How To Refinance Your Home Loan
There are simple methods you can use to determine if you want and/or need to refinance and what loan type you want.
Your first step is to ask your current mortgage holder (the company to which you are making your payments) if they offer a fixed-fee option.
With a fixed-fee, you pay the mortgage company a certain amount of money to reduce your interest rate. This can save you money, as a full refinance is generally more expensive.
If you need to refinance, a fixed rate is the better way to go.
With an adjustable rate, you may have a very low payment at the beginning of the payment period.
But when it first adjusts, it always adjusts upward. Why? Because you are offered, as an incentive, a lower introductory rate that will expire at the first adjustment. Then there's a big jump.
There are also adjustable-rate mortgages that have shorter terms than a year. Avoid these products. Having your mortgage adjusting every 6 months is a formula for disaster. As I've said above, your first adjustment will be upwards and by a good amount.
Why go to the expense of refinancing if your rate is going to increase greatly in a mere 6 months? And how can you have peace of mind knowing that your monthly payment may go up every half year?
No Negative Amortization
Whatever you do, never sign up for a mortgage loan that involves negative amortization. (Amortization just means payments spread over time and calculated in a particular way.)
An interest-only loan is negative in that you build up debt every month that you do not pay your principal but only the interest.
Even a monthly payment that includes both principal and interest will build up debt if you are not covering your full monthly principal-and-interest payment.
The steps for finding the best refinance for you are these:
- Pick a loan type from a particular lender you feel you can trust. Pick a loan amount that you feel meets your needs.
- Ask a mortgage loan officer at that lender to tell you in writing the full costs of the refinance and how much your proposed full monthly payment will be, breaking it down into principal and interest, mortgage insurance, home insurance, taxes, etc. You can talk to the loan officer on the phone and have the information faxed to you.
- Calculate how much you will save per month after you've refinanced. (Simply subtract your current monthly payment from the proposed monthly payment. Make sure that you include taxes, home insurance, mortgage insurance, etc. for both current and proposed. That way you will be "comparing apples with apples.")
- Divide your monthly savings into the total cost of refinancing. That will show you how many months it will take to pay off the costs.
- Estimate how long you'll stay in the house. If you think that you may well move in 2 years and it will take 3 years to pay off the cost of the refinance, that may not be the best loan for you. However, if you don't think you'll move again for 8 years, it could be a good idea.
Pay The Full Amount Monthly
Some mortgage companies offer loans that don't require you to pay the full monthly payment every month. They may present this as a benefit for you.
Don't fall for this.
Every month that you do not pay the full principal and interest -- plus other monthly fees like taxes, homeowner's insurance, and mortgage insurance -- you go into the hole.
Some of these loans are called interest-only loans. That is, you will pay only the interest every month.
This may sound great when you first hear about it. But if you don't cover your full principal-and-interest payment every month, you will have to make up at the shortfall at some point.
Where will you get the money to catch up on the principal payments you've missed? If the housing market goes into a slump, you may find yourself owing more on the house than it is worth. And that's a highly undesirable predicament to find yourself in.
Mortgage Bankers vs. Mortgage Brokers
Note: The video above lumps all mortgage lenders into the category of mortgage brokers. This is incorrect. See below for the differences.
One main difference between a mortgage lender and a mortgage broker is that:
- Mortgage lenders approve their own loans.
- Mortgage brokers submit their loans to mortgage lenders, who then approve or deny the loans.
As a rule of thumb, it's smart to start with mortgage lenders first. Although some mortgage brokers are reliable, mortgage lenders tend to enjoy better reputations.
When you're considering loan officers, ask them to provide you with three references. If a loan officer is upset by this request, move on to another loan officer.
If you have a friend who is a realtor, ask him or her to recommend a reliable loan officer. An experienced realtor will usually have developed a long-standing relationship with a specific loan officer. If your realtor friend is not that experienced, ask her or him to get the information from a more experienced realtor.
Getting Professional Advice
If you need to refinance in order to stay afloat financially, be sure to scrutinize the loan types available. If you don't understand what the loan involves, consult your local bank branch manager or a real estate attorney before signing papers or giving the mortgage lender any non-refundable money.
Don't accept without question a type of loan that seems "too good to be true." What seems too good to be true usually is.
Most mortgage loan officers and all mortgage brokers work on commission. So they may urge you to get the loan amount and loan type that will earn them the largest commission. Be wary.
If you don't understand the terms of the loan or how high the loan amount really needs to be, consult your local bank branch manager, who does not work on commission. Consulting your branch manager will not commit you to refinancing through them. You can still go elsewhere to obtain the rate you want. But the branch manager can help you get perspective on your situation and what type of loan you need.
When you make a formal application for your refinance, the fees you will be charged will be disclosed to you. Hold onto the document that outlines your charges.
As your loan is processed, your loan amount may change, based on the exact payoff figure required by your current lender. Also, if you are paying off consumer debt with the funds from your refinance, these payoff amounts may vary a bit from what you told the lender when you applied for the refinance.
You'll be issued a final statement of fees at the time of closing. Keeping in mind that payoff amounts may have changed somewhat, compare your final statement of fees with the disclosure of fees you received when you applied for the refinance. If unexpected fees have been added, especially lender fees, challenge them.
The closing attorney is working for you, even if he or she was recommended by the lender. And the attorney is required to ensure that you are not overcharged by any party to the loan, including the lender.
A loan closing can be an intimidating experience. But don't feel rushed. Look over every line item, compare it to your previous cost disclosures, and question anything you don't understand.
Even after the loan has closed, you still have the ability and the right to question the attorney about any fees. If they were unfairly charged to you, your attorney has a duty to see that those fees are refunded to you.
Your 3-Day Right Of Rescission
With a refinance, you have a three-day right of rescission. That means that you can freely walk away from the loan during those three days. However, if you choose to do so, you will lose any nonrefundable money that you paid to the lender, including:
- the cost of your appraisal, if one was required
- the cost of your credit report
- any part of your discount points that you were required to pay when you applied for the loan.
Easing Financial Strain
Refinancing can be the solution to pressing financial problems. For most people, their largest monthly expense is their mortgage payment.
If you have a fixed rate, consider going with a 1-year ARM. But don't go with an ARM that adjusts more often than yearly.
And be sure that you are paying your full principal-and-interest payment every month, so that you don't go into the hole.
Don't accept any too-good-to-be-true loan types. Remember, most loan officers and all loan brokers are working on commission. They may suggest a loan type that will make the most money for them, regardless of whether it's the right type of loan for you.
If you feel confused, get advice from a disinterested party, an authority who has nothing to gain -- a real estate attorney or your local bank branch manager. They can help you find your way to the refinance program that is best suited to meet your financial needs.