The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes it harder and more expensive to file for bankruptcy. Under this Act, credit card companies are now charging double for minimum payments and exorbitant universal default rates for missed payments. As a result, people are doing debt consolidation with home equity loans and mortgage refinancing by the droves.
But, what about people who have good rates for their existing mortgages? Interest rates are rising, and if you bought your house before the interest rates started rising, you may still need a bill consolidation solution, but a mortgage refinance doesn't make good financial sense. However, refinancing revolving debt with a home equity loan might. You may qualify for a 100% home equity loan. Then, you can use your home equity to refinance high rate credit cards, lowering monthly payments, so you can enjoy lowered interest and more money in your pocket.
100% home equity loans are generally tax deductible up to 100% of the value of your home. Your credit scores can rise due to lowered non-mortgage debt which, according to myFICO.com (a division of Fair Isaac), accounts for 30% of the weighted factors in your FICO scores. While there are adjustable rate and balloon payment loans available, it's best to get a fixed rate loan, so the monthly payments never change.
How do I qualify?
General qualification requirements are as follows. There may be additional requirements.
o A minimum middle FICO score of 600 for documented income loans, and a minimum middle score of 640 for stated income loans.
o Typically, six months seasoning to get a new appraised value.
o No bankruptcies and foreclosures in the last 2 years.
o Appraisal required for amounts above $35,000.
For greater savings:
o Find a lender that doesn't charge an application fee upfront.
o Consider the annual percentage rate (APR). This reflects the total cost of a loan by taking into consideration the interest rate plus any points and fees paid.
o Don't have your credit run until you've narrowed your choice to 2-3 lenders. Once you have your 2-3 lenders, compare loan disclosures before making your final choice. Loan disclosures include a good faith estimate of every expense associated with your home loan.
Making these comparisons will help you determine which mortgage broker is offering you a loan that saves you the most money each month.
Wednesday, 30 March 2011
Cash Out Refinance Vs Home Equity Loan - What's the Difference?
The end of the second quarter of 2010 is almost at an end and mortgage interest rates are currently near historic lows. This is very encouraging for anyone looking to secure a new mortgage or to refinance an existing mortgage at a lower interest rate.
Now might be a great time to consolidate some high interest bearing credit card debt, or to invest in a new addition to your home, or pay for an education. What ever the case may be, if you have equity in your home, there is a way to access that cash and spend it how you choose.
Generally speaking, there are two options to tap the equity in your home: cash out refinancing or a home equity loan. To determine which option is best for you, it is important to know the differences between the two options.
Cash out refinancing differs from a home equity loan in a few ways:
A cash-out refinance is a replacement of your primary mortgage
A home equity loan is a separate loan in addition to your primary mortgage
Interest rates on a cash-out refinance are often times lower than what you are charged for a home equity loan, although not always
When you do a cash-out refinance, you will pay closing costs
Generally, you are not charged closing costs when you secure a home equity loan
Home equity loans are generally better under the following circumstances:
If you simply want to access a small amount of your available equity
You need access to an open line of credit
You plan to pay off the home equity loan before your primary mortgage loan
A quick way to determine whether or not you should refinance is to compare your expected interest rate to your existing one. It never makes sense to refinance a higher amount at a higher rate. You should also pay attention to what you will be charged in closing costs if you decide to do a cash-out refinance since closing costs can often add up quickly, making the cost of refinancing too much to justify.
Work with a lender you trust and ask them for advice given your specific situation. They will be able to help you determine all of the associated risks and benefits so you can make an informed and comfortable decision.
Now might be a great time to consolidate some high interest bearing credit card debt, or to invest in a new addition to your home, or pay for an education. What ever the case may be, if you have equity in your home, there is a way to access that cash and spend it how you choose.
Generally speaking, there are two options to tap the equity in your home: cash out refinancing or a home equity loan. To determine which option is best for you, it is important to know the differences between the two options.
Cash out refinancing differs from a home equity loan in a few ways:
A cash-out refinance is a replacement of your primary mortgage
A home equity loan is a separate loan in addition to your primary mortgage
Interest rates on a cash-out refinance are often times lower than what you are charged for a home equity loan, although not always
When you do a cash-out refinance, you will pay closing costs
Generally, you are not charged closing costs when you secure a home equity loan
Home equity loans are generally better under the following circumstances:
If you simply want to access a small amount of your available equity
You need access to an open line of credit
You plan to pay off the home equity loan before your primary mortgage loan
A quick way to determine whether or not you should refinance is to compare your expected interest rate to your existing one. It never makes sense to refinance a higher amount at a higher rate. You should also pay attention to what you will be charged in closing costs if you decide to do a cash-out refinance since closing costs can often add up quickly, making the cost of refinancing too much to justify.
Work with a lender you trust and ask them for advice given your specific situation. They will be able to help you determine all of the associated risks and benefits so you can make an informed and comfortable decision.
Home Equity Loan Refinance - 3 Things to Know Before Refinancing Your Equity Loan
You can refinance your home equity loan for lower rates, just like with any other type of credit. Improving your credit and shopping for rates ensure that you will get the best financial deal. Researching lenders couldn't be easier with rates and terms offered online for easy comparison.
