Refinancing Options Regardless of Mortgage Rates
Since the media has over zealously expounded on the issue of tighter bank lending standards, a number of homeowners that could refinance their existing mortgages are overlooking this option due to the concern over being denied for a new home loan.
While, it is difficult to refute the argument that bank mortgage lenders are more conservative in their home loan underwriting practices since the credit crisis began, this by no concludes that mortgage loans for refinance transactions are any more difficult to obtain than one for a purchase. In fact, quite the opposite is true. In general, mortgage loan approvals for a refinance transaction are easier to obtain than a purchase transaction.
A key difference between a mortgage refinance a mortgage for a purchase transaction from the mortgage lenders point of view is the equity in the home or down payment. A standard mortgage is evaluated based only a few factors, the most significant being the credit of the borrower, the income relative to the debt payments and the equity in the home.
The equity is measured by the loan to value. On a purchase, the loan to value is a reflection of the down payment amount where a 10% down payment would lead to a 90% loan to value. With a refinance the loan to value is the loan amount divided by the property value for example; a $100,000 loan request for a property worth $125,000 would have a loan to value of 80%.
Even with the recent reduction of property values over the past years, most homeowners find that their home is their most valuable financial asset and the mortgage they have is their largest debt. Consequently, reviewing the existing mortgage interest rate, monthly payment, mortgage balance and potential mortgage options is a prudent financial decision.
As part of the mortgage review, in order to assess the benefits and costs of a mortgage refinance, a variety of factors should be considered, including: mortgage interest rate, type of mortgage, expected holding period for the mortgage or home and tax consequences.
With mortgage rates at or near record low levels, homeowners that have not refinanced yet or purchased their home during the last period of low rates, should compare their mortgage rate with the current mortgage rates and measure this against the other loan factors such as the length of time to hold the loan and tax savings.
When evaluating the mortgage interest rates, note that mortgage interest rates charged on a home loan will vary greatly depending on the type of mortgage. Fixed rate mortgages offer the benefit of locking in a rate and knowing exactly what the monthly mortgage payments will be for the term of the mortgage. Generally the longer the mortgage term, the higher the mortgage rate. A 15 year term mortgage not only pays the home loan off in shorter time period but generally has a slightly lower interest rate as well.
When reviewing your mortgage options, be sure to factor in how long you intend to keep your home as well as your ability to handle potentially higher rates in the future with ARMs. If you plan to downsize and move to a smaller home in a few years, a 5 year ARM would provide a much lower interest rate than a traditional 15 or 30 year fixed rate mortgage.
For homeowners that itemize your tax deductions, the interest that is paid on a mortgage loan may be deductible. Refinancing a mortgage and taking cash out may provide the money to pay off higher rate loans, such as credit cards or auto loans, and provide a tax deduction as well.
It is possible that a refinance to maximize savings and improve finances can be accomplished in several ways, including:
Lowering the monthly mortgage payments.
Obtaining cash back by accessing the home equity.
Eliminating private mortgage insurance
Using equity to pay off high interest debts such as credit cards or loans.
Changing mortgage terms to pay off the home loan faster.
Switching loans to a fixed rate mortgage from an ARM or adjustable rate mortgage.
Inaccurate Mortgage Payment Estimates with Taxes and Insurance
A standard mortgage payment is often quoted by a mortgage lenders with either just the principal or interest portion of the monthly payment or the principal and interest as well as the monthly allotment for taxes and insurance. The terms used by the mortgage industry for these monthly mortgage payments are referred to by a couple of acronyms. PI is used to refer to the principle and interest payment and PITI is used to refer to the full payment of principal, interest, taxes and insurance.
When the mortgage lender is quoting a payment that includes the TI or taxes and insurance portion of a monthly mortgage payment, this number is frequently just and estimate and is often inaccurate.
