 1/30 of $1,500 or ($50) each year you own the home, rather than deducting all $1,500 in the year you do the refinance.
What's In it for You?
While the benefits of refinancing seem apparent when interest rates drop, you have to add lender fees and closing costs. It will take some time to recover the costs of refinancing your mortgage. You can calculate how long it will take to recover your up-front refinancing costs through lower monthly mortgage payments with this simple formula:
Refinance Costs/Monthly Savings = Months to Recover Costs (Approximately)
|
Refinance Essentials: The Nuts and Bolts
|
|
Refinancing may save you thousands of dollars over the life of your loan. Here's how:
The "IF" Factor
If the current interest rate is at least 1.5 to 2% points lower than the rate you originally financed,
If you've been in your house long enough to build equity,
If you bought your house with equity (i.e. foreclosure),
If you need a large sum of money (i.e. cash-out),
If you can convert your 30 year mortgage to a 20 or 15 year mortgage, shortening your term and reducing your interest rate,
If you can convert an Adustable Rate Mortgage (ARM) to a fixed rate or an ARM with better terms,
You may want to consider refinancing.
How Does a Refinance Work?
The refinancing process is similar to the one you followed when you got your first mortgage loan. The four-step process is listed below:
1. Check Your Credit
You should order a copy of your credit report and review it before beginning the refinance process. You can also order a credit report by contacting one of the major credit bureaus:
Equifax: (800) 685-1111; www.equifax.com
Experian: (800) 682-7654; www.experian.com
Trans Union: (800) 916-8800; www.tuc.com
2. Get Your Paperwork Ready
It's likely you will have to provide the lender with documentation and information that are similar to those you submitted for your original loan. This checklist can help you organize your paperwork and get it ready for your new loan application. Check with your lender to find out if additional documentation is required.
Income - W-2s for the past two years - paycheck stub(s) covering the past 30 days (must include year-to-date earnings, name and Social Security number) Note: If you are self-employed, you may also need to submit the most recent years' personal tax returns proof of other income for consideration in loan application such as alimony, child support, or gift letter.
Assets - bank statements covering the past 3 months for all savings accounts, checking accounts, 401(k) accounts, and any other asset account
Debts - documentation for liabilities -- most recent loan statement for current mortgage, student loan, car leases/loans, and credit card debts, as well as alimony and child support, if applicable
Other original property settlement documents -- deed, deed of trust, survey, and title policy insurance policies -- homeowner and flood, if applicable insurance policies -- homeowner and flood, if applicable
3. Apply for Financing
Figure out the type of mortgage that best meets your needs.
Decide whether you want to tap into some of the equity in your home by applying for a "cash-out" refi, or whether you prefer to minimize up front costs by a "no-cost"refi.
Talk to your loan officer for advice on how best to accomplish your financial goals.
Discuss with the loan officer interest rate lock options and when best to lock in a rate.
Be sure to review your disclosures (which should be given to you at application or within 3 days), in particular:
Good Faith Estimate of Settlement Costs, which estimates your closing costs.
Truth in Lending statement, which shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.
Find out how long the process will take before you get a commitment and can close the transaction. Generally, refinances are processed much faster than purchase loans. Check that your rate lock extends to the scheduled closing date (and a little beyond for safety).
4. Close the Loan
You have the option of choosing your own settlement attorney or using the one recommended by the lender. The closing attorney and lender will coordinate all the necessary paperwork. Request a copy of the settlement statement (also called the HUD 1) prior to closing so that you can review all the costs. Unless you are getting a "no-cost" refi, you will need to bring a cashier's check to settlement.
When you refinance, you have 3 business days after closing in which to change your mind and rescind the transaction. This is called the rescission period. Until that time is over, no funds are disbursed, so your old mortgage is not paid off and your new mortgage is not funded. If you do have a change of mind, you must notify the settlement attorney in writing by midnight of the third day.
|
Refinancing: Things You Should Know
|
|
Now that Refinancing is popular, it is important for you to understand that there could be some companies that might try to take advantage of you. From giving you phony rates over the telephone to adding ridiculous hidden costs in your loan, some financial companies will do anything to make money off of you. Here are some tips to make sure that you get the most out of your refinance experience:
Tips:
Make sure the company is reputable
Many new companies will try and get a slice of the refinance pie. Lack of experience, no reputation, and no company history are just a few of the factors that can contribute towards a bad deal.
What should you do? Ask lots of questions and make sure you feel comfortable with their level of service. Make sure you understand every aspect of your refinance process.
Know What Questions to Ask
It takes more than calling a lender and asking "What's your rate?" A lender could tell you the rates are at an all time low of 5%. But what they don't tell you is that there are three origination points involved, there are 20% refinance penalties involved, etc. It is your responsibility to ask about the conditions of the rate, talk about the kind of loan you need, i.e. cash-out, low-cost refinance, lock period, etc. Did you know that a loan with a lock period of 15 days is much lower than 60 days? But how many of us are prepared to go to closing in two weeks? So be careful, and be specific.