1. You Can Improve Your Credit Score
Credit scores are fluid, changing every time you pay a bill or open an account. While huge credit score improvements take time, you can quickly polish your score with a few steps.
First, check your free annual credit report for any errors. Also, spread out any credit card debt amongst your accounts so no card is maxed. Paying off debts and closing unused credit accounts are also good steps.
Improving your credit will improve the rates you qualify for, along with other types of credit. However, even if you don't dramatically perk up your credit score, you can still find great rates.
2. Lenders Charge Different Rates
Lenders charge different rates than what are being quoted in the news. Financial companies determine their rates based on market demands and competition. You can find these below average rates by shopping around.
Don't just stick with the big named companies. Less known companies often offer better rates and terms in order to compete. Online access allows you to find these great deals. You may also find good rates through a broker site.
While a difference of less than a percent may seem trivial, it can save you hundreds over the course of your loan. Taking some time to research lenders is really an investment that pays real dividends.
3. You Can Request Free Quotes
Financing shopping couldn't be easier or faster with the internet. Most lenders post their financing information online. You can also request a basic quote by providing some preliminary information.
By requesting quotes first, you can compare lenders without filling out a ton of paperwork or authorizing a credit check, which temporarily hurts your credit score.
While rates are easy numbers to look at, search for the APR, which includes both fees and rates. That way you can be sure you won't get stung with large upfront costs.
1. You Can Improve Your Credit Score
Credit scores are fluid, changing every time you pay a bill or open an account. While huge credit score improvements take time, you can quickly polish your score with a few steps.
First, check your free annual credit report for any errors. Also, spread out any credit card debt amongst your accounts so no card is maxed. Paying off debts and closing unused credit accounts are also good steps.
Improving your credit will improve the rates you qualify for, along with other types of credit. However, even if you don't dramatically perk up your credit score, you can still find great rates.
2. Lenders Charge Different Rates
Lenders charge different rates than what are being quoted in the news. Financial companies determine their rates based on market demands and competition. You can find these below average rates by shopping around.
Don't just stick with the big named companies. Less known companies often offer better rates and terms in order to compete. Online access allows you to find these great deals. You may also find good rates through a broker site.
While a difference of less than a percent may seem trivial, it can save you hundreds over the course of your loan. Taking some time to research lenders is really an investment that pays real dividends.
3. You Can Request Free Quotes
Financing shopping couldn't be easier or faster with the internet. Most lenders post their financing information online. You can also request a basic quote by providing some preliminary information.
By requesting quotes first, you can compare lenders without filling out a ton of paperwork or authorizing a credit check, which temporarily hurts your credit score.
While rates are easy numbers to look at, search for the APR, which includes both fees and rates. That way you can be sure you won't get stung with large upfront costs.
How a Home Equity Loan Refinance Can Save You Money - Should You Refinance Your Texas Home Loan?
In Texas you can refinance your home as well as your investment property. And with today's low mortgage rates, lots of people are doing just that using home equity loans
Plus some are doing the two-birds-one-refinance-approach: Refinance the home and pull cash out.
When it comes to refinancing, you have two options. A "rate and term" refinance or a Texas home equity loan "cash out" refinance.
With a home equity loan you pull equity out of your home or investment property.
Most people refinance to get a lower rate; this is called a "rate and term" refinance. One is keeping the same loan amount, they are just lowering or changing the rate or term of the mortgage.
Maybe they are moving out of a 30 year note to a 15 year note. This is called a rate and term refi because they are just changing the rate or the term of the original loan.
Lower mortgage rates do mean lower payments. But some clients choose a "cash out" refinance (Home Equity loan)- which means they pull equity (cash) out of their homes or investment properties for other purposes ...like paying off debt or buying additional property.
For example, let's say a family has a $450 car payment where they owe $15000. If they have enough equity in their home, it's common for a family to refinance the home and pull enough cash out of their home to pay off other costly debt; like credit cards, cars, etc. The house payment might go up $50 but the car payment is eliminated. So a family has $400 more each month.
Some suggest against home equity loans to pay off debt stating it's not wise to take a 3-5 year debt and spread it across 15-30 years. And these people are right. However, when I help a client save $400-500, sometimes $1000/month now these families can afford to pay extra on their 30 year mortgage and pay it off in 12-15 years.
In fact, most of the time a family will pay their home off earlier-after a home equity loan-than they would have before.
You can always call us to see if Texas home equity loan cash out refinance makes sense for you.
Home Equity Rules
Home equity loans have slightly higher rates than traditional rate and term refinances because one is raising the original loan amount. Plus when one pulls cash out of a home or investment property this is a higher risk loan. Higher risk = slightly higher rate.
And in Texas you are limited to 80% of your home's value. Meaning if your home is worth $200,000, the most your new loan could be is $160,000. If you owe 100K, you could take out 60K or up to 80%
Then there's the 3% home equity rule: This means the total fees associated can't exceed 3% of the loan amount. This mostly effects those with smaller home loan balances. For example, if your home is only worth 75,000 and we are limited to 80%-your loan could only be 60K. 3% of 60k is $1800. So if your title company charges $700 for the title policy and your appraiser charges $325 and the bank charges $500 to underwrite your loan it's not hard to be over 3%. This would mean the mortgage company could only charge $275 to be under the 3% rule.
