Home Loan Delinquency and Foreclosure Help
The mortgage foreclosure pandemic has not yet abated. While investors talk about a rebounding stock market 1000’s of new foreclosure filings continue to be processed.
For some home owners the foreclosure process can be a bitter end to poorly fitting monthly mortgage payment. In these cases, the mortgage amount and monthly commitment probably never matched the household income. Servicing the mortgage payment combined with the new homes expenses and recurring monthly living expenses was a budgeting nightmare the day the mortgage loan was signed. But for others, the late mortgage payments and impending foreclosure are not a product of risky lifestyle decisions and too much consumption but standard income stresses like the loss of a job, divorce and unexpected financial calamities.
The economic crisis has made it hard for a number of homeowners who were not having trouble in prior months finding it hard to now make ends meet. For some of these people who were finding it difficult to make their mortgage payments, they have been able to save their home from foreclosure. For those borrowers who do nothing, they could lose their home if they continue to ignore the problem and do nothing
If you are having trouble making your payments, sift through the mess to understand what the underlying financial problem is and seek help sooner rather than later. The longer a home loan borrower waits to call, the fewer options they will have.
One of the first steps to make in times of financial distress and when experiencing payments problems is to analyze your monthly expenses and income and to see where savings can be made. Dramatic savings made have to made, if necessary. As your try to fix the household budget leaks, make sure to understand then consequences of mortgage payment delinquency and the foreclosure process so you know what you are up against if you can not realign your budget.
Review the mortgage loan contract you signed when your mortgage lender loaned the money necessary to buy the house or more likely, the last home loan refinance transaction since that will be the mortgage that is secured against the house. The mortgage loan agreement will cover the terms under which you agreed that if you can’t repay the home loan, the mortgage lender can foreclose to take ownership of the house. If you do not pay your monthly mortgage payment, you are technically in default on your mortgage.
State laws vary, but generally, a mortgage loan that is as little as 90 days delinquent can be considered in foreclosure and the process of foreclosing on the home may begin. Your mortgage lender may send a notice indicating that they are starting foreclosure proceedings, but a homeowner should not wait fro this document to arrive. It is important to take steps to prevent a foreclosure as soon as you realize you are having trouble paying the monthly mortgage payment.
The good news is that there has been a tremendous amount of pressure applied to banks and mortgage lenders that originate and service mortgage loans to take prudent attempts to find solutions for homeowners having trouble making their mortgage payments. Contact your mortgage loan servicer (the company that collects your monthly mortgage payments) to discuss your options as early as you can. Many home loan servicers are expanding the options that have made available to their borrowers. It is certainly worth calling your mortgage loan servicer even if you had a request that was denied in the past. Mortgage loan servicers are getting a tremendous amount of calls from distressed borrowers. Be persistent and try to be patient but by all means find out what your home loan lender or servicer can do for you.
While you will want to discus any and all options the mortgage lender may have, one option that is being sponsored by the present administration is home loan modifications. Many home loan servicers implemented new loan modification programs in 2009 to assist homeowners experiencing financial difficulties by lowering their monthly mortgage payments. Plus, many home loan servicers are participating in the government’s Making Home Affordable Program as well as working with non-profit counseling agencies through HOPE NOW.
In a mortgage loan modification, the home loan servicer and the home loan borrower agree to permanently change one or more of the mortgage’s terms to make the monthly mortgage payments more manageable for you. The changes could include reducing the mortgage rate, extending the term of the loan, creating a forbearance on the past due interest or forgiving principal, or a combination of these factors.
With the government sponsored loan modification program in order to be eligible, the home must be the primary residence, the mortgage loan balance must be no more than $729,750 for a single-family home, the monthly mortgage payment (on a first mortgage) must be more than 31 percent of the borrower’s gross monthly income, and the homeowner must either be having trouble meeting mortgage payments or be at serious risk of falling behind. Don’t worry if you had a bankruptcy filing, this does not automatically disqualify a homeowner from participating in a loan modification program.