Refinance for the right reasons
Don't exchange one debt problem for another. Aggressive debt collectors may be putting the pressure on you to pay outstanding medical expenses, credit card debt, etc. You may feel that by refinancing your property and receiving a "cash out " payment, everything will be ok. Make sure you understand that "cash out" refinancing might mean that you owe even more debt, especially if you use your house as collateral to consolidate debt. A higher mortgage loan balance may mean you need to make a bigger monthly mortgage payment when you're trying to save money with penalties, charges and fees. You need to understand that if you fall behind on your mortgage payments, the lender can take your home in a foreclosure on the mortgage loan.
3 is the magic number
You have a right to change your mind about the refinance process. The law says you have 3 days to cancel a refinance deal. It is called the right to recision. So if you feel you have erred, or refinancing isn't for you at this time, you may opt out by signing a letter with the date and cancellation of the transaction.
Tax Facts
It is important to understand the tax rules of a refinance, or hire someone who does. There is tax deductible interest on a mortgage, but it won't count if you don't itemize. Or, if you refinance twice, there are potential tax write-offs for the points that haven't been deducted from the life of the loan that can be written off in a lump sum. There can be lots of tax benefits for you, but you need to be certain you are complying with current federal and state tax laws.
"The above information is a general discussion of tax rules and not intended as a substitute for the professional advice of attorneys, tax preparers, or others. Your tax treatment depends on your particular circumstances, therefore, you should consult a tax advisor or Internal Revenue Service materials to determine how the rules apply to you."
|
The Costs of Refinancing
|
|
If you are considering refinancing your existing mortgage, it is important to understand the costs and fees you'll have to pay and how long it will take you to recover those costs. This article provides in-depth information about refinancing, and takes away the questions about how the money is allocated during the process.
What You Can Expect To Pay
Refinancing is similar to applying for an original mortgage, so you can expect to pay similar costs. Some of these may include:
An application fee, which covers the lender's cost to process your application.
A fee for a search of the public record of ownership of your property.
A title insurance policy, which protects the lender for any loss due to a discrepancy in the title (you may be able to have your settlement company re-issue your current title policy at a reduced rate, saving you some of the cost to have this service performed).
A fee to have your property re-appraised.
A new survey of your property to confirm that no changes to the land or physical structures have been made that would affect its potential sale.
A loan origination fee, which covers the lender's work in evaluating and processing your loan. It is usually expressed as a percentage of your loan.
Other fees, depending on the type of mortgage refinancing you are seeking, may include a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance.
Other Costs and Considerations
Some refinance costs may be waived under certain circumstances. For example, an appraisal may not be necessary if you refinance with your original lender. Or you may be able to get a lower rate or have some of the fees dismissed with through negotiation.
If you have additional cash for the closing, you may be able to bring your interest rate down by having discount points applied to your new mortgage. Each discount point equals one percent of the loan amount (for example, one point on a $150,000 mortgage equals $1,500).
Be sure to ask your lender if your existing mortgage contains a prepayment penalty. Many states limit this penalty or prohibit it altogether.
You may choose to hire your own attorney to review documents and to represent and guide you through the stages of this transaction. If you do, you will have to pay your attorney out of your own pocket.
Check with the lender to see if "no-cost" financing is offered. Under this plan, you don't pay many of the typical costs, but the interest rate on your mortgage may be higher.
You may be able to save paying some fees by talking to more than one lender and selecting the one that best meets your refinancing needs at the lowest cost.
Recouping Your Costs Over Time
An important question to ask before starting the refinance process is "How long will it take to recoup the up-front costs of the refinance?" In some cases, you may have to remain in your home for several years before you have recouped these costs.
To determine if you're likely to recover the fees you pay to refinance within an acceptable amount of time, just divide your total refinancing cost by your total monthly savings. This will show you approximately how long it will take to recover your up-front costs through your lower monthly mortgage payment. If you find it would take longer to recover your costs than you plan to remain in your home, you may not want to refinance your mortgage. Your lender can help you make this decision.
|
The Money You Need to Refinance
|
|
Financially, refinancing shouldn't hold too many surprises for you. Primarily, you are paying off your old loan and securing a new one. Many of the costs are similar to what you paid when you first closed on your existing property. You may be able to eliminate costs and save even more money during the refinance process.
How Much Money Do You Need?
To take full advantage of lowered interest rates, your lender may charge 3 to 6% of the principle, or total amount you borrow. For example, if your original mortgage was $80,000, and you've paid $20,000 to have a remaining principal of $60,000, then your refinancing costs will average $1,800 to $3,600.
Today, since market conditions are favorable for refinancing, several lenders offer low to no-cost refinancing in return for a slightly higher interest rate, or increased loan amount. Typically, the lender will build in fees that are usually paid up front to save you out of pocket costs. In the case of low-cost refinancing, you may have to pay something like $500.
Just in case you've gotten a little rusty, here are a few estimated costs to use as you consider refinancing. Some of these costs may not be charged in your situation. It's also important to remember that these costs are estimates; your actual costs will vary depending on lender and state.
