Mortgage Refinancing

A reverse mortgage is exactly what it sounds like - a loan whose features make it essentially the reverse of a traditional or forward mortgage. In a reverse mortgage instead of making monthly payments, you receive the mortgage payments. That’s the “reverse” part of a reverse mortgage. Instead of turning your income into equity, you turn your equity into income.

This last feature, turning your equity into income, is what most distinguishes a reverse mortgage from other loans, and it's what makes it so valuable to many senior homeowners. Having spent years repaying the mortgage that allowed you to buy your home, you can now use that investment to help you achieve your later goals in life. Whatever the plans are, whether it’s traveling, paying medical expenses, improving your home, or just adding a bit of luxury to your budget, you now have a golden opportunity to put your nest egg to good use.

You remain the owner of your house for as long as you live there, and you cannot be forced to move. However, your balance cannot exceed the value of your home when you sell it. So no matter how much money you receive through your reverse mortgage, you cannot owe more than your home is worth.

The world is wallowing in the tidal wave caused by the sub-prime mortgage market crisis. What exactly is it? Subprime mortgage loans have higher rates than equivalent prime loans. Lenders consider many factors in a process called "risk-based pricing" when they come up with mortgage rates and terms. This makes it impossible to generalize about subprime rates. They are higher, but how much higher depends on factors such as credit score, size of downpayment, and what types of delinquencies the borrower has in the recent past. From a mortgage lender's standpoint, late mortgage or rent payments are worse than late credit card payments.

A subprime mortgage loan also is more likely to have a prepayment penalty, a balloon payment, or both. A prepayment penalty is a fee assessed against the borrower for paying off the mortgage loan early, either because the borrower sells the house or refinances the high-rate loan. A mortgage with a balloon payment requires the borrower to pay off the entire outstanding amount in a lump sum after a certain period has passed, often five years.

If the borrower can't pay the entire amount when the balloon payment is due, he has to refinance the loan or sell the house. And that’s exactly what happened.

Mortgages generally refer to a money loan and can best be illustrated in the property market where a prospective buyer requires additional finance to purchase the property.

You are going to take out a loan from the Bank or other financial institution, and at the same time pledge the property you are buying as security for the loan. You will be able to repay this loan over an agreed period of years and pay the installments monthly
There are various types of mortgage deals available and the best advice is to discuss your request with a reputable bank which has a Mortgage department or some other financial institutions which specialize in this type of finance. There are also on line sources where you can find sound advice and with no cost be able to make comparisons of the types of mortgages available.

There is a fixed mortgage:
The interest rate that you will have to pay is fixed at the time you sign the agreement. It will not change and so you know with certainty exactly what your monthly financial commitment is during the term of your loan. This makes budgeting simple.
Discounted:
The Bank has a rate that can vary over a period. You enter into an agreement which is that whatever the rate you get an agreed discount. This means that whatever that rate is, your agreed discount applies. The standard bank rate may go up or it may go down, but whatever it is you get the discount you agreed to. The period of the loan is again fixed and during this period your rate is the discounted by your agreed amount.
Tracker:
The interest rate on this type of loan is linked directly to the Central Bank base rate. This means that if the Reserve bank rate changes, so will the rate on your loan change
Capped:
With this type of loan the maximum rate of interest is set at the start. So for the duration of your loan, the interest rates might fall below this rate but you are assured that your interest rate will never rise above the capped rate you agreed to.

Naturally the amount of money that you will be able to borrow will depend on the value of your property. The valuation of the property is done by a valuer sent by the bank. He will assess the value and report accordingly. If it is a new property you are wanting to buy you should take into account some very important factors that decide the value of a property. For example certain locations are much sort after and even if the property is small if its location is very good the value will be very high. A large property in a bad location will not attract much interest.

You should negotiate your loan very seriously to ensure you get the best rates available.

If you are in urgent need of money to take care of some unexpected or expected expenses, then you might be thinking about getting a second mortgage on the equity in your home. There are some things you need to be aware of.

If you want to use the equity in your home then a second mortgage is will be right for you. This also true if you are planning to move, or don’t know how much you should borrow.

First of, a second mortgage is a loan that you can get which is secured by the equity in your home. So if you are to get a second mortgage loan, there will be a lien placed on your home by the lender. The lien is second to your first or primary mortgage on the house. So if you should default on your loan then the first mortgagor will have first claim on the sale and proceeds of your home. After the first mortgagor is paid then the second mortgagor will be able to stake their claim on what’s left.

Your second mortgage loan is likely to one of two types, a fixed-rate loan or an adjustable-rate credit line. Most lenders will have different second mortgage loan programs with varying interest rates.

The interest that you will be paying on the loan is possibly a tax deduction. It would be good to check with a tax expert and tell them about your situation, usually it is fully deductible once the value of the first and second mortgage combined is not in excess of the value of your home.

Once you get your second mortgage loan the money you get can be used for anything you would like. Although most people take a second mortgage to pay off debts, or to pay for college, it is up to you to use the money from the loan wisely. You must also remember that you will have to pay back this second mortgage loan, and if you default, you can loose your home.

Everyone should not seek a second mortgage loan, because it is not for everyone. So before you consider a second mortgage loan, you should look at other financing options, and work out what you can afford to pay in premiums. If you want to borrow over 80% of the equity in your home you will have to get private mortgage insurance.

