There are a variety of mortgage insurance products on the market. Some of these products claim to help you to save for a home. Some of these products are geared to make your payments in the case of disability, ill health or death.
In most cases, if your lender offers you mortgage insurance, it will be a type of mortgage life insurance. This insurance will ensure that your mortgage is paid off in the case of the death of you or your spouse (as long as you are both named on the mortgage itself.)
In general, you will get a better deal on this kind of insurance if you buy it from an insurance company directly. The insurance packages that are offered to you by your lender are normally a more expensive insurance with lesser benefits. So, although your lender may try to talk you into life insurance for your mortgage, you are better off to say no.
Frankly, the kind of mortgage life insurance offered by your lender can be more than 3 times as expensive as buying a term life insurance policy for the same amount and the net effect is the same: You will have the money to pay off your home in the case of a death. However, if you have to buy additional insurance for both of you in order to fully ensure your home in case of death, you should compare the costs of two life insurance policies against the cost of the single insurance through your lender.
What if you have a bad credit history and your lender insists on insurance as a condition of your loan? Then, you may have to take the insurance. However, this insurance is likely to be different than mortgage life insurance. In all likelihood, this will be private mortgage insurance, and you'll usually be required to get it if you don't have a full 25% down for your home. Now while this kind of insurance may allow you to buy your home, it is an additional cost and it will not benefit you.
You are taking out insurance that will benefit your lender, in case you default on the mortgage. This provides your lender with greater security, and may allow you to get a mortgage that you wouldn't otherwise be able to get. However, as soon as you can, renegotiate to get rid of this insurance. It is pure overhead for you.
A mortgage quote is pretty much exactly what you would expect. It's a quote from a lender for your mortgage, which provides you with an interest rate and term for the mortgage.
You can get a quote on any type of mortgage, from a fixed rate mortgage to an adjustable rate mortgage to a variable rate mortgage. You can get a quote on various terms, from 6 months to 10 years. It's up to you. Most lenders, however, will want to steer you in the direction of the type of mortgage that will make the most money for them. So it's up to you to decide which mortgage will work best for you, in advance.
How do you decide what kind of mortgage you would like to get quotes for? Here are a few simple guidelines:
If interest rates are going down, consider a shorter-term mortgage. Go for one year or less (if your credit rating and life circumstance will allow). Read up on financial sites and see whether rates are expected to go down, stay the same, or go up; during what time frame. Based on this information you can decide whether to lock in, for what time period and whether a variable mortgage or adjustable rate mortgage are better deals.
If interest rates are going up consider a longer-term mortgage. However, it's not usually in your best interests to lock in for more than 5 years. If you do, you'll likely end up paying a much higher interest rate on average than if you took a shorter mortgage or a variable mortgage. You may also out on being able to lower your rate. Again, keep your own credit rating and life circumstances in mind.
If you are good at saving money get the best prepayment and payment frequency options you can. Sacrifice as much as ¼ percent interest to get these (particularly if you are good at saving or expect to have a 'windfall' in the near future), but never sacrifice more than that. Keep in mind that most of us may have the best of intentions regarding extra payments, but we may not actually make them. You still need to get the best interest rate you can.
One of your best tools in getting quotes is through your local broker (Melody Milak). Many sites offer free mortgage quotes without knowing your individual situation. Speak to a live person that wants your business.
The right time to refinance is when it will save you money. It's as simple as that.
However, it normally saves you money in the long run. In the short run, it's likely going to cost you money. Your costs could be penalties for refinancing, including points, fees, a new property appraisal (if required), and potentially title insurance. If you move from one lender to another, you can definitely expect to need an appraisal and title insurance. If you can refinance with your current lender, you may be able to avoid some costs, but this will depend on your lender and what that lender is willing to waive.
So, when will you most likely save money? There are three basic scenarios that generally work in your favour:
Interest rates are dropping, and you are locked in at a rate more than 1.5 % higher than the current rate.
