But what about when rates are rising? In this situation there may not be any monthly savings. In fact, in some cases monthly costs may actually increase. Does refinancing in such a rate environment -- the rate environment we're seeing now -- ever make sense?
Oddly enough, many borrowers -- especially those with "nontraditional" loans issued during the past few years -- would be smart to refinance, even in a period of rising rates.
While it may be true that interest levels are not as attractive as they were when historic lows were reached in 2003, it's equally true that refinancing now may be a far better choice than waiting and perhaps facing even-higher rates in the future.
What circumstances am I talking about?
Let's look at a borrower who knows with absolute certainty that future costs are going to rise -- and rise steeply.
Example: You have a 30-year mortgage. Payments during the first five years are interest-only and fixed at 5.5 percent. The loan balance is 300,000 and the initial monthly payment for principal and interest is 1,703.37.
In year six, the loan becomes a 1-year ARM, there is still 300,000 left to repay but now only 25 years remain for the loan term. Also in year six interest rates are higher -- let's say the new rate is 6.5 percent. The new monthly payment for principal and interest in year six: 2,025.62.
Why did the monthly cost increase so much?
First, the original loan balance was not paid down during the first five years of the loan term. The result is that the original loan amount must now be repaid in 25 years rather than 30 years. Even if rates stayed the same, a shorter repayment period guarantees higher monthly costs.
Second, interest rates rose. In our example rates went from 5.5 to 6.5 percent, but they could rise more. For instance, if rates reached 8 percent in year six -- a rate that has hardly been uncommon in the past 20 years -- the monthly cost for principal and interest would be 2,315.45. At 9 percent the monthly cost would reach 2,517.59.
Given the potential for vastly-higher payments -- and given the potential for increases in other costs such as utilities and property taxes -- it can make great sense for borrowers with interest-only loans, "option" ARMs, and ARMs generally to convert to fixed-rate financing in the face of rising rates.
For instance: Imagine that rates are now 6.5 percent. Our borrower with the 300,000 loan balance gets a fixed-rate, 6.5 percent mortgage. He pays 1,896.20 per month for principal and interest over 30 years. Yes, that's more than the current monthly payment of 1,703.37 -- but more importantly the new monthly payment will not increase, a considerable benefit given the possibility of bankrupting future costs.
One ARM for Another?
The examples above argue that it makes sense to replace ARMs and non-traditional loans with fixed-rate financing when rates are expected to rise in the long-term. But does it ever make sense to replace one ARM with another?
Actually, within limited standards, it does.
ARMs are attractive for two reasons: ARM start rates are routinely below fixed-rate interest levels and ARM qualification standards tend to be more liberal, which means borrowers can get bigger loans with ARMs than with fixed-rate financing.
In terms of refinancing in a rising-rate environment, there's one reason to consider replacing one ARM with another: Many combo-ARMs and interest-only loans have start periods where rates and payments are locked in for the first three, five, or seven years. The savings may not be significant relative to a fixed-rate loan, but the qualifica
So what's the right level of debt?
The loan qualification standards used by mortgage lenders are an important guideline. You can typically get that old standby -- the fixed-rate, 30 year mortgage -- if no more than 28 percent of your gross monthly income goes for mortgage principal and interest, property taxes and property insurance (PITI). In addition, as much as 36 percent of your gross monthly income can go to regular monthly costs -- PITI plus car payments, credit card debt, school costs, etc. In addition, because they have more liberal qualification standards, you can often borrow more with other loan programs such as FHA, VA and adjustable-rate financing.
But no matter what type of mortgage financing you consider, the real question should be not how much can you borrow, but rather how much can you borrow comfortably. In other words, financial sanity counts.
Unfortunately the term "financial sanity" is an expression without a definition. The economics that work for the Webbers plainly may not work for the Johnsons. We each have different incomes as well as different interests, expenses and preferences. Given this background one might ask: What makes financial sense for me?
The answer looks like this: If you're living from paycheck to paycheck, if monthly costs are a burden, if savings are small or non-existent, if you do not have health insurance then it's time to re-think debt burdens.