12 day Home Equity Rule, 3 day wait-until-we-fund rule:
In Texas we have to wait at least 12 days from mortgage application to close. I even have to get a special 12 day letter signed. Then once we close, we then can't fund the home loan for 3 days. Texas has weird home equity refinance rules so you want to work with an experienced mortgage company who does a lot of these type of loans. If you have additional questions, please call us at 512-996-8194, we help people all over Texas.
For many people home equity refinances can be a great way to jump start a new financial plan. I offer them to my clients to help them: Get out of debt, pay off bills, have more money to save and invest. My clients have saved hundreds each month by paying off high interest credit cards. My personal record is saving a family $1000/month using a home equity loan.
Once they save this money they plan to pay extra on their mortgage so they pay a 30 year note in 15 years. So used correctly, a home equity mortgage is a great way to move forward financially.
After 5 years in the mortgage business I've come up with my personal lending philosophy. Because anyone can do a home loan. However, my business is helping move people forward financially-starting on the mortgage level; the biggest expense for a family.
Most of my clients know my personal philosophy with mortgage lending. There are lots of mortgage people out there who promise "the lowest 30 year mortgage rate or the "best Texas 15 year mtg rate"-but this isn't really my approach. I tend to favor what is best for the client's short and long term. If one needs a 15 year mortgage with low closing costs, let's use this program. Need to consolidate debt, let's use a home equity loan.
I just don't believe in one-size fits all mortgage plans. As soon as my clients all look the same, have the same income/debt, goals, then I'll become a one-size fits all mortgage guy. But for now, I work with low income people, millionaires, investors, first time home buyers, second home mortgages, etc.
One's mortgage can be either a debt instrument or a better financial tool, it's really up to you and your mortgage professional. And in today's economy where the realities of $5 gas aren't really unreasonable you should work with a professional who will take the time to listen and bring the right mortgage plan to the table. Because once a mortgage is in place you must live with it.
Some questions you should ask yourself when buying or refinancing a home or investment property:
1) How much debt do I currently have? How much debt am I currently servicing each month?
2) How much in liquid savings do I currently have? Could I choose a mortgage that will help (a) lower my bills and (b) help me to save more money each month? Rate is important but now the only thing to consider. Who cares if the 15 year mortgage rate is the best rate, if it's not affordable to you-it's not the wise loan. Go with the 30 year rate.
3) How long do I plan to keep this home? Is this home appreciating?
4) What is my long term financial plan, and how does this new mortgage help me accomplish this plan?
#4 is where the rubber meets the road. And this is where I spend the most time with my clients; constructing the long term plan and then customizing the mortgage to fit this plan. Most people chase the lowest rate when getting into homes however without a mid-long range goal they usually end up paying more in the long-term.
Take the sub-prime meltdown. There's nothing wrong with sub-prime loans. Sometimes things happen that cause people's credit to go in the trash. Divorces do happen and sometimes medical bills come out of no where and people have a lot of collections. Jobs are sometimes lost and savings are use up before they were originally intended. The problem with sub-prime loans is not that they are bad, but that they need to be on Fixed rates. Not adjustable. This country has lost billions of dollars during the sub-prime meltdown for one reason: People chased the lowest rate when they bought the home and ARMs have lower rates than FIXED rates. And since ARMs had lower rates people chose ARMs over Fixed rates.
So thousands of people with bad credit bought homes on ARMs and today we have a major problem: Because people chased the lowest rate.
Having a long term financial plan. Example, let's say you're self employed and don't have a company retirement plan-401k-to rely on. One approach in solving the "no 401K/IRA" problem is to own real estate. The goal is to own a few choice properties so when you do retire you will have these properties paid off and creating passive retirement income. Imagine if your mortgage broker took the time to understand your long-term goals and structured the new loan around these goals. Funny thing, most people are 15-30 years from retirement and the typical home loan is paid off in 15-30 years. Bottom line: The home you buy today could help you retire tomorrow-and you need the right home loan to go along with it.
Remember, most mortgages are based on a 15 or 30 year basis, why not structure your first home to help you retire in 30 years. I know this seems unrealistic because most people don't keep homes that long, but going into a mortgage with a plan is better than just going into a mortgage.
Most people don't want to take the time to think about money-but in the end-the lack of money causes a lot of other challenges in life.
This is how I'm different from the other Texas Mortgage Loan people. I believe I can either help people move forward financially or I can just get them into debt. Sure it's easier to "sell low rates" but not at the expense of helping a client in the long term.
PMI (just so no-or at least try to get out of it.)
My clients avoid PMI when possible. But to do an 80/15 or 80/10 or an 80/10/10 one's mortgage rate is slightly higher but the benefit is avoid pointless PMI and having lower closing costs. This is another example of why "chasing the lowest rate" isn't always the best. Loans with PMI are better than loans without. But the benefit of not have PMI is huge. Not only will you pay less when your home loan doesn't have PMI but your closing costs are less too.