Application Fee: $75 - $300
This fee covers your credit check, and the initial cost of processing the loan.
Appraisal Fee: $150 - $400
This will cover the cost of an appraisal for your property. If you are using your existing lender, they should already have this information in their records.
Survey costs: $125 - $300
Hazard Insurance: $300 - $600
Legal Fees: $75 - $200
These fees will pay for the attorney used for closing on behalf of the lender.
Title Fees: $450 - $600
This will cover the amount of cost of a policy insuring the policyholder for a certain dollar amount to cover property loss. The fee will also include the cost to examine public records to validate the property owner.
Home Inspection: $175 - $350
Points: 1 - 3% of loan amount.
Defined as the percentage of fees the lender will charge to originate, or prepare the loan, there are two kinds of points; origination and discount. Discount points are prepaid finance charges to help you get a lower interest rate. One point is equal to 1% of the value of the mortgage. So, if your property is valued at $100,000, a point is equal to $1,000.
Origination Fees: 1% of the loan
The lender charges you this fee to evaluate your application, process it and prepare the loan.
Other - Whether your mortgage loan is FHA, Conventional or VA, you may have to pay for a VA loan guarantee, FHA or Private Mortgage Insurance (PMI), or pre-payment penalties.
As you can see, your costs for refinancing can add up. However, talk to your lender, as they may waive some of these costs, such as title search, inspections and surveys. Make sure you ask specific questions, and ask them to present you with an itemization of charges before closing.
|
The Refinancing Process
|
|
Thinking about refinancing your mortgage but feeling unsure about the process? Are you wondering if you can lower your monthly mortgage payment but aren't sure if it would be worth the cost of refinancing?
The refinancing process is similar to the one you followed when you got your first mortgage. In a nutshell, refinancing involves paying off your existing mortgage and taking out a new one. Your new mortgage could be at a more attractive interest rate, for a different term, or an entirely different type of mortgage (such as refinancing from a fixed-rate to an adjustable-rate mortgage).
A good place to start when considering whether to refinance is to ask yourself several questions. How long do you plan to stay in your home? Is the current mortgage interest rate more attractive than the one you have? How much equity do you have in your home?
You may want to take advantage of lower interest rates to reduce your monthly mortgage payments or you may want to build equity in your home faster by refinancing to a shorter-term mortgage. Ask several lenders about the interest rates they offer, as well as any costs associated with refinancing.
You may want to start your search for a new mortgage with the lender you used the first time. Sometimes, this lender will give you a better deal to keep you as a customer. You can also get refinancing information from a real estate sales professional you've worked with in the past.
|
True or False - Take a Quiz!
|
|
Statement: The best time to refinance is when the interest rates fall at least 1/2 point. T or F?
True. The best time to refinance is when current interest rates are lower than your current mortgage rate.
Statement: Refinancing is a great idea if you're going to move in two years. T or F?
False. It takes approximately three years to recover the cost of refinancing. If you are planning to move within two years, you may lose money in the deal. If the interest rate difference is considerable, say for 1 and 1/2 points or more, you may still want to consider refinancing, especially if you can get a "no-cost" loan, which will reduce your mortgage payment.
Statement: You can refinance without putting any money down. T or F?
False. You are required to have at least 5% equity in your home before you refinance.
Statement: You can refinance without having any equity in your home. T or F?
True. There are different refinance options, such as no-cost refinancing. The lender may build your fees into the loan.
Statement: You can refinance to get money back during closing, called a cash-out refinance. T or F?
True. One refinance option is called a "cash-out." This option allows you to get cash back on the approximate amount of equity in your home during closing. Homeowners use this option for a variety of reasons, including college tuition, or to pay outstanding debt.
Statement: Refinancing usually takes about 6 weeks on average. T or F?
False. Refinancing can take anywhere from two weeks to a month. To expedite a refinancing, one rule of thumb is to have most of your paperwork ready as soon as you're considering refinancing. You should also arrange to get an appraisal relatively quickly, if you need one.
Statement: There are no prepayment penalties in refinancing. T or F?
False. In some cases, there may be prepayment penalties. This provision in your contract stipulates that if you pay your mortgage loan off early, you will have to pay the lender a percentage of the interest. In some states, pre-payment penalties are not permitted.
Statement: You have three days to change your mind after closing a refinance deal. T or F?
True. The three days allowed by law is called your "right to recision".
Statement: Refinancing can lower your monthly payments, shorten your loan terms, lower interest rates and make more available money to pay and outstanding debt. T or F?
True. Refinancing can offer lots of flexibility and save you money during the term of your loan.
|
| Building Capital |
|
You would like to build home equity faster.
By decreasing the term of your mortgage, such as refinancing from a 30-year loan to a 20- or 15-year mortgage, you can usually get a better interest rate and pay off your mortgage loan earlier, saving thousands of dollars in interest costs. Generally, in order to pay the higher monthly payment of a shorter-term mortgage loan, you're making more money or you've got less debt.
|
(back to top)
|
|