The richest person I ever met, someone who started with nothing and created jobs for more than 50,000 people, once offered this advice: "The key to financial success is saving, and nothing is harder than saving that first 10,000. After that, it's easy."
In other words, it's entirely possible to have a substantial salary and to fail the financial sanity test. The waiting rooms in every bankruptcy court are filled with people who once had big incomes and bigger debts. One day the numbers didn't work and away went the trophy houses and the big cars.
So how do you begin the savings process?
The first step, literally, is to open a savings account. The very nice people who provide checking accounts and credit cards will also be happy to hold your savings.
The second step is to go after every nickel and dime you can find.
The economics of savings resemble gravity: Little pieces brought together in one place produce big results. Here's an example: Imagine that you usually spend 2.50 per day on little things -- coffee, candy or whatever. Instead, you set the money aside in an account that pays 6 percent interest. The result? After 30 years there's almost 77,000 in your account.
There are any number of strategies to save money, but let me suggest a practical approach. Look at your debts. Pick the one with the lowest balance, say a small credit card that requires monthly payments of 25. Save and pay it off. Then identify the next remaining debt with the smallest balance. You now have 25 a month extra that can be applied to the second obligation. Save and pay off the second debt. Maybe with the second obligation you can save 50 a month. After the second debt is repaid, you have an additional 75 a month to attack the third debt.
During this process there are other steps to take. Bring lunch to work. Have one car (hard in some areas, but not impossible). Collect change at the end of the day and deposit rolls of coins every month or so. Eat out -- but not often. Stay away from credit cards. Avoid late fees and maintain good credit by paying bills in full and on time.
As this process continues you'll notice several interesting results.
First, borrowing for real estate becomes easy as debts decline and qualif
Now you can refinance quickly at almost any time: No less important, refinancing no longer takes a ton of cash.
It was in June 2003 when mortgage rates hit a low not seen in decades: 5.21 percent according to Freddie Mac. In the first quarter of 2006 rates are roughly 1.25 percent higher, a big difference in terms of monthly payments.
Refinancing when rates are falling is easy to understand, but why refinance when rates are rising?
The answer works like this: Some borrowers should refinance in full, some should refinance in part and some should not refinance at all. The trick is to know which option best meets your needs.
If you were fortunate enough to finance or refinance with a fixed-rate mortgage in the summer of 2003 or thereabouts you certainly want to hold onto such debt for as long as it makes sense. However, there are situations where even borrowers with loans at great rates should look at refinancing options.
Cashing-Out
According to the National Association of Realtors, a typical home cost $165,400 in 2003. As of January 2006, that same home was worth $211,000 -- an increase of $45,600.
Growing home values tell us two things: First, if you want to refinance you likely have far more equity then even a few years ago. Second, that additional equity means you can get a lot of cash from your home without touching your current loan. This is great news if you have low-rate financing you don't want to touch.
Go back to that 2003 home. Imagine it was bought with 5 percent down. That means a $165,400 house was financed with $8,270 in cash and a first mortgage worth $157,130. At 5.5 percent interest, two years later the loan balance has been reduced to $152,585. If the house is worth $211,000 today then the available equity is roughly $58,415.
You could get cash out of the house by getting a new loan for $211,000. However, if you refinanced for $211,000 it means the old loan would be paid off and replaced by a new loan at a higher rate. That's not good.
The better choice is this: Get a fixed-rate second loan or a home equity line of credit (HELOC), a form of financing which usually involves an adjustable interest rate. Such additional financing leaves the first loan in place and untouched. By getting a second mortgage you hold on to the old loan and its low rate plus you get additional cash.
The other attraction of second mortgage loans is that they are often available with little or no cash out of pocket. This is not to say such loans are "free" or nearly free, instead what happens is that the lender pays most or all closing costs.