Right now I want to touch briefly on these 3 issues and why one should be thinking of them when you buy or refinance a home. Actually, your mortgage person should customize your loan around these three points for you. If they don't-run. If all they sell is a mortgage rate did they really serve you?
Mortgage brokers and banks love to advertise low mortgage rates. "We have the lowest rates in Texas!" But let's think about the loan like this: "How much did it cost you to get this rate." Because low mtg rates are one thing, but how much did it cost to get the rate?
Let's look at one of Today's Mortgage ads. (April 17) They are advertising a 4.87% rate.
Funny. The real 30 year rate is around 6% but they know people want "low rates" so they advertise a great rate. But when you look at the points it will take to get this rate, you'll see there's more to getting a mortgage than just rate. Closing costs.
For example, if you're buying a $200K home should you really "buy the rate down" with points to get a good rate? To buy this low, low rate, it will cost $6,000 just for discount points. And yet people do this all the time. Mortgage people advertise low rate because people want low rates.
Sorta reminds me of when I bought my Toyota Tundra. I wanted to save a nickel so I went for the 2×4 instead of the 4×4 all-wheel drive. I was so proud of getting the "lowest price in town" but when it snowed or iced I had to ask my wife to drive her front-wheeled drive Honda Accord.
This is one reason why I suggest working with a mortgage broker (like me) who approaches mortgage lending from a total financial planning perspective. Because if I notice a client has a ton of credit cards and misc. debt-this 6K should not go towards a new (tax deductible) debt but towards paying off old, high interest debt that's not tax-deductible.
Or to use real numbers, if you have the $6000 to pay towards debt, retire 15% interest debt that's costing you $500/month instead of trying to save $200 on your mortgage. Then pay $100 extra and you're still saving $300. Use this $300 for savings, investing or having fun.
But what about all the interest I'll save by having a low rate? Shouldn't I try to get the best rate so I can have lower monthly bills? Yes. Once you're out of consumer debt-and you no longer have to pay $500 out, begin to apply $100-$200 extra on your mortgage payment. This will take years off your mortgage, usually taking a 30 year mortgage to a 12-15 year. This will save you tons in interest and give you lower payments.
When you buy or refinance any property take the time to look at the bigger picture because a mortgage or refinance can either help move you forward financially or just get you into debt.
Plus some are doing the two-birds-one-refinance-approach: Refinance the home and pull cash out.
When it comes to refinancing, you have two options. A "rate and term" refinance or a Texas home equity loan "cash out" refinance.
With a home equity loan you pull equity out of your home or investment property.
Most people refinance to get a lower rate; this is called a "rate and term" refinance. One is keeping the same loan amount, they are just lowering or changing the rate or term of the mortgage.
Maybe they are moving out of a 30 year note to a 15 year note. This is called a rate and term refi because they are just changing the rate or the term of the original loan.
Lower mortgage rates do mean lower payments. But some clients choose a "cash out" refinance (Home Equity loan)- which means they pull equity (cash) out of their homes or investment properties for other purposes ...like paying off debt or buying additional property.
For example, let's say a family has a $450 car payment where they owe $15000. If they have enough equity in their home, it's common for a family to refinance the home and pull enough cash out of their home to pay off other costly debt; like credit cards, cars, etc. The house payment might go up $50 but the car payment is eliminated. So a family has $400 more each month.
Some suggest against home equity loans to pay off debt stating it's not wise to take a 3-5 year debt and spread it across 15-30 years. And these people are right. However, when I help a client save $400-500, sometimes $1000/month now these families can afford to pay extra on their 30 year mortgage and pay it off in 12-15 years.
In fact, most of the time a family will pay their home off earlier-after a home equity loan-than they would have before.
You can always call us to see if Texas home equity loan cash out refinance makes sense for you.
Home Equity Rules
Home equity loans have slightly higher rates than traditional rate and term refinances because one is raising the original loan amount. Plus when one pulls cash out of a home or investment property this is a higher risk loan. Higher risk = slightly higher rate.
And in Texas you are limited to 80% of your home's value. Meaning if your home is worth $200,000, the most your new loan could be is $160,000. If you owe 100K, you could take out 60K or up to 80%
Then there's the 3% home equity rule: This means the total fees associated can't exceed 3% of the loan amount. This mostly effects those with smaller home loan balances. For example, if your home is only worth 75,000 and we are limited to 80%-your loan could only be 60K. 3% of 60k is $1800. So if your title company charges $700 for the title policy and your appraiser charges $325 and the bank charges $500 to underwrite your loan it's not hard to be over 3%. This would mean the mortgage company could only charge $275 to be under the 3% rule.
12 day Home Equity Rule, 3 day wait-until-we-fund rule:
In Texas we have to wait at least 12 days from mortgage application to close. I even have to get a special 12 day letter signed. Then once we close, we then can't fund the home loan for 3 days. Texas has weird home equity refinance rules so you want to work with an experienced mortgage company who does a lot of these type of loans. If you have additional questions, please call us at 512-996-8194, we help people all over Texas.