Miscalculating the monthly amount of property taxes or insurance is generally not intentional. When a potential home loan borrower first calls a mortgage lender for a mortgage rate quote, a common question is what the monthly payment will be. It is fairly easy to provide a mortgage payment amount based on the loan amount, the mortgage rate offered by the mortgage lender and the term of the loan. In fact, with these figures, an exact mortgage payment can be calculated that includes principal and interest. Now when it comes time to quote the payment with taxes and insurance, the mortgage lender has to rely on an estimate of these figures based on the property value and location or use figures that are provide by the borrower.
In either case, the PITI monthly payment that is initially quoted is generally going to be an estimate that has quite a bit of room for error. This error amount is magnified in the current low mortgage rate and high property tax period.
As an example, a home in Naperville Illinois worth $500,000.00 will have a property tax bill of $12,500.00 ( approximately ), with a 20% down payment the loan amount would be $400,000, with mortgage rate of 4.50% the monthly mortgage payment would be $2,026.74. This is the principal and interest portion of the monthly mortgage payment. By dividing the annual taxes of $12,500.00, the tax portion of the monthly mortgage payment is $1,041.67. If the annual home owner’s insurance bill is $775.00, the insurance portion of the monthly bill would be $64.58. This puts the total PITI payment at $3,132.99. Of the total PITI monthly mortgage payment, almost 35% of the payment is for taxes and insurance.
Exact property taxes are typically available only through public records or through tax data published in a local multiple listing services. Once the mortgage loan request is being processed, the mortgage lender will have a more exact figure on the real estate taxes based on information retrieved form the county tax offices.
The same issue of inexact figures applies to hazard insurance or home owners insurance. The exact number for the insurance costs will come from the insurance company not the loan officer or the borrower. In the meantime, the figures that used in the initial calculations are just estimates.
Escrow accounts, sometimes called impound accounts are deposit accounts established by the mortgage lender to pay annual property tax bills and insurance premiums. The escrow amount is initially set up with approximately 1/6 of the annual real estate tax bill and 1/16 of the annual insurance bill. The cost or amount of money needed to fund the escrow account will impact the amount of funds need at the loan closing.
If the insurance policy and / or the property taxes are misquoted, it can be quite a shock when the mortgage borrower arrives to the loan closing and has to come up with more funds to cover changes in the escrow account and more importantly, discover for the first time the actual monthly mortgage payment including PITI is significantly higher than thought based on that first mortgage payment quote they received.
To avoid these surprises, pay attention to the numbers. When a mortgage lender quotes a payment, understand what is covered in that mortgage payment. Is it the mortgage payment PITI or just the PI and further recognize how these numbers were calculated. Check the results with a mortgage calculator for the term and mortgage rate and go the extra step to verify the tax payment amount and insurance costs.
Florida Mortgage Rates at Federal Trust Bank
Federal Trust Bank is a full service financial institution that provides banking services to individual and corporate customers in Florida. The bank is headquartered in Sanford, Florida and has 11 bank branch locations serving the Central Florida area.
Federal Trust Bank provides a variety of deposit and savings products and services including checking, savings, money market accounts; certificate of deposits; individual retirement accounts as well as a large lending portfolio that includes multi-family residential and commercial real estate loans; and construction, commercial, and consumer loans.
Federal Trust Bank offers several different home loans in Florida to choose from including competitively priced adjustable rate mortgages. The bank offers adjustable rate mortgages with a variety of mortgage rates in Florida and point options.
The conventional adjustable rate mortgage offers lower initial monthly mortgage payments than standard fixed rate mortgages allowing many borrowers to purchase a larger home or allows borrowers to benefit from a lower mortgage rate if they are anticipating a move by the end of the selected fixed term of the adjustable rate mortgage.
Current terms and mortgage rates in Florida offered by Federal Trust Bank include:
A 3 year adjustable rate mortgage has a mortgage rate of 4.375% with 0 points and an APR of 3.463%.
The 3 year adjustable rate mortgage with one point has a mortgage rate of 4.125% and an APR of 3.489%.
The bank’s five year adjustable rate mortgage has a mortgage rate of 5.00% and an APR of 3.859%.
The five year adjustable rate mortgage with one point has a mortgage rate of 4.75% and a 3.852% APR.
