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Key Aspects Of Refinancing A Mortgage By Craig Elliott Refinancing is the term that describes taking out a new home loan to pay off your existing one. Refinancing is done for a variety of reasons, but generally the purpose is to save money by obtaining a lower interest rate, or to exchange some of the equity in the property for cash.
What's involved in Refinancing?
Refinancing is very similar to the process of getting a first mortgage, and the same rules and eligibility criteria apply. You will need a favorable credit rating and income-to-debt ratio, just as with the original mortgage. The cost of refinancing is an important point to consider when deciding whether or not it's a good financial decision.
Refinancing requires paying closing costs, points, and origination fees, appraisal fees for your property, and possibly a prepayment penalty depending on the terms and conditions of your mortgage. In general you can expect refinancing to cost between three and six percent of the amount of principal you have left to pay on your existing mortgage.
Reasons to Refinance
There are three situations in which refinancing will almost always pay off. First, if you have an adjustable rate and rates start rising, refinancing is usually the safest course of action. You can refinance to a fixed rate before interest rates get out of hand, and avoid the high monthly payments that go along with the higher rate. Refinancing out of an adjustable rate is also a good idea if you decide you prefer a lower-risk loan.
The second reason to refinance is to obtain a lower interest rate and save money on your monthly repayments. This can be a good idea regardless of what kind of you currently have, but there's more to consider than interest rates. In some situations, refinancing won't be the best option, even if interest rates are in your favor.
Finally, refinancing to decrease the terms of your is a good option if your financial situation changes to allow you to afford higher monthly payments. Refinancing in this situation can save you thousands of dollars in interest, even if you end up with a slightly higher interest rate than you currently have.
Many people choose to refinance for another reason. They may not be concerned with saving money on the mortgage, but instead want a "cash-out" mortgage, where some of the equity in their home is exchanged for cash. This is usually done to pay off other debts with higher interest rates or to finance a large purchase. Refinancing for this reason often seems like a great idea, but it's important to explore your options thoroughly before making the decision.
When to Refinance-and When to Hold Off
In general, refinancing is a good idea in any situation where doing so will save money. Interest rates are
Proposed RESPA Reform
Mortgage brokers may have some intrusive rules from HUD to deal with.
When I read the news on HUD?s proposed reform of the Real Estate Settlement and Procedures Act (RESPA) I was skeptical. Cathy from Sequim challenged me to read the 96-page federal register document so we could all figure out what?s going on. I am here to tell you that there is one very good change coming out of this proposal. In fact, it?s so good that I am borderline hopeful that this change might do what legislation is suppose to do and what HUD forgot to do when they signed the original version of RESPA in 1974. But first, the changes that will have many, but not all mortgage brokers screaming bloody murder:
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Neocon-omics
How much can the Fed and the U.S. government do in the face of declining housing prices?
That?s been my worry since I saw the housing bubble peak in 2005. Historically, declines in housing prices take 3-4 years to bottom, which means we still should be at least half a year away. But after that, the economy doesn?t rebound instantly. It yo-yos for a bit - essentially running horizontal.
Fannie Mae and Freddie Mac have entered into cooperation agreements with New York?s attorney general to only purchase loans that meet a new home valuation protection code, the state announced. The code is effected on Jan. 1, 2009. Under the new code, mortgage brokers and loan originators are prohibited from choosing or communicating with appraisers.
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Choosing Second-best
How to leverage your second choice into seller concessions and a better deal.
So, rather than competing for the best house and paying top dollar, you can use it as leverage to get a lower price and seller concessions on a home that could be even more ideal for you ? after you do a little work.
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Price Depression
A forecast for more housing price depression.
My theory is that housing prices will continue to wilt as long as large levels of foreclosures and new home inventories run high. These are not traditional homeowners, and are motivated to slash prices, thus continuing to depress prices.
You should try to get pre-approved by a lender prior to shopping for a home. A pre-approval is a strong marketing tool when making an offer that may contain many a number of seller concessions. Telling a seller that you are already approved for a loan makes the acceptance of a low offer or one where he may be paying the closing costs much more palatable.
US News and World Report implies (hopes?) we may be nearing a bottom in housing prices but with a mountain of resets coming in the next few months, it?s difficult to see how a bottom can be seen or even predicted.