For many people home equity refinances can be a great way to jump start a new financial plan. I offer them to my clients to help them: Get out of debt, pay off bills, have more money to save and invest. My clients have saved hundreds each month by paying off high interest credit cards. My personal record is saving a family $1000/month using a home equity loan.
Once they save this money they plan to pay extra on their mortgage so they pay a 30 year note in 15 years. So used correctly, a home equity mortgage is a great way to move forward financially.
After 5 years in the mortgage business I've come up with my personal lending philosophy. Because anyone can do a home loan. However, my business is helping move people forward financially-starting on the mortgage level; the biggest expense for a family.
Most of my clients know my personal philosophy with mortgage lending. There are lots of mortgage people out there who promise "the lowest 30 year mortgage rate or the "best Texas 15 year mtg rate"-but this isn't really my approach. I tend to favor what is best for the client's short and long term. If one needs a 15 year mortgage with low closing costs, let's use this program. Need to consolidate debt, let's use a home equity loan.
I just don't believe in one-size fits all mortgage plans. As soon as my clients all look the same, have the same income/debt, goals, then I'll become a one-size fits all mortgage guy. But for now, I work with low income people, millionaires, investors, first time home buyers, second home mortgages, etc.
One's mortgage can be either a debt instrument or a better financial tool, it's really up to you and your mortgage professional. And in today's economy where the realities of $5 gas aren't really unreasonable you should work with a professional who will take the time to listen and bring the right mortgage plan to the table. Because once a mortgage is in place you must live with it.
Some questions you should ask yourself when buying or refinancing a home or investment property:
1) How much debt do I currently have? How much debt am I currently servicing each month?
2) How much in liquid savings do I currently have? Could I choose a mortgage that will help (a) lower my bills and (b) help me to save more money each month? Rate is important but now the only thing to consider. Who cares if the 15 year mortgage rate is the best rate, if it's not affordable to you-it's not the wise loan. Go with the 30 year rate.
3) How long do I plan to keep this home? Is this home appreciating?
4) What is my long term financial plan, and how does this new mortgage help me accomplish this plan?
#4 is where the rubber meets the road. And this is where I spend the most time with my clients; constructing the long term plan and then customizing the mortgage to fit this plan. Most people chase the lowest rate when getting into homes however without a mid-long range goal they usually end up paying more in the long-term.
Take the sub-prime meltdown. There's nothing wrong with sub-prime loans. Sometimes things happen that cause people's credit to go in the trash. Divorces do happen and sometimes medical bills come out of no where and people have a lot of collections. Jobs are sometimes lost and savings are use up before they were originally intended. The problem with sub-prime loans is not that they are bad, but that they need to be on Fixed rates. Not adjustable. This country has lost billions of dollars during the sub-prime meltdown for one reason: People chased the lowest rate when they bought the home and ARMs have lower rates than FIXED rates. And since ARMs had lower rates people chose ARMs over Fixed rates.
So thousands of people with bad credit bought homes on ARMs and today we have a major problem: Because people chased the lowest rate.
Having a long term financial plan. Example, let's say you're self employed and don't have a company retirement plan-401k-to rely on. One approach in solving the "no 401K/IRA" problem is to own real estate. The goal is to own a few choice properties so when you do retire you will have these properties paid off and creating passive retirement income. Imagine if your mortgage broker took the time to understand your long-term goals and structured the new loan around these goals. Funny thing, most people are 15-30 years from retirement and the typical home loan is paid off in 15-30 years. Bottom line: The home you buy today could help you retire tomorrow-and you need the right home loan to go along with it.
Remember, most mortgages are based on a 15 or 30 year basis, why not structure your first home to help you retire in 30 years. I know this seems unrealistic because most people don't keep homes that long, but going into a mortgage with a plan is better than just going into a mortgage.
Most people don't want to take the time to think about money-but in the end-the lack of money causes a lot of other challenges in life.
This is how I'm different from the other Texas Mortgage Loan people. I believe I can either help people move forward financially or I can just get them into debt. Sure it's easier to "sell low rates" but not at the expense of helping a client in the long term.
PMI (just so no-or at least try to get out of it.)
My clients avoid PMI when possible. But to do an 80/15 or 80/10 or an 80/10/10 one's mortgage rate is slightly higher but the benefit is avoid pointless PMI and having lower closing costs. This is another example of why "chasing the lowest rate" isn't always the best. Loans with PMI are better than loans without. But the benefit of not have PMI is huge. Not only will you pay less when your home loan doesn't have PMI but your closing costs are less too.
Right now I want to touch briefly on these 3 issues and why one should be thinking of them when you buy or refinance a home. Actually, your mortgage person should customize your loan around these three points for you. If they don't-run. If all they sell is a mortgage rate did they really serve you?
Mortgage brokers and banks love to advertise low mortgage rates. "We have the lowest rates in Texas!" But let's think about the loan like this: "How much did it cost you to get this rate." Because low mtg rates are one thing, but how much did it cost to get the rate?
Let's look at one of Today's Mortgage ads. (April 17) They are advertising a 4.87% rate.
Funny. The real 30 year rate is around 6% but they know people want "low rates" so they advertise a great rate. But when you look at the points it will take to get this rate, you'll see there's more to getting a mortgage than just rate. Closing costs.