With this program, the participation of home mortgage lenders and home loan servicers is voluntary. However, the U.S. Treasury added incentives to mortgage loan servicers to modify loans to make them affordable. Part of the program includes the ability to reduce the mortgage rate to as low as 2 percent, and next, if needed, to extend the length of the loan to 40 years. If that isn’t enough to make the mortgage loan affordable, the home loan servicer may defer repayment on a portion of the mortgage loan, which may result in a large balloon payment that will be due at the end of the home loan term. Another option under the home loan modification program is be for the home loan servicer to forgive some of the loan principal, but technically there is no requirement for the home loan servicers to make the concession.
If the mortgage rate is modified under the program, the modified interest rate will remain in place for five years, and then it will increase gradually by up to one percent per year until it reaches a cap prescribed by the program.
The web site www.makinghomeaffordable.gov provides homeowners with detailed information about the programs. The Web site can help home loan borrowers determine if you may be eligible fro the program, but be aware that even with government pressure, only the home loan servicer of your loan can tell you if you qualify.
In general, you may qualify for a loan modification under the Making Home Affordable Modification Program (HAMP) if: your home is your primary residence; you owe less than $729,750 on your first mortgage; you received your mortgage before January 1, 2009; your monthly payment on your first mortgage (including principal, interest, taxes, insurance and homeowner’s association dues, if applicable) is more than 31 percent of your current gross income; and you can’t afford your mortgage payment because of a financial hardship, like a job loss or medical bills.
If you meet these qualifications you must contact the mortgage loan servicer. Once you start communication with the mortgage loan servicer you will need to provide some documentation for the mortgage servicer or mortgage lender that may include: information about the monthly gross (before tax) income of your household, including recent pay stubs, your most recent income tax return, information about your savings and other assets, your monthly mortgage statement, information about any second mortgage or home equity line of credit on your home, account balances and minimum monthly payments due on your credit cards, account balances and monthly payments on your other debts such as student loans or car loans and a completed Hardship Affidavit describing the circumstances responsible for the decrease in your income or the increase in your expenses.
The government has also sponsored a program called the Home Affordable Refinance. This part of the program is intended to help homeowners who have been unable to refinance into mortgages with a lower mortgage rate because their homes have decreased in value.
In general, to qualify for a mortgage refinancing under this program, homeowners must have an existing mortgage owned or guaranteed by Fannie Mae or Freddie Mac (government-sponsored enterprises that help ensure funds are available for home buyers at affordable interest rates), be current on their mortgage, and have a first mortgage that does not exceed 105 percent of the property’s current market value.
The interest rate and any refinancing fees will be set by each mortgage lender. It will be necessary to call your mortgage lender or home loan servicer to find out if your loan is eligible. For those home loan borrowers who already know that their mortgage loan is held or guaranteed by Fannie Mae or Freddie Mac, these organizations can be contacted directly at 1-800-7FANNIE or 1-800-FREDDIE to see if you qualify for this program.
The bottom line is that homeowners who currently have a hard time making their monthly mortgage payments should contact their mortgage loan lender or mortgage loan servicer or a reputable counseling agency as soon as possible to discuss options. Home loan borrowers who are in distress should also be very careful in dealing with organizations that encourage borrowers to cease making payments or walk away from their home while also promising to repair their credit.
Here is a partial list of mortgage foreclosure prevention resources:
Government Mortgage Modification Programs:
Making Home Affordable
www.MakingHomeAffordable.gov
www.FinancialStability.gov
Hope for Homeowners (H4H)
http://portal.HUD.gov
(800) CALL-FHA or (800) 225-5342
Foreclosure Assistance and Counseling:
U.S. Department of Housing and Urban Development (HUD)
www.HUD.gov
www.HUD.gov/offices/hsg/sfh/hcc/fc
(800) 569-4287
Homeownership Preservation Foundation (HopeNOW)
www.995hope.org
(888) 995-HOPE or (888) 995-4673
NeighborWorks America
www.FindaForeclosureCounselor.org
www.NW.org/network/home.asp
FDIC Foreclosure Prevention Website
www.FDIC.gov/foreclosureprevention
(877) ASK-FDIC or (877) 275-3342
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.
Mortgage Loan Refinance Break Even Analysis
Mortgage refinancing is a measurable sector of in mortgage lending. Mortgage refinancing is normally comprises at least 50% of all mortgage loan applications. When you refinance your existing home loan there are many factors to consider in choosing the optimal term, loan amount, and mortgage rate. The best way to measure the costs and benefits from refinancing is to compare all the costs of the existing mortgage and the new mortgage over a future period of time. The decision to refinance should only be made if the long term savings outweigh the initial expenses. One such tool to help make this cost and benefit decision for home loan refinance is a measurement called the break even period.