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Strike One
A look at role of mortgage insurance in FHA loans.
Regarding the second point: By not raising the loan limits they fail in one of the 11 ways they can help. I believe they will fail in almost all, but let us have hope. To be specific as to why I support this: FHA is not a government gimme. It is a government guarantee the mortgage will be paid or the lender compensated for losses. The program pays positive cash flow to the government in that there is a type of mortgage insurance fee charged the borrower. It is reasonable and more than pays for the reimbursements made to the lenders that suffer a default.
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Who's To Blame
Mortgage brokers share the blame with the rest of the industry in the current real estate mess.
Who is not to blame for the mortgage mess? Take one step back. As lenders, money was flowing from the spigot like there was no tomorrow. As mortgage brokers, there was money to be made by cranking the faucet, and it was a foot race to see who could get to the sink first. As agents, we sang the ?Houses are expensive, but money is cheap? refrain until we were blue in the face. And, as for the consumer, it really doesn?t matter in the final analysis whether they were motivated by necessity, opportunity or unadulterated greed. We all helped make this bed in which we now must lie.
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Trying To Move
Hard to move when you're house loses value.
I will continue to work from Los Angeles while we work on selling our house, which unfortunately is bad timing as housing prices have taken a bit of a dive around here. Once we have things settled over here, we?ll pack our things and move up to Seattle.
What else can you say to such a ridiculous report, such obvious sensationalism? The sad thing is, many people will read this wild hyperbole and imagine that the TV station?s salacious report has a ?point? to it.
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Home Buyers Returning This Fall
This blogger says lower mortgage rates will drive buyers to the residential real estate market soon.
Ten days ago after the Fed calmed the markets' credit panic with a 1/2 point cut in the Discount rate, I postulated that home buyers will come back this fall when the Fed finally drops the Fed Funds rate, and mortgage rates drop. It's now almost certain to happen. Here are the parameters in play now:
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Lead Scrub Rates
A look at the cost of a lead for a mortgage broker.
Joel has a good interview with Dave Wengel of TargusInfo around Mortgage lead scrub rates. Specifically that lendingtree and lowermybills have a 15% scrub rate whereas the free ipod guys (lure people in with promise of a free ipod but they and their friends have to signup for credit cards, netflix and talk to mortgage brokers to get it) have around a 50-60% scrub rate.
Having been an FHA lender I can attest it is a pain at times. FHA requires annual financial audits of the mortgage brokers financial condition and more. We always have survived the several day pain, and the expenses tied to it, but only FHA drags brokers through this. The actual banks that sponsor the mortgage broker go through even more red tape and grief. Loan officers have to know more rules. FHA doesn?t rely on the easy automated underwriting or the quick answer from a subprime lender. FHA restricts how the borrowers pay for certain expenses and how much the lender can charge.
not the only issues to consider. Other factors such as the amount of equity you have in your home, how long you plan to live in the home, and how many years are left on your mortgage, also come into play when determining whether refinancing will pay off in the long run.
Refinancing will usually pay off if one of the following situations is true:
You're refinancing out of a high-risk (such as an adjustable rate mortgage) to take advantage of favorable fixed interest rates or because you prefer a lower-risk mortgage
You're refinancing from a fixed rate to a new fixed rate with shorter terms or a lower interest rate
In addition, for refinancing to pay off, you should also be planning to remain in the home until you've recovered the costs of refinancing with the savings you make on the new payments.
In some situations however, refinancing won't necessarily pay off even in cases where one of the above situations applies. For example, if your credit rating has decreased since you obtained the first mortgage, you may not qualify for an interest rate that's low enough to make refinancing financially worthwhile.
The amount of equity you have in your home also plays an important role in determining how feasible refinancing will be. If you're planning on a cash-out refinance, for example, you'll likely need private insurance if the amount of equity you retain in your home drops below 20%.
Finally, remember that cash-out refinancing should be approached with caution, particularly if you plan to use the cash to finance a large purchase or pay credit card debt. When you use the money in this way, you're turning unsecured debt into debt that is secured against your house. Using equity to pay off credit card debt, for example, can lead to problems if you end up creating more debt after refinancing.
About Author: Craig Elliott is a freelance writer who writes about topics pertaining to the industry such as Mortgage Rates | Lender
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