You can reduce your overall monthly payments enough to offset any costs of refinancing penalties.
You have credit card debt that is not getting paid off, your payments are too high, and you are finding yourself in financial difficulty. (This is an extended circumstance of point #2.)
Let's look at the first scenario. You're locked into an interest rate that is too high. How can you be sure you'll save over the long run if you refinance? You'll have to look at the type of mortgage you have. If you have an ARM (most folks do) then you'll want to compare the lifetime caps of your mortgage versus today's ARMs to determine if your rate is high enough to justify refinancing. Also, the likelihood of saving money increases if you plan to hold onto your property for at least 5 years. If you are planning on moving in the next year or so, refinancing may not be the best option.
What's at issue is how long it will take to recoup the costs of refinancing and start to see a dollar benefit back to you. Let's say you've added up all the costs, and you've got a number of $3000. However, refinancing actually saves you $150 a month. It looks as if you'll have made back the costs in 20 months and your saving will then be yours. But, you have to be careful when calculating your benefits. There are catches.
The biggest is that you'll lose tax benefits by refinancing. Interest paid on your mortgage is tax deductible. If you are paying less on your mortgage, you'll also be claiming less on your taxes. As a result, depending on your tax bracket, some of your savings will be "clawed back" in tax. In fact, if your federal tax rate is 28 %, and you use the scenario we've used here, your real savings will be $108 a month (once your income tax changes are factored in). So, it will actually take you 28 months to get your costs back.
So, keep in mind the changes to your taxes when you are thinking about refinancing, and this will give you a true picture of the benefits to you.
It's the same calculation if you are refinancing to reduce your overall monthly payments, either by rolling credit card debt or other consumer debt into your mortgage. The overall costs should eventually "pay back" any cost to the refinancing. However, if you are doing this to avoid bankruptcy, then you need to consider your financial health first, and recouping your costs second.
If you have decided that refinancing works for you, be sure to comparison shop! Also, read all the fine print on your current mortgage. Some have prepayment penalties, and they can be quite high.
Yahoo! The rates are dropping! But you've still got 3 years on your mortgage and you're paying a couple percentage points more than the going rate.
What to do?
Your best option is to approach your current lender and try to get an 'early renewal' on your mortgage.
Some lenders will charge a penalty for early renewal. You will have to determine if the cost of the penalty is less than the savings you will get with the new mortgage. If not - you'll be best to wait.
Some mortgage lenders will renew early without penalty, but will give you a 'blended rate'. What this means is you will have a 'new' mortgage, and you will be paying a rate that is a 'blend' of your existing interest rate and the new current interest rate.
Confused? Don't worry. While it is a bit complex, it boils down to this - based on the term picked for the 'renewal' and the time left on your current mortgage, the lender will 'blend' the two interest rates. So you will be paying a 'blend' of your existing rate and the new lower rate. While you won't get a rate as low as the lender's current best rate, you should find that you will be paying a lower rate overall than if you'd stayed at your existing interest rate.
Again, do your homework. This is only a good deal if you have a fair amount of time left on your mortgage, and you are confident that interest rates won't fall a lot further! If interest rates continue to go down, and you are now locked into a longer term at the blended rate, you may find that it wasn't a good deal.
Still confused? Talk to a financial planner or advisor. They can take all the confusion out of this.
With the cost of homes, it's often better to buy what you can afford and remodel later!
Once you are ready to remodel, particularly if you've lived in the house for a few years or have some equity built up, you may find that your best option is to refinance.
Most lenders are willing to discuss refinancing to get you some more money. What they are really doing is looking at the current value of your home versus the amount you have mortgaged, and they give you some cash back from the difference. This means that your mortgage gets bigger - and the cash difference comes to you.
This can be a better deal than negotiating for a separate home improvements loan, but be careful! You always have to read the fine print:
First, be sure that you will not be paying fees to do this. Your mortgage lender already has your business, right? You are offering them MORE business, right? As long as you are a good customer, they should be thanking you! You are going to make them money. At worst, fees should be minimal, as long as your credit rating and history are good.