In exchange for closing help the home mortgage lender charges a somewhat higher rate. In addition, loans that require little or no cash up front often have a pre-payment penalty. If the loan is refinanced with another lender or the property is sold within two or three years then a penalty may be due. Ask lenders for specifics.
Safeguarding the Future
It may be that your current financing has a low interest rate or a small monthly payment -- for the moment. But borrowers with interest-only loans, option or flexible ARMs, or loans that convert from a fixed rate to an adjustable-rate mortgage after three to five years should be checked for potential payment shock.
In other words, a 5/1 ARM may have allowed you to acquire a property that has appreciated in value -- a property that could not be financed at the time with a fixed-rate loan. Because you could get the loan you could get the property. In turn, because the value of most homes has risen substantially in the past five years, getting that 5/1 ARM a few years ago has grea
Mortgage refinancing can be done in a number of ways. The two most common are going to your local bank or using the internet.
The internet is becoming a more and more popular method of mortgage refinancing by the day.
Some of the reasons are obvious, mortgage refinancing over the internet is very simple, and the information you can find on the mortgage industry is limitless.
The mortgage industry is a very competitive one, so using the internet to shop around for mortgage refinancing is very smart. As opposed to using your local bank that normally has one product for you to choose from.
Finding someone to do your mortgage refinancing by way of the internet may be easier than you think. These loan officers are hungry for your business, and by putting only limited information on a secure mortgage web site, you will have at least four mortgage loan officers calling to compete for your business within twenty-four hours.
There is also no need to hide the fact that you are shopping around, this only forces loan officers to come back at you with the best rate they can possibly find in order to keep you from doing business with someone else.
The best part is, you are not committed to anything by shopping around, and this is a great way to educate yourself about the programs that are available, and to get a feel for how mortgage refinancing works.
In the end, the choice is yours. But remember, take your time and gather as much information on the mortgage industry as possible. It will help you make much wiser choices, which will pay off in the end.
Mortgage refinancing could also result in lower monthly payments, depending on factors such as: if any 'points' are paid to lower the interest rate on the new mortgage; how much cash is taken out at the time of refinancing; the duration of the new mortgage and whether the new mortgage is a fixed-rate, adjustable-rate or variable-rate loan.
"A vast majority of people close their loans, make their payments and don't worry about it again," says Bob Cannon of BancMortgage Financial Corp. "They don't refinance when they should be looking at it."
Even if you have bad credit and have to pay somewhat higher interest rates, mortgage refinancing will still cost less than other forms of borrowing because the loan is secured by your home. And if you use the money wisely, you can get out of credit trouble and raise your FICO score. This will qualify you for better rates in the future.
Your FICO score is computed and tracked by the three major credit bureaus: Trans Union, Equifax and Experian. Your score is updated quarterly and is negatively affected by such things as: late or missed loan payments, filing for bankruptcy, having too much debt compared to your income, and credit card balances being too close to their limits.
Fixing Bad Credit
If you are a homeowner, mortgage refinancing can go a long way toward improving your financial situation. Here are a few other positive steps you can take to speed up the process:
Credit card discipline - Reduce the number of cards in your wallet or purse to one. Take it out only when necessary and pay it off each month.
Credit union membership - If you aren't already a member, join a credit union. They're a good source of loans for purchases like a car or a home.
Automatic savings - Have your bank automatically deposit a set amount from your paycheck into your savings account or retirement plan.
Avoid credit repair scams - There's nothing a credit repair company can do that you can't do yourself with a little research and effort.
Wholesale lenders work closely with mortgage brokers. Mortgage brokers are the people who work with people looking for mortgages in the way of counseling, educating, and locating a loan for people who find themselves in a unique situation and have trouble finding a loan on their own because their needs may be special.
Keep in mind, wholesale lenders are out there by the thousands, and they are very competitive. So be sure to shop around. Just because you have bad credit, it does not mean that you should be at the mercy of mortgage companies. There are plenty of lenders out there who have programs to lend money to people with bad credit.
The best place to begin your search for a bad credit mortgage refinance would be the internet. Make an attempt to contact no more than four lenders, allow for them to assess your situation, than base your decision on the one that offers you the best deal that meets your needs and budget.