The break even period is the number of months it takes before the savings from the lower rate of a refinance covers the costs of the new mortgage refinance. In order to find your break even point, you will need to first determine the amount of time it would take for you to cover the amount of money you spend on closing costs. An example of this would be if you spent $2400.00 on closing costs for a new home loan to reduce the monthly mortgage payment by $115, it would take just under 21 months in order to cover the costs of the refinance or reach the break even point. As long you intend to hold the new home loan for a period beyond the break-even point, the new mortgage loan pays for itself.
There are several types of refinancing options available. If you already have an existing mortgage, simply replacing it with a new first mortgage at a lower mortgage rate may be an option for you but many borrowers are adding additional funds to the refinance or doing a cash out refinance to pay off other debt. Measuring the break even point is more difficult in these cases since the debt being paid off with the cash out transaction generally has much lower term left on it.
When existing homeowners are refinancing more debts into the refinance home loan transaction, extra care should be taken to make sure they are receiving a beneficial mortgage with the appropriate mortgage rate and term that matches the debt being paid off. In these situations it is wise to measure the cost of the home loan and review the savings on the debt you are paying off. The break even point on this debt should be measured over a similar time frame or term. Therefore, don’t just add $15,000.00 in credit card debt pay offs to your cash out refinance and calculate how much you are saving over a 30 year mortgage. The calculation on the savings should be performed as if you were to pay this portion off in a much shorter period that would be comparable to the amount of time it would take to pay off the debt the way it is structured now.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. In order to get the best possible refinancing deal, you’ll need to shop around and conduct a detailed cost comparison to see which mortgage offers the greatest financial return.
But what really matters is how long it will take you to break-even on the transaction and whether you plan to stay in your home that long. In other words, make sure you understand, and are comfortable, with the amount of time it will take for your overall savings to compensate for the cost of the refinancing. Use the mortgage calculators to help with the evaluation on process on the home loan closing costs, mortgage payments as well as the break even time period.
Before you make a commitment to refinance your mortgage, it’s important to do your homework and determine whether such a move is the right one for you. And of course, it is always important to evaluate the mortgage rates and mortgage loan programs that are available. A mortgage refinance is all about the numbers, shop and compare to find the best mortgage that fits your needs.
Mortgage Refinance Numbers and Costs
Mortgage refinancing is a home loan process in which one or more existing mortgage loans are paid off and replaced with a new home loan. Shopping around for the right home loan has never been more important to assure a mortgage refinance candidate will get the best financing deal.
The requirements for a refinance have become much more restrictive in 2009. A homeowner’s eligibility for refinancing will still be similar to the mortgage loan underwriting and approval process that an applicant went through when they first obtained the mortgage they are now trying to refinance. A mortgage lender will review and evaluate the borrower’s income and assets, their credit history and credit score, outstanding debts, the appraised value of the property, and the mortgage loan amount requested. Unfortunately, the guidelines to approve these home loans are more stringent regarding the parameters such as credit scores, income, assets and property value. In addition, mortgage costs are running higher.
This makes comparing mortgage loan products, mortgage rates and mortgage loan costs that much more important. Shopping, comparing, and negotiating may save you thousands of dollars. The first step is to begin by getting copy of your credit reports to make sure the information in the report is accurate. Credit report errors or discrepancies are a sure fire way to put a real wrench in the mortgage refinance process. Make sure to correct any mistakes and evaluate how good your current credit profile is.
In order to help evaluate whether a home loan is a good deal or not is worthwhile to have an idea on what to expect for closing costs and refinancing costs. Refinancing fees will vary from mortgage lender to mortgage lender and there will be different costs in different states.
Mortgage lenders are required by federal law to provide a good faith estimate of closing costs within three business days of receiving a mortgage loan application whether it is for a home purchase or refinance. The good faith estimate will provide a detailed approximation of all costs involved in the home loan closing. This document can be very helpful when used to compare costs with different mortgage lenders. Once a mortgage loan is approved and a settlement or closing date is set, the borrower should make sure to get copy of the HUD-1 settlement cost form before the home loan closing takes place.
