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REFINANCING A HOME |
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Why Refinance?
Choosing a Loan
Lock, Cap or Float?
Rates, Points & APR
Closing
There are a variety of reasons you may choose to refinance your home. Here are some of the most common reasons:
Refinancing to Lower Monthly Payments.
There are two ways refinancing can allow you to reduce your monthly payment. One way is to refinance at a lower interest rate. A rate that is just a half or three quarters of a percentage lower than what your current loan is, can make a change in your monthly payment. It is important however, to evaluate application, closing and other costs to determine your breakeven point (or how long you will have to make payments at the lower rate before the cost of refinancing has paid off) and if /when refinancing makes sense. Use this calculator to determine your breakeven point.
Another way to lower your monthly payments is to change the term of your loan. Changing the term from 15 years to 30 years, for example, would yield a lower monthly payment. Note however, refinancing to a longer term may mean paying more in interest over the life of the loan.
Refinancing to Save on Interest
Obviously, a lower mortgage rate means you won't pay as much interest for any given loan, but another way to save on interest is by reducing the term of your loan. Refinancing to change the term from 30 years to 15 years can save a significant amount in interest over the life of the loan. Note however, your monthly payments could increase if you choose a shorter term loan.
Refinancing to Convert An Adjustable Rate Mortgage (ARM) to a Fixed-Rate or Vice Versa
If interest rates are favorable, you may want to consider converting an adjustable rate mortgage (ARM) to a fixed rate mortgage before the ARM term ends and the rate becomes fixed. Or, you might consider refinancing to another ARM if you feel interest rates are in your favor to do so.
If you are planning on staying in your house for only another 5-7 years, you might want to consider refinancing to an ARM. Interest rates on adjustable rate mortgages are generally lower than current fixed-rate mortgages, thereby making monthly payments lower. Since you won't be in the same house when the ARM converts to a fixed rate, you won't have to worry about what the fixed rate will be.
Refinancing to Get Cash or Pay off Debt
Known as “cash out refinance”, you can refinance to get a loan that is greater than the amount you owe on your current mortgage, based upon the equity in your home. This can help you pay for any large expenses you see coming in the near future, such as home improvements or college tuition, or help you pay off credit card charges or other debt that has a high interest rate. Not only can you save money with a lower interest rate, you can get a tax benefit - interest paid in mortgages is most likely tax deductible. Be sure to check with a tax advisor or attorney before you begin. Apply for a Debt Consolidation/Cash Out Refinance Loan.
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It’s important to understand your options so you can determine the type of loan which best fits your needs and which loan term offers the ideal repayment schedule.
Loan Types
There are two general categories for home loans: fixed-rate mortgages and adjustable-rate mortgages (ARMs).
Fixed-Rate Mortgages
Fixed-rate mortgages offer interest rates that stay the same throughout the life of the loan so you can have predictable monthly payments. You won’t have to worry about rising interest rates and can take comfort in knowing your loan payments will never increase. Fixed-rate loans may be appropriate for buyers who plan to live in the property more than 10 years and like total payment stability. Consider paying points if you want to lower the rate and consider shorter term loans if you want to build equity faster,
Adjustable-Rate Mortgages (ARM)
Adjustable-rate mortgages have interest rates that adjust periodically based on market conditions. The initial rate is fixed for a period of time (dependant on the loan you select), and then adjusts annually based on the current market index; it can not go above a pre-determined cap. The initial interest rate for adjustable rate mortgages is generally lower than current fixed-rate mortgages, making them appropriate for buyers who want to take advantage of the lowest rate possible, are willing to accept payment changes, or cannot qualify for higher rate programs. Adjustable rate mortgages may also be appropriate for people with growing incomes, who will refinance in a few years or who be able to afford a larger payment in a few years if interest rates rise.
Mortgage Programs
We strives to offer borrowers the most innovative and competitive loan programs available in the mortgage industry. We provide not only conventional loans but offer FHA and VA loans as well as alternative financing options to borrowers who have past or current credit issues and/or difficult to verify income.
Federal Housing Administration (FHA) Loans
FHA loans are insured by the federal government to help first-time homebuyers with low to moderate income and those who can’t afford a large down payment purchase a home. Loan qualification is typically easier than conventional loans and closing costs can often be included as part of the loan amount. FHA loans can be either fixed- or adjustable-rate; maximum loan amounts vary by state.