One purpose refinancing your house may serve would be obtaining a lower rate which would lower the amount of fees' you pay on the money you borrowed over the course of the loan.
Another purpose refinancing your house may serve is that if you have lived in your home for some time, at least long enough to establish some equity through appreciation and principal payments, you may be considering refinancing and getting some cash out.
It is not at all uncommon to liquidate some of the equity in your home to put toward home repairs, buying a car, college tuition, etc.
The mortgage industry is a very competitive one, so obtaining a lender to help you refinance your house should not be at all that hard.
For starters you may want to check out the internet to find a lender. The internet is a very valuable resource when it comes to locating lenders and loan officers so that you may shop around for the best deal.
Once you have located a few lenders to work with, allow them to assess your situation to see what rate and product they come back at you with.
Once you have received a few quotes and explanations of programs available to you, base your decision on what rate and program best fits your needs and budget.
Obviously, you will want to go with the program that offers you the best rate. This is the wisest choice. However, make sure you get the loan officer's proposal in writing. Anything but a written agreement is useless.
Remember, before you go jumping in to refinancing your house, do your homework, and research the mortgage industry, it will make the process a lot less painless.
Author Bio
Jennifer Hershey has more than twenty years of experience in the Mortgage Industry as a loan officer. She is the owner of www.explainingmortgages.com, a mortgage resource site devoted to making mortgage terms and products easy to understand.
Article Source: http://www.ArticleGeek.com - Free Website Content By: Jennifer Hershey
Refinancing can be done in a few different ways. One of the most popular recently has been the home equity loan.
A home equity loan is a loan used to pay off your existing mortgage at a lower rate.
Also, when refinancing with a home equity loan, you have the option of liquidating some of the equity you have established in your home through monthly mortgage payments and appreciation.
Lets suppose you owe $125,000.00 on the mortgage to your home, but your home is worth $200,000.00. This means you have $75,000.00 worth of equity that you can liquidate.
Realistically, you could get a home equity loan for $150,000.00, pay off your existing mortgage, and have $25,000.00 left for home improvement, a new car, college tuition, etc.
Home equity loans also come in the form of a line of credit, better known as a home equity line of credit.
The difference between a home equity loan and line is that the line comes with a variable rate, which means it will adjust with the prime rate, so be careful when deciding.
The home equity credit line can also be re-tapped once it has been partially paid off, or paid off in full, which makes for much convenience.
Before deciding on how you want to go about doing your refinancing, be sure to educate yourself as much as possible about the mortgage industry.
Also, shop around for the best rate and program that fits your needs and budget. The mortgage industry is a competitive one, so let them fight for your business. Good luck.
Author Bio
Jennifer Hershey has more than twenty years of experience in the Mortgage Industry as a loan officer. She is the owner of www.explainingmortgages.com, a mortgage resource site devoted to making mortgage terms and products easy to understand.
Article Source: http://www.ArticleGeek.com - Free Website Content By: Jennifer Hershey
Refinancing with cash out in laymen terms simply means to refinance your existing mortgage and borrow some of the equity in the home to be received in a lump sum at the closing table.
People refinance with cash out all the time and for a variety of reasons. The number one reason being to get a lower rate on their mortgage. The cash out scenario you can use for all sorts of reasons. Such as debt consolidation, buying a new vehicle, home improvement, college tuition, family vacation, etc.
If you are seriously considering refinancing with cash out, you may want to consider shopping around for a mortgage. By shopping around you can compare rates, and fees.
Also, be sure to educate yourself as much as possible. Take the time to learn as much as you can about the mortgage industry, so when the time comes to dealing with a loan officer you will have a strong grasp on your options.
Once you are done educating yourself, you will be able to track down a mortgage company to assist you with your cash out refinance.
Once you begin your search, don't limit yourself to one company, talk with up to four at the very least. Allow them to assess your scenario and do inform them that you are shopping around.