Here is a list of some of the usual costs and fees that charged on the average mortgage refinance:
Application Fee
Some mortgage lenders and banks charge an application fee at the time of the home loan application. This fee can range from $200.00 to $500.00 and covers the initial costs of processing your home loan request and checking your credit report. If the home loan is denied, you will most likely not be refunded the cost for the mortgage loan application fee. Some mortgage lenders will credit the cost to the closing once the mortgage loan is signed.
Points and Loan Origination Fees
A point is equal to 1 percent of the amount of your mortgage loan. There are two kinds of points you a home loan borrower may pay for the home loan. The first is the mortgage loan discount points, a one-time charge paid to reduce the interest rate of the mortgage loan. The second type of mortgage points are charged by some mortgage lenders as origination fees to earn money on the home loan. The number of mortgage points will vary from mortgage lender to mortgage lender. It is important to review the mortgage points and the mortgage rate between mortgage lenders because the number will often not be directly comparable. As an example one mortgage lender may charge one point for a rate of 5.375% while another mortgage lender will charge 1.5 points for a mortgage rate of 5.25%. The general rule is that mortgage points are fees paid to the mortgage lender or broker for the home loan and are often linked to the interest rate; usually the more points you pay, the lower the rate but this is not always the case. Compare rates and points carefully.
Appraisal Fees
The appraisal fee pays for an appraisal of the home to be performed by an independent licensed appraiser. The appraisal is used to determine the market value of the property, its condition and the overall property market. Some mortgage lenders include the appraisal fee as part of the application fee but many do not. Once the appraisal is completed, you may request a copy of the appraisal and you are legally entitled to that copy even if the home loan is denied. Customary appraisal fees range from $300.00 to $600.00.
Title Search and Title Insurance
A title search and title insurance is used to check and insure the ownership of the property and the existing liens such as other mortgages or judgments on that property. The search fee covers the process of checking these documents and the insurance is to protect the mortgage lender in the event of an error or unknown recorded claim against the property that may very well impact the mortgage lenders security interest or the mortgage loan. If a problem arises, the insurance covers the mortgage lender’s investment in your mortgage. Search fees and insurance vary significantly by state since some state regulates the cost on the title insurance, ranges run from $600.00 to $900.00
Attorney Fees and Closing Fees
The mortgage lender will usually collect the fees paid to the lawyer or title company that conducts the closing for the mortgage lender. Attorney fees on a purchase transaction are a different fee, the attorney fee in a refinance transaction is generally charged in states that require attorneys consummate the home loan transaction otherwise; the title company or other representative handles the mortgage loan closing paperwork. The cost range for these fees is approximately $200.00 to $1,000.00.
Real Estate Taxes and Homeowner’s Insurance Escrow
The mortgage lender will require that the real estate taxes and homeowner’s insurance policy (sometimes referred to as hazard insurance) are paid up to the time of the home loan settlement and that a new escrow is established to disburse future taxes and insurance premiums. The homeowner’s insurance policy protects against physical damage to the house by fire, wind, vandalism, and other causes covered by the policy. The policy insures that the mortgage lender’s investment is still sound even if the home incurs some devastating calamity. The real estate tax escrow insures that the taxes are paid and the property does not become delinquent and subsequently sold for unpaid property or real estate taxes. These charges are technically not closing costs, since they are not charged by the mortgage lender, only collected by the mortgage lender to disburse to the appropriate collecting body. It is difficult to provide a range of costs for the tax and insurance escrow costs since property taxes may range from $1000.00 to $30,000.00.
Private Mortgage Insurance or Mortgage Insurance
These fees may be required on home loans that have less than 20% down payment or over 80% loan to value on a refinance transaction or are insured by federal government housing programs, such as loans insured by the Federal Housing Administration (FHA) or the Rural Development Services (RDS) and loans guaranteed by the Department of Veterans Affairs (VA). If there is not at least 20% equity in the property, mortgage lenders usually require the home owner to have private mortgage insurance to protect the mortgage lender. Insured home loans with private mortgage insurance cover the mortgage lender’s risk that the home owner will not make all the home loan payments. Costs for mortgage insurance have a wide range from 1.75% for FHA loans and 1.25% for VA home loans to .50% on for conventional mortgage loans.
