Read this before Refinancing your home!

Mortgage and Lending with First Option Mortgage 269761

When is it a good time to refinance? When the rate is 1% lower than your current rate? When you are able to reduce the number of years in paying off the mortgage? When you are able to get away from your current lender? When you are able to get a no-closing cost loan from the lender? When you want to pull money out to rehab the property? When you want to consolidate debt into the loan? When you want a fixed rate instead of your current adjustable rate? When you want to pay for a vacation, a new car, or just to put cash in your pocket? When you are close to retirement and need extra cash for emergencies?

Sure. Why not? As long as you know the following information and can make an informed decision, then go for it. 

- The average cost of refinancing a loan is about 2% to 3% of the loan amount. The lower the loan amount, the higher the percentage. For example, if the loan amount is $50,000 and the title company charges $750, the lender $500 and the appraisal is $500, then your costs to close is 3.50%. If the loan amount is $150,000, then the costs to close is 1.10% (actual costs vary by lender and this is just an example). 

- There are  3 ways to pay for closing costs when refinancing a mortgage loan:

1. Increase the loan amount to cover the costs. For every $1000 increase, the payment goes up around $5 a month. 

2. Increase the rate to cover the costs. For every .25% increase in rate, the monthly payment goes up around $15 for every $100,000.

3. Pay out of pocket. 

If considering the first 2 options, then take into account the cost of the loan, the increase in monthly payment compared to the drop in interest rate. Companies that claim no closing costs are actually either increasing the interest rate and using the point spread to pay for the costs or increasing the loan amount and using the equity of the property to pay for the costs to close. Either way, the drop in interest rate will be offset by the way the loan is created and you may not save any money.

When refinancing to reduce the years to pay off the loan, consider the fact that you are paying a company thousands of dollars to do nothing for you. In fact, there are a lot of calculators online that can tell you how much extra to pay on the loan to pay it off faster (look up amortization calculators). 

I get a few calls once in a while of people wanting to refinance away from their current lender. There is no reason to refinance away from a lender. In most cases, the lender you have services the loan and is not the actual lien holder. Refinancing the loan may give you a different lender but the new lender may go back to the original company for loan servicing.

There are several programs available to borrow money in order to update or rehabilitate (rehab) your property. The least costly way is to get the cash out and find your own contractor. If you decide to use FHA's 203k Streamline Rehab loan, costs are higher, loan amounts are limited and it takes longer to close. This product is best used for purchasing a home that needs rehab work.

Using equity in the property to pay off debt is a bad idea if you are unable to curb your spending habits. If you decide to use the equity to pay off debt, do NOT close the credit card accounts. Continue using them sparingly so that your credit stays functional for future uses. Consider paying off revolving debt and not paying off installment loans (cars, student loans) unless doing so can save you a considerable amount of money each month. Student loans can be forgiven. Cars may stop running and you end up paying for something of no use.

If you're currently in an Adjustable Rate Mortgage (ARM), check interest rates to see if fixed rates are lower. In almost all cases, a lender is allowed to refinance you to a fix rate even if there is no monetary tangible gain (the federal government prohibits refinancing a home loan if there is no net tangible benefit to the borrower, regardless of what you want). If for some reason you are not able to refinance, find out the parameters of the rate. Is the loan tied to the LIBOR or Treasury? What is the cap of the rate? What are the odds that the rate will continue to stay where it is or go lower? After or just before ARM's expire, most banks will offer the ability to convert it to a fixed rate or you can continue playing the ARM game.

In either case of borrowing equity from the home to pay for a vacation or buy a car, it's important to know that after the thrill of buying the car or returning from that great vacation, your mortgage payment just went up. It is better to save money to go on vacation or get a loan from a credit union to buy a car than it is to spend thousands of equity dollars to fund excitement. 

People of age continue to listen to paid actors selling Reverse Mortgages (for this reason I'm no longer a fan of The Fonz). This loan needs to be outlawed. The cost of doing a reverse mortgage is near 15% commission to the bank. The borrower (age 62 or more) can borrow more money than the value of the property without ever making a payment (cool huh?). If the borrower becomes ill and moves into a nursing home for more than 6 months or leaves the home for more than 6 months, the mortgage becomes due and payments must be made or the foreclosure process begins (not cool huh?). When the borrower dies, the family members are stuck with an undervalued home that must be sold or purchased by the family. Whoa! says the Happy Days Character. Since the loan is backed by the government it subsidizes the bank for its loss. For example if the borrower borrowed $130,000 and the home is worth $50,000, after selling the property, the bank gets 95% of the current value and the government (indirect tax payers) pays the difference. Everyone is happy, right? 

The best way to pull money out for retirement is by doing a first or second mortgage. The cost is lower. The money can be put into an annuity or other retirement account and pay the retiree as needed (first speak to a financial adviser). The money can then be used to make the mortgage payment. Since there are a lot of programs designed to help people with mortgage related issues, chances of foreclosure are less than using a reverse mortgage. If a Home Equity Line Of Credit (HELOC) is used, the line can be increased if approved and the account can be used like a credit card, a checking account or to pay for emergencies.

I hope this information helped you to make a better decision about refinancing your home. If you have any questions, feel free to contact me directly.  


NMLS 269761