Veterans Affairs (VA) Loans
VA loans are insured by the federal government to help veterans of the armed services, active-duty personnel, reservists and their spouses purchase a home. VA loans offer a set interest rate for the entire length of the loan. Qualified borrowers may be eligible for no down payment loans and for mortgage payments up to 41% of their income (depending on other debt).
Jumbo Loans
Jumbo loans, also known as non-conforming loans, are for buyers that need to borrow a larger loan amount. With a Jumbo Fixed Rate option, you'll have the peace of mind in knowing your principal and interest payment will remain the same throughout the loan term.
If you'll most likely be moving again within the next 5 to 10 years, a Jumbo ARM may work best for you. These loans have a lower interest rate than fixed rate mortgages and may allow you to qualify for a larger loan amount.
Jumbo programs are required if you need a loan amount greater than $330,700.
Balloon Mortgages
Balloon mortgages have a fixed interest rate and fixed monthly payment for the term of the balloon loan, which is generally 5-7 years. At the end of balloon term the loan is due in full. The borrower may then refinance into new loan at current interest rates. Balloon mortgages are appropriate for buyers who plan to live in the property more than 5 years and are willing to refinance at the end of the balloon term if loan is not paid in full.
Alternative Financing
We are proud to offer loan options that can help you move past financial difficulties including credit issues, high debt ratios, lack of savings and no credit history to help you achieve homeownership. Fixed- and adjustable-rates loan options are available. Contact an Advisor.
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Lock a Rate
Locking a rate means that the lender will honor a rate for a specified period of time while your application is being processed. In a volatile interest rate market, locking a rate will protect you from rising interest rates and will give you the security of knowing what your interest rate will be at the time of closing. Be sure you know lock-in period and that it allows enough time for your loan application to be processed.
Float a Rate
By floating a rate, you are subject to market fluctuations during the float period. If you think interest rates might drop before your loan is processed, you can “float” instead of lock. You can keep an eye on interest rates and lock in at any time until five business days before your closing.
Cap a Rate
You can place a ceiling on the interest rate without locking it by capping it.
With a cap, interest rates can fall, but cannot rise above the ceiling for a fixed period of time. Note however, that the initial capped rate is slightly higher than daily market rate. In a volatile interest rate market, you’ll have to decide if you should cap a rate or lock it.
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Interest Rates
The interest rate of your loan affects your monthly payment; the higher the interest rate, the higher your monthly payment, the lower the interest rate, the lower your monthly payment. Use this calculator to compare two or three mortgage packages.
Points
A point, also known as a loan’s “origination fee”, is equal to 1% of loan amount. For example, a loan equal to $100,000, one point would equal $1,000; two points would equal $2,000 and so on. Points are paid to the lender at the time of closing and are used as a way to save money on interest over the life of a loan and, in turn, lower your monthly payments.
APR
The APR expresses the annual cost of a loan as a percentage, factoring in its rate, points and other charges over the life of the loan.
The following costs are generally included in the APR:
- Points - both discount points and origination points
- Pre-paid interest - the interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations, however others may use any number between 1 and 30.
- Loan-processing fee
- Underwriting fee
- Document-preparation fee
- Private mortgage-insurance
The following costs are sometimes included in the APR:
- Loan-application fee
- Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
The Truth-in-Lending Act requires that all advertisements for home loan credit terms include the APR. The APR is intended to enable you to compare terms of loan products from different lenders. Note however, that not all lenders calculate APR the same way.
The best way to make an accurate comparison, is to compare loans with the same terms, interest rates and other fees.
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The closing is the final phase of the refinancing process. Make sure you review all your settlement documents and resolve any questions prior to signing them. Also consider asking your attorney to review the documents prior to closing.
Closing costs generally range from 3% - 5% of your loan amount, and are based on where you live, the loan you choose and your closing date. You may be able to include your closing costs in your mortgage loan, check with your Loan Officer. When you apply for a loan, we will give you an estimate of closing costs.
Closing costs include:
- Costs to process your loan (including application, property survey and appraisal); known as origination fees.
- City/county property taxes, insurance premiums paid in advance, including first-year mortgage insurance, first-year hazard insurance and first-year flood or earthquake insurance, if required.
- Title insurance charges
- Recording and transfer charges
- Attorney's fees
You'll need to bring certified or cashier's checks for any closing costs.
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