For example, if you're buying a $200K home should you really "buy the rate down" with points to get a good rate? To buy this low, low rate, it will cost $6,000 just for discount points. And yet people do this all the time. Mortgage people advertise low rate because people want low rates.
Sorta reminds me of when I bought my Toyota Tundra. I wanted to save a nickel so I went for the 2×4 instead of the 4×4 all-wheel drive. I was so proud of getting the "lowest price in town" but when it snowed or iced I had to ask my wife to drive her front-wheeled drive Honda Accord.
This is one reason why I suggest working with a mortgage broker (like me) who approaches mortgage lending from a total financial planning perspective. Because if I notice a client has a ton of credit cards and misc. debt-this 6K should not go towards a new (tax deductible) debt but towards paying off old, high interest debt that's not tax-deductible.
Or to use real numbers, if you have the $6000 to pay towards debt, retire 15% interest debt that's costing you $500/month instead of trying to save $200 on your mortgage. Then pay $100 extra and you're still saving $300. Use this $300 for savings, investing or having fun.
But what about all the interest I'll save by having a low rate? Shouldn't I try to get the best rate so I can have lower monthly bills? Yes. Once you're out of consumer debt-and you no longer have to pay $500 out, begin to apply $100-$200 extra on your mortgage payment. This will take years off your mortgage, usually taking a 30 year mortgage to a 12-15 year. This will save you tons in interest and give you lower payments.
When you buy or refinance any property take the time to look at the bigger picture because a mortgage or refinance can either help move you forward financially or just get you into debt.
Guiding You Through Home Equity Loan Refinancing
The current housing crisis has brought about difficult times for many home owners but it has also produced the lowest interest rates in history. Those who can, are tempted to refinance. But, not all home equity loan refinancing is the same. There are responsible reasons to refinance (such as consolidating debt) and there are irresponsible reasons to refinance too (i.e. the purchase of non-essentials such as boats and vacations). Refinancing for the wrong reason could lead to a much feared foreclosure.
Homework needs to be done before deciding to refinance. Probably the most basic information needed is the interest rate of the potential new loan. The interest rate of the new mortgage should be 2 percentage points lower than the current loan to make a refinance worth while. Also, how long it will take to break even compared to the life of the loan should be considered. All loans involve the payment of closing costs and it usually takes the average person about 3 years to "pay off" those costs. Those who plan to sell the property before the 3 year mark might not find a refinance to be in their best interest.
Loan type and the mitigating factors should be taken into consideration. Variable rate loans, also known as Adjustable-Rate Mortgages (ARM) also have a variable monthly payment amount. Some wish to refinance to a fixed rate mortgage so as to remove the uncertainty from the equation. Another ARM might also be desired, but with the addition of protective features such as lower starting rates and payment caps.
The mortgage term is also important. If a property owner wants fast equity growth, then a short term loan would be the best option. Long term loans are usually the better choice when the refinance is needed to pay for a college education or to buy home improvements using the equity in the property.
Not all mortgages are "refinance friendly." In fact, some assess fines against the property owner for early pay off. The current home loan agreement should be read carefully to determine if these fines apply. Sometimes the fines are so expensive that the savings from a refinance isn't enough to warrant a change.
Once a home owner decides to refinance, he or she needs to then decide what type of mortgage is the right fit. The annual-percentage-rate (APR) and the loan type (variable or fixed) should factor into the decision as well as other items such as the life of the mortgage. Short term mortgages have a high monthly payment but a lower interest rate.
Origination or discount fees (also known as "points") re fees payable to the lender at the time of closing and one point represents one percent of the mortgage's value. In recent years, many mortgage companies have been offering the "no-cost loan" (zero points), but these loans have many serious pitfalls that can turn out to be quite expensive (and risky). The amount in fees, or points, balanced against the lowered interest rate should be factored into any refinance calculation.
Refinancing can be done in two different ways. The "cash out" refinance is when the original mortgage is refinanced for a larger amount than the balance owed. This guarantees that the home owner will be handed cash at the time of signing. The home equity loan does not touch the original mortgage at all. It is actually a second mortgage based on the equity in the home.
Deciding which type of refinance to use should be based on 4 factors: term, rate, cost, and speed. Home equity loans are faster to obtain, are shorter in term, and are quite flexible. Their major drawback is that they tend to have a high interest rate. Whatever the choice, it is important to research all options before making a final decision.
Homework needs to be done before deciding to refinance. Probably the most basic information needed is the interest rate of the potential new loan. The interest rate of the new mortgage should be 2 percentage points lower than the current loan to make a refinance worth while. Also, how long it will take to break even compared to the life of the loan should be considered. All loans involve the payment of closing costs and it usually takes the average person about 3 years to "pay off" those costs. Those who plan to sell the property before the 3 year mark might not find a refinance to be in their best interest.
Loan type and the mitigating factors should be taken into consideration. Variable rate loans, also known as Adjustable-Rate Mortgages (ARM) also have a variable monthly payment amount. Some wish to refinance to a fixed rate mortgage so as to remove the uncertainty from the equation. Another ARM might also be desired, but with the addition of protective features such as lower starting rates and payment caps.