Second, be sure that the interest rate for your new mortgage is fair. Do some homework, and ensure that just because you are refinancing doesn't mean that your lender is taking an opportunity to get more out of you.
Be sure when you are comparing interest rates that you also look at the rates of home improvement loans. You may actually be better off to have a separate home improvement loan. However, it depends on whether you can handle the amount of the home improvement loan, as well as interest rate. Home improvement loans are often over much shorter periods than a mortgage. Therefore, even if the interest rate is much lower, you may have a payment which is too high for you to handle. So, you'll need to know both interest rates AND payment amounts to compare home improvement loans with mortgage refinancing.
Be sure that your mortgage lender knows that you are comparing options. If you want your lender to compete for your business, you should be knowledgeable. Don't be browbeat into something because they are 'doing you a favour'.
Once you have your cash in hand - happy renovating!
Your mortgage is up for renewal. Your lender has called you, and suggested they can handle your business, you've been a good customer. Why don't you just come in and sign some papers? So, you make an appointment, and you go in, without another thought.
Is this the right approach? Nope.
When your mortgage is due for renewal, it is an ideal time for you to shop around and really understand interest rates. It might be worth your while to move your mortgage to another lender - particularly if the competition is good and interest rates are lower elsewhere. While another company is competing for your business, they may also offer you other benefits you aren't getting now - including paying any fees associated with moving your mortgage.
Doesn't moving your mortgage mean a lot of hassle? Not really. But do your homework. First, check your current mortgage and understand if there are any fees associated with moving your mortgage. (This kind of fee is extremely common - and you should expect it.) Once you know there are some costs to you, you should be looking for a lender who pays those fees.
Second, shop around. Is your current lender offering you a really good rate? Perfect! You may not want to move. Just go ahead and renew. However, if you can save somewhere else, then you should likely move, especially if your mortgage is for a large amount or you still have many years on it. Why? The long term costs of your mortgage are the result of the interest you pay over the life of the loan. The more you save in interest in the early part of your mortgage (when the amount owing is still high) the less it will cost you over time. If your mortgage is for a very small amount, or you will be mortgage free in 5 years or less, and you are saving less than ½ percent, you may not want to move your mortgage. The savings may not give you enough 'pay back'. Be sure you know how much the fees are to move it, and compare that to what you will be saving. If the fees are more than you save - stay put.
Third, are you getting the kinds of other options you want? Does your mortgage allow you to make lump sum payments whenever you want (or do you only have 1 day a year, on the anniversary)? The open ability to pay extra, from as little as $100 to 10 or 15 percent of the mortgage value, can make a huge difference in the long term costs to you. Every extra payment you make is money directly to the 'principal' of the loan. This means less loan that you are paying interest on!
While it takes some legwork, if you shop carefully and make the mortgage lenders compete for your business, you will usually do better.
For many people, refinancing their mortgage is another way of saying 'renewal'. Their bank or lender calls them up and says, "It's time to renew your mortgage." They have a short discussion on the phone, which results in the signing of new papers for another term, without too much thought. However, this isn't really refinancing.
Refinancing is generally something you do to get access to the equity in your property.
Refinancing is a necessity for some because they need some extra money for the house. They want to make use of some of the equity that has built up in their property. This means that they need to negotiate for a new mortgage - at a higher amount than they had before.
And then again, it could be that your interest rate on your mortgage is too high, and you want to refinance to get that rate down. If you negotiated a mortgage when your credit rating was not as good, and you've repaired your credit now through a good track record of payments, you should certainly refinance. In a volatile interest rate market where rates are dropping and you are locked in at a much higher rate, it can be to your advantage to pay those penalty clauses and get yourself a better interest rate.
Your best reason to refinance is to lower your interest rate and consolidate your debt. Of all the reasons to refinance, this is one where you are going to benefit without a doubt. If you are carrying a lot of credit card debt and are finding yourself in over your head, refinancing can get you out of the hole and in position to turn your financial situation around.