By letting the loan officer know that you are shopping around, it will be in their best interest to offer you their best rate to prohibit you from going to their competition.
The mortgage industry is a very competitive one, and they will compete for your business. So sit back, relax, and wait for the best offer to come your way. Good luck.
Author Bio
Jennifer Hershey has more than twenty years of experience in the Mortgage Industry as a loan officer. She is the owner of a mortgage resource site devoted to making mortgage terms and products easy to understand.
Article Source: http://www.ArticleGeek.com - Free Website Content By: Jennifer Hershey
The first question your realtor will ask you when you begin your search is "Are you pre approved for a loan"? You may very well think that this is a strange question, as you have not even looked at a home yet, let alone found one you want to make an offer on. But this question is not as strange as it seems. Getting pre approved for a loan at the very beginning of the home buying process is a very important step.
Before proceeding, it is best to understand the difference between the two terms bandied about by realtors and lenders. These terms are pre qualified and pre approved. Pre qualified for a loan means absolutely nothing in the home buying process. It merely means that you have been qualified to submit a loan application to a lender. That is all.
Pre approved, on the other hand, means that you have already been approved for a home mortgage loan. The lender has already studied your qualifications and accepted your application for a loan up to a certain amount. At this point, you still have not borrowed the money, and you are not responsible for any payments. But if you find a home up to the loan amount, the bank will lend you the money. The pre approval will also tell you the price range of homes that you should be looking at.
Why is this important? When you start looking for a home you may find one that you like pretty quickly. If you are pre approved, you can immediately sit down with your realtor and make a purchase offer. When the offer is presented to the sellers, along with a copy of your home mortgage loan pre approval letter, you are in a very strong position with your purchase offer. Sellers have been known to accept lower bids from pre approved buyers over higher bids from buyers who have not been pre approved.
So if you have decided to take the big step of purchasing a home, do yourself a favor and call a lender before you call a realtor. Then when the realtor asks, "Have you been pre approved"? You can surprise them with your "yes" answer. Being well prepared will be a nice feeling.
The reason personal mortgage insurance exists is to protect the lender in case the borrower defaults on the loan. When a buyer does not have 20% of the purchase price to put down on a piece of property, private mortgage insurance may be required by the lender in order for the mortgage to be secured.
It is vital to remember that you only need to have private mortgage insurance while you own less than 20% of your home. Once your equity has been built up, either through extra payments or property appreciation, you can have your PMI cancelled. If you cancel your PMI and continue to make the same payments, your principal balance on the mortgage will decrease at a faster rate.
With the advent of private mortgage insurance, more people are able to buy a home that is of higher quality than they would if they needed to come up with a 20% down payment. With the assurance provided by PMI, lenders are willing to accept down payments as low as 3% for a borrower to purchase a piece of property. On a $200,000 home, this calculates into a buyer needing $34,000 less in order to secure a mortgage, a great advantage to buyers who can afford a mortgage but haven't been able to save significantly for a down payment.
Private mortgage insurance will make your monthly payments higher, but you will know what your payments will be before you decide to go with a loan that requires this insurance. Remember that you will have to pay this amount until you own 20% of your home. This may take a few years, especially if real estate values are declining. Although PMI provides protection for the lender in case the buyer defaults, there is no protection provided to the buyer.
There are other types of loans available if you want to avoid paying for PMI. You can secure a first mortgage for 80% of your purchase price and then a second mortgage for 20% of the purchase price. The second mortgage will very likely be at a rate significantly higher than the first mortgage. You are encouraged to pay as much extra as possible on your second mortgage in order to reduce your interest payments over the long term. When you get close to paying off your second mortgage, you will know that you own at least 20% of your home.
Regardless of the type of loan you choose, you will have to pay for your new home purchase, plain and simple. PMI protects lenders from losing money and allows you to obtain a mortgage without coming up with a significant down payment. PMI appears to be a beneficial addition to real estate lending options for both the buyer and lender. Always know what you can afford each month and you will be able to meet your payments and live in the home of your dreams.