The mortgage term is also important. If a property owner wants fast equity growth, then a short term loan would be the best option. Long term loans are usually the better choice when the refinance is needed to pay for a college education or to buy home improvements using the equity in the property.
Not all mortgages are "refinance friendly." In fact, some assess fines against the property owner for early pay off. The current home loan agreement should be read carefully to determine if these fines apply. Sometimes the fines are so expensive that the savings from a refinance isn't enough to warrant a change.
Once a home owner decides to refinance, he or she needs to then decide what type of mortgage is the right fit. The annual-percentage-rate (APR) and the loan type (variable or fixed) should factor into the decision as well as other items such as the life of the mortgage. Short term mortgages have a high monthly payment but a lower interest rate.
Origination or discount fees (also known as "points") re fees payable to the lender at the time of closing and one point represents one percent of the mortgage's value. In recent years, many mortgage companies have been offering the "no-cost loan" (zero points), but these loans have many serious pitfalls that can turn out to be quite expensive (and risky). The amount in fees, or points, balanced against the lowered interest rate should be factored into any refinance calculation.
Refinancing can be done in two different ways. The "cash out" refinance is when the original mortgage is refinanced for a larger amount than the balance owed. This guarantees that the home owner will be handed cash at the time of signing. The home equity loan does not touch the original mortgage at all. It is actually a second mortgage based on the equity in the home.
Deciding which type of refinance to use should be based on 4 factors: term, rate, cost, and speed. Home equity loans are faster to obtain, are shorter in term, and are quite flexible. Their major drawback is that they tend to have a high interest rate. Whatever the choice, it is important to research all options before making a final decision.
Home Equity Loans Can Also Be Refinanced!
Lower interest rates and monthly home equity loan payments can make cash available for other usage or make debt more manageable. As interest rates move in cycles, when rates drop, it is the best time for refinancing. This is what most advisors suggest provided that your home equity loan is due in a long repayment program.
How to Know When To Refinance
Refinancing is not recommended if you plan to sell your home in a year. With closing costs and other fees, it's crucial to know whether refinancing cost is offset by lower monthly payments. Refinancing also avoids a balloon payment. Combine your first mortgage and home equity loan or credit line for one fixed-term payment and avoid a huge lump sum payment.
Using equity from refinancing to pay off credit card debt makes a bad deal. In transferring $15,000 in credit cards to a new 30-year first mortgage, monthly payments may decrease but due to the long term of the loan, it costs more to pay off otherwise revolving credit cards.
Fees And Other Charges
Better than that is to take 10 years to pay off the charge cards which can save you 20 years worth of additional interest. Consider also how long it will take to break even. Refinancing costs of $2,500 with payments $100 lower each month, you need 25 months to break even.
Apart from lower interest rate, refinancing also offers the advantage of converting all or part of your equity loans to a fixed-rate installment loan. It also enables you to acquire a shorter-term loan to build new equity more quickly. In refinancing at lower rates, it is common for homeowners to take cash from the equity for a remodeling project too.
Refinancing is Not For Everyone
10 years into a 30-year mortgage makes refinancing a new 30-year loan pointless as it would mean paying off for 40 years. Keeping mortgage on the books for this long can boost overall interest expenses for a home.
If your credit is worse now than when you originally borrowed, then it is not advisable to refinance. Credit score falls with late mortgage, credit card or auto payments since buying your home. Since you no longer qualify for the best rates, refinancing may boost payments and interests instead of lowering them.
Home Equity Loans And Lines Of Credit Are Cheaper
Conditions in the loan market have improved in the last few years and the interest rates have dropped too. Getting a home equity loan or line of credit can be really cheap and it is undoubtedly an excellent source of funds. Taking advantage of no closing costs promotions is also a smart thing to do.
How to Know When To Refinance
Refinancing is not recommended if you plan to sell your home in a year. With closing costs and other fees, it's crucial to know whether refinancing cost is offset by lower monthly payments. Refinancing also avoids a balloon payment. Combine your first mortgage and home equity loan or credit line for one fixed-term payment and avoid a huge lump sum payment.
Using equity from refinancing to pay off credit card debt makes a bad deal. In transferring $15,000 in credit cards to a new 30-year first mortgage, monthly payments may decrease but due to the long term of the loan, it costs more to pay off otherwise revolving credit cards.
Fees And Other Charges
Better than that is to take 10 years to pay off the charge cards which can save you 20 years worth of additional interest. Consider also how long it will take to break even. Refinancing costs of $2,500 with payments $100 lower each month, you need 25 months to break even.
Apart from lower interest rate, refinancing also offers the advantage of converting all or part of your equity loans to a fixed-rate installment loan. It also enables you to acquire a shorter-term loan to build new equity more quickly. In refinancing at lower rates, it is common for homeowners to take cash from the equity for a remodeling project too.
Refinancing is Not For Everyone
10 years into a 30-year mortgage makes refinancing a new 30-year loan pointless as it would mean paying off for 40 years. Keeping mortgage on the books for this long can boost overall interest expenses for a home.