Needful homeowners totaling in the millions have found their way to take advantage of the low rates offered by the banks and gone ahead and refinanced their mortgages. But what are the advantages and hindrances associated with refinance?

The Basics of Home Refinancing

Over the past few years American homeowners have taken up the cause of refinancing and lined up to refinance their mortgages for a myriad of reasons. In the year 2003 the practice of refinance has hit an all-time high and remained so for two years following.

Despite the fact that it has proven to help reduce costs that are associated with the borrowing of money in order to own a home it is not always the strategy that makes total sense for each individual homeowner for any given situation. Before making any sort of steadfast commitment to refinance it’s important that you research your options to be certain that such an action is your best one.

Should You Refinance

The usual rule to which one would follow in order to come to the conclusion of whether or not to refinance is if you can lower your rate of interest by a minimum of two points so if you can move your current rate of, let’s say, 10% down to 8% then you’ve achieved what you set out to do. The bottom line though is how long it may take you in order to hit the break even point and if you’re even planning to remain in the home that long. Just be sure you’re comfortable with how long it will take for you to see the actual savings from your refinancing.

The numbers are very important to your refinancing efforts. If you took out a 30 year mortgage for 200k and an interest rate of around 8% your payment per month would be $1,468 and if you refinanced at 6% then your monthly payment would be $1,1999 saving you $269 a month. If the closing costs were $2,000 it’d take 8 months to hit the break even mark. So the bottom line is that if you were planning to live in the same home for at least 8 more months then you’re golden and refinancing would be a viable option. However, if you planned to move before that time then it wouldn’t be very wise to refinance.

Not All The Same

Do not choose a mortgage based solely on its reported annual rate of percentage, its APR, because there are more variables to take into consideration such as:

1. Term: How long will it take you to pay off the loan’s principal and interest? Mortgages in the short term usually offer less interest than longer running mortgages and usually involve higher monthly payments. The other hand of the equation is that they result, hopefully, in significantly lessened costs over a period of time.
2. Interest Variability: Mortgages consist of two basic types of mortgages. Fixed or unchanging and then those with variable rates that can change over time that has been predetermined. Though an adjustable rate typically offers lower rates on introduction than that of a fixed mortgage with comparable terms. The adjustable rate can change if the interest rates increase. If you plan to remain in your home for many years you may wish to choose predictability and security that a fixed rate mortgage brings. On the other hand if you plan to vacate your home before that time then an adjustable rate would be your choice. Keep in mind that interest rates that are typically lower are more likely to go up before they go down.
3. Points/Fees: Origination or discount fees are paid to the lender or the broker when a deal is closed. Some mortgage loans are what they call “zero” or “no-point” loans which do not have this cost associated with them but they can be more expensive as the lending company will usually replace this zero cost with a higher interest rate. In the end you’ll need to figure out if the savings are justified. One single point is equal to a percentage point.

Savings: How Much?

A standard figure is that a homeowner with a 30 year mortgage that charges a rate of 8% on a 200k price tag would be paying $1,468 per month. The potential savings are shown below in the table along with the varying break-even points by refinancing your home with several different rates.

Rate After Refinancing New Monthly Payment Monthly Savings Months to Break Even*
7.5% $1,398 $70 29
7.0% $1,331 $137 15
6.5% $1,264 $204 10
6.0% $1,199 $269 8
5.5% $1,136 $332 7
5.0% $1,074 $394 6
*$2,000 closing cost assumed and rounded up.

Mortgage Fees at a Closer Look

Using averaged out fees to consumers and based on an average home loan amount of $180k the fees broke down to:

Average Lender/Broker Fees
Administration fee: $336
Application fee: $205
Commitment fee: $498
Document preparation: $194
Funding fee: $228
Mortgage broker fee: $839
Processing: $320
Tax service: $73
Underwriting: $269
Wire transfer: $31
Third-Party Fees
Appraisal: $327
Attorney or settlement fees: $445
Credit report: $29
Flood certification: $17
Pest & other inspection: $68
Postage/courier: $45
Survey: $174
Title insurance: $605
Title work: $200
Government Fees
Recording fee: $76
Various taxes: $1,339

Keeping With What You Know

Your current purveyor of loans could make your life easier and maybe even cheaper to refinance than any other lend would. Your current lender will have your up to date financial records on hand. It doesn’t sound like much but that does decrease time and resources that would be needed otherwise to process your request. Make a well-informed and confident decision by shopping around. Compare the numbers and ask questions.

Summing it all Up

• Only determine to refinance should the savings in the long run outweigh the expenses you’ll face in the beginning. Calculate your break-even. To do this you divide the refinance cost by your savings per month. This figure is equal to the number of months that you’ll need to remain in your home in order to make refinancing work for you.
• Annual percentage rates change often so do not choose a new mortgage solely based on that.
• Evaluate the terms. Are the rates fixed or variable? Are the merits of paying fees up-front worth it for a lower rate?
• Your current loan provider is already familiar with you and your financial information. With this in mind you may be able to get a better rate than going to a new provider.
• Shop around for the best deal. Do the numbers and ask as many questions as you can think of.