Regardless of the reason that you are looking at refinancing, you should weigh all the pros and cons carefully.
Always be sure that you are lowering your overall interest costs when you refinance. You should check this even when you want to refinance to get access to money to renovate. If you could buy your materials through a no interest deal with a home renovation store, you might not really benefit by refinancing now. Many of the large stores in home renovations have credit cards that will give you 6 months no interest. The trick is that you have to be willing to pay the purchase off in that time period, or pay the much-higher credit card interest rates.
In general, however, the "cheaper" the cost of borrowing, the better it is for you. If you take that credit card and find that you won't be able to pay it off before the no interest period is over, you should consider refinancing. It will save you a lot of money over any credit card debt.
However, you have to be careful. The shorter the amortization, the higher the payment. So, while you save money over the long run because you pay less in interest charges for your loan, you have to be able to afford the payment in the short term.
One option which reduces your risk and still lets you save money is to keep your mortgage at a 25 or 30 year amortization, but increase your payment. Most mortgage lenders will let you do this without penalty. Increasing your payment by even a very small amount will let you pay off your mortgage years earlier, while leaving you the option of reducing your payment back down to the original amount in the case that you need that money.
So, let's say you get a 5 % raise this year. If you have the right mortgage you could simply increase your mortgage payment by 5%. While a very small change in the amount that you pay per payment, it will make a big difference over many years. Every penny of that extra 5% is paying off the balance (or principal) of your loan.
Then, a new baby arrives. You want the 5% back? You reduce your payments back down and away you go.
Remember that most mortgage lenders will have some restrictions on the amount that you can increase your payment and the number of times you can adjust it.
The other way to really cut the time off your mortgage is to make lump sum payments against it. Can't see your way to increasing your payments? Fine. This year, take your yearly bonus and put it directly against your mortgage. Again, every dollar will reduce the balance of your mortgage and will mean that you pay less interest in the long run. Even small amounts every year will reduce the amount of time it takes to pay your mortgage off - and who doesn't want to be mortgage-free?
An important aspect of your home mortgage is the interest rate. This rate is negotiated for a period of time - from 6 months to as long as 10 years. This time period is the period over which you will pay the agreed interest rate.
The lower your interest rate, the less you pay in interest costs over the life of the mortgage. This can also save you thousands of dollars, especially on the mortgage you negotiate when you first buy your property.
When you first buy your property the amount of your mortgage will be the biggest it will ever be. At this point, the majority of your payments will be interest charges and a smaller amount will be used to reduce the 'principal' (which is the amount of money borrowed.) Therefore, the lower your interest rate, the less you are paying on this large sum of money - and the more money you save in the long run.
How do you get the best interest rate? Shop around. Be sure to negotiate. Your business is the lifeblood of a lender - remember that you are going to make them money. While they may want you to think that they are doing you a favour, in reality you are doing them a favour - as long as you are paying off your debt as you should!
A final word on interest rates: mortgage lenders 'stack' the deck in their own favour. Any interest rate they are willing to charge is at a level at which they believe they will make money. This is certainly not a charity business. Now, if you 'lock in' your interest rate for 5 years you will likely pay more for your mortgage. Why? Because they want to ensure that they will make money even if rates go up. So, anything which you do to reduce your risk (like locking in payments), you can expect to pay more for because you raise risk to the lender.
However, if you are willing to accept a bit of risk at your end (particularly if you have a stable job and a good credit history) you are almost always better off with variable rate mortgage. This type of mortgage allows the interest you pay to fluctuate with the market. While this sounds risky, it actually allows you a lot of freedom and almost always saves you money, for two reasons:
The interest rate charged on variable rate mortgages are usually much less than any 'locked in' rate
If the rates look like they will go up you can generally switch to a 'locked in' interest rate at no penalty.
In other words, you can't lose with the variable rate type of mortgage (as long as you can switch without penalty).
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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