If your credit is worse now than when you originally borrowed, then it is not advisable to refinance. Credit score falls with late mortgage, credit card or auto payments since buying your home. Since you no longer qualify for the best rates, refinancing may boost payments and interests instead of lowering them.
Home Equity Loans And Lines Of Credit Are Cheaper
Conditions in the loan market have improved in the last few years and the interest rates have dropped too. Getting a home equity loan or line of credit can be really cheap and it is undoubtedly an excellent source of funds. Taking advantage of no closing costs promotions is also a smart thing to do.
Home Equity Loan - When Does Refinancing Make Sense?
For the last two years, interest rates have been much lower than anytime during the last thirty years. This has resulted in an unprecedented boom in real estate sales, home refinancing and home equity lending, as borrowers try to take advantage of these rates for the long term. But refinancing or even borrowing against your home's equity may not make sense for everyone. When is it a good idea to refinance your home? When is it not advisable?
Traditionally, lenders advised homeowners not to refinance unless doing so would lower the interest rate on the loan by 1-2%. While anyone who can save 2% on their interest rate would almost certainly benefit from doing so, others might find refinancing worthwhile even with a smaller reduction in the interest rate. Increased competition among lenders has brought the costs of refinancing down in recent years, so homeowners can realize a significant reduction in their home payments with reductions of ½% or so, depending on the size of their mortgage.
The key to whether or not refinancing makes sense is how long the homeowner intends to remain in his or her home. The costs of the refinancing, which can run $1000-2000, are amortized over the life of the loan. For many people, a reduction of $50 or more in the house payment would be more than enough to justify a new mortgage. If payments cannot be reduced by at least that much, or if the homeowner plans to live in the home only a short while, refinancing may not be a good option.
Refinancing may also make sense for those with Adjustable Rate Mortgages (ARMs.) At the moment, at 30-year fixed-rate mortgage is quite competitive with an ARM, and may actually be cheaper. With rates at historic lows, an ARM can only adjust upward, making it a less desirable choice in comparison with a fixed-rate loan.
Anyone considering a home remodeling project or debt consolidation might ordinarily think of a home equity loan or line of credit. These are often wise choices, as they offer deductible interest and great repayment flexibility. On the other hand, a chance to obtain a 30-year loan at 5% might make a complete refinancing with a cash-out option a better choice, as home equity rates are somewhat higher than first mortgages.
A new mortgage might also make sense for anyone with a second mortgage or a piggyback loan. A piggyback loan is a second loan used at the time of a home's purchase to help the buyer avoid paying the sometimes-expensive private mortgage insurance. Simultaneous payments on two mortgages will be higher than paying on one, so this might be a great time to roll them together on a refinance. The same applies to anyone carrying a large credit card balance; that money could be rolled into a home loan with deductible interest at a lower rate. Anyone considering such a move should be careful, however, as failure to repay that debt could lead to home foreclosure.
Now is a great time for any homeowner to consider whether or not a new mortgage could help lower their payments. With interest rates as low as they are now, the timing is great, and there's nowhere for the rates to go but up.
Traditionally, lenders advised homeowners not to refinance unless doing so would lower the interest rate on the loan by 1-2%. While anyone who can save 2% on their interest rate would almost certainly benefit from doing so, others might find refinancing worthwhile even with a smaller reduction in the interest rate. Increased competition among lenders has brought the costs of refinancing down in recent years, so homeowners can realize a significant reduction in their home payments with reductions of ½% or so, depending on the size of their mortgage.
The key to whether or not refinancing makes sense is how long the homeowner intends to remain in his or her home. The costs of the refinancing, which can run $1000-2000, are amortized over the life of the loan. For many people, a reduction of $50 or more in the house payment would be more than enough to justify a new mortgage. If payments cannot be reduced by at least that much, or if the homeowner plans to live in the home only a short while, refinancing may not be a good option.
Refinancing may also make sense for those with Adjustable Rate Mortgages (ARMs.) At the moment, at 30-year fixed-rate mortgage is quite competitive with an ARM, and may actually be cheaper. With rates at historic lows, an ARM can only adjust upward, making it a less desirable choice in comparison with a fixed-rate loan.
Anyone considering a home remodeling project or debt consolidation might ordinarily think of a home equity loan or line of credit. These are often wise choices, as they offer deductible interest and great repayment flexibility. On the other hand, a chance to obtain a 30-year loan at 5% might make a complete refinancing with a cash-out option a better choice, as home equity rates are somewhat higher than first mortgages.
A new mortgage might also make sense for anyone with a second mortgage or a piggyback loan. A piggyback loan is a second loan used at the time of a home's purchase to help the buyer avoid paying the sometimes-expensive private mortgage insurance. Simultaneous payments on two mortgages will be higher than paying on one, so this might be a great time to roll them together on a refinance. The same applies to anyone carrying a large credit card balance; that money could be rolled into a home loan with deductible interest at a lower rate. Anyone considering such a move should be careful, however, as failure to repay that debt could lead to home foreclosure.
Now is a great time for any homeowner to consider whether or not a new mortgage could help lower their payments. With interest rates as low as they are now, the timing is great, and there's nowhere for the rates to go but up.