Mortgage loans and mortgage rates in Florida offered by Federal Trust Bank are subject to bank approval and additional conditions will apply. The interest rates, annual percentage rates (APRs) and points listed are subject to change without notice. The actual APRs will vary based on the mortgage loan applicant’s final loan amount and finance charges.
For current Florida mortgage rates and to find out more about financing options available from Federal Trust Bank, a bank representative can be reached at 800-226-2829.
Mortgage Loans and the Mortgage Note
In making a mortgage loan, the mortgage lender requires the borrower to sign a promissory note. The mortgage note or loan note, which must be in writing, provides evidence that a valid debt exists. The note covers the terms of repayment for the home loan. The note contains a promise that the borrower will be personally liable for paying the amount of money set forth in the note and specifies the manner in which the debt is to be paid. Payment is typically in monthly installments of a stated amount, starting on a specific date. The note also states the annual rate of interest or mortgage rate to be charged on the outstanding principal balance of the home loan.
The mortgage note is a negotiable instrument. It is an unconditional promise or order to pay a specified sum of money on demand at a definite time or, in the case of home loans, at definite time intervals. The note is made “to the order of “or “to bearer”. The negotiability of an instrument allows it to function the same as currency. Promissory notes, stocks, bonds, and checks are examples of negotiable instruments. The person responsible for the notes payment may be called the payor, promisor, or obligor. The person who is to receive the money may be called a payee, promise, or oblige. In real estate, mortgage lenders will require the buyer to sign a security instrument such as a mortgage or trust deed, which are not negotiable instruments. The mortgage is the security instrument that pledges the property as collateral for the loan.
Understanding the terms, interest rate and principal is essential to understanding notes, mortgages, deeds of trust, and all real estate financing methods. Interest is the money paid for using someone else’s money the interest rate is the rate at which the interest is calculated. The principal is the amount of money on which interest is either paid or received. In the case of an interest bearing note, principal is the amount of money the lender has lent the borrower and on which the borrower will pay interest to the mortgage lender.
The note can be an interest only note on which interest is paid periodically until the note matures and the entire principal balance is paid at maturity. Construction loans or notes are usually of this type. Or the note can be a single payment loan that requires no monthly mortgage payments on either principal or interest until the note matures, and the entire principal and interest is paid at maturity. This is seen more frequently in short term notes. The note also can be an amortizing note in which periodic monthly payments are made on both principal and interest until such time as the principal is completely paid. Most mortgage loans are of this type.
The original principal is the total amount of the note or the home loan. This amount remains the same in an interest only or a one payment loan until the entire principal is paid. In a amortizing mortgage loan, periodic monthly mortgage payments are applied first toward the interest and amount of principal gradually decreases. As each successive payment is made, the interest is applied to the declining principal balance; therefore with each successive payment, the interest portion of the payment decreases and the principal portion increases. The first payment is applied mostly toward interest, and the last payment is applied mostly toward principal. The payments can be set at a fixed rate for the life of the home loan, or they can fluctuate as adjustable rate mortgages do based on a specified index, or they can change at set intervals according to a set formula.
Simple interest is usually used to calculate mortgage loan interest. This means the annual rate of interest is used to calculate payments even though payments normally are made monthly. Payments sometimes are set up to be paid quarterly or annually. A payment plan in which payments are made every two weeks or biweekly mortgages have become popular because it reduces the term of the loan and saves a significant amount of interest over the life of the loan. A current home loan can sometimes be converted into a biweekly payment plan.
Mortgage loan interest almost always is calculated in arrears, although it sometimes is calculated in advance. If interest is calculated in arrears, a monthly payment due on the first of the month includes interest for using the money during the previous month. If interest is calculated in advance, a monthly payment due on the first of the month includes interest for the month in which the payment is due. When paying off or assuming a mortgage loan, one must know if the interest is paid in advance or in arrears to determine the amount of interest owed or to be prorated at the home loan closing. Interest must be paid in arrears on all loans sold in the secondary mortgage market.
Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.