Once you know what each mortgage lender has to offer run the figures the mortgage calculators to see which mortgage loan program and mortgage rates best suits your needs. And don’t forget to negotiate for the best deal that you can. Armed with the right information and a sufficient amount of mortgage comparison shopping, a consumer should be assured they will receive the right home loan with best mortgage rate and lowest costs.
What Is a Mortgage Refinance
Refinancing is defined as taking one mortgage loan and replacing it with another. A refinance is useful for homeowners who want to lower their mortgage payments, change the length of their existing mortgage, or taking cash out for any worthwhile purpose.
Historically, refinance transactions were used mainly when interest rates and mortgage rates were falling. Homeowners would seek to refinance at interest rate that would be below what they had on their home loan when their first bought the property.
Reducing the existing rate on a mortgage or altering the existing length of your loan is referred to as a rate and term refinance. A rate and term refinance isn’t always used by someone to lower his or her payment or change the term of the home loan. In today’s chaotic interest rate environment numerous homeowners are refinancing into fixed rate loans from adjustable rate loans regardless of what the difference in mortgage rates may be. Some homeowners make use of a rate and term refinance to avoid the rate changes coming due on an adjustable rate mortgage and merely refinance into yet another adjustable rate loan with a lower start rate.
Refinancing for additional cash to pay for bills, other loans, home improvements or any other purpose is categorized as a cash out refinance. Paying off any other debts or using the funds from the proceeds of a new refinance for any thing other than paying off the existing mortgage and the costs associated with that mortgage loan, is considered a cash out refinance. A cash out refinance requires that there be sufficient equity in the property to cover the amount of cash requested. If a homeowner has paid down their mortgage for a long period of time or if property values have risen since the time the property was purchased, the homeowner has probably built up some equity in the home that can be accessed with a cash out mortgage refinance.
Refinancing an existing mortgage loan and taking out a new home loan can yield substantial monthly savings by reducing the mortgage rate, shortening a mortgage term to build home equity faster, changing the mortgage product from an adjustable rate mortgage to a fixed rates loan or a fixed rate mortgage into a an adjustable rate mortgage or taking cash out. However, mortgage refinancing comes with a cost to obtain the new home loan. It is essential that home owners who are considering a mortgage refinance transaction evaluate both the costs and benefits before filling out a mortgage application.
No matter which refinancing option you choose be sure to research it carefully. Your refinancing decision depends on current interest rates and mortgage rates as well as your own financial needs. Compare the available mortgage loan programs, gather information, and check out online mortgage calculators to see what type of mortgage refinancing will work best for you. Take your time to decide if refinancing is right for you before starting this new home loan transaction.
Cash-Out Refinancing Basics
When you enter into cash out mortgage refinance you are making use of the equity that you enjoy in your home. The equity in your home is the part that you own outright. If you have a home that is worth $120,000 dollars, and you owe $90,000 dollars on your mortgage, then the amount of equity that belongs to you is $30,000 dollars. For most all mortgage refinances, you will not be able to borrow all of the available equity in the home.
When you refinance, any kind of refinancing, you are basically in some way trading your previous mortgage for a new mortgage. The new mortgage will likely have different options, a different mortgage rate, different term or length, and a different loan amount than your current mortgage loan. Using cash out mortgage refinancing, you enter into a mortgage for more than the mortgage you currently own, and the mortgage lender or bank gives you a lump sum check for the difference. When you refinance and you use the money for anything other than paying the existing mortgage and costs, you are doing a cash out refinance. Even if the money is used to consolidate your debt it is still considered a cash out refinance transaction.
Utilizing cash out refinancing allows an existing homeowner to access some of that equity to use for beneficial purposes. Borrowing against the equity in your home is almost always cheaper than other types of financing and the mortgage interest in most cases is tax deductible. In a favorable mortgage rate market, the cash out refinance may actually lower your monthly mortgage payment. If mortgage rates now are lower than when you first took out your mortgage, the payment may go down; in addition, since you are most likely extending the length of time for repayment, this may bring about a lower payment as well. Refinancing with new loan terms and possibly a lower mortgage rate can add value to an individual’s budget and personal balance sheet. Of course, even with a lower mortgage rate or monthly payment the full costs and benefits of cash out refinance should be reviewed. The process of comparing mortgage costs, mortgage rates, the loan amount and the costs and benefits of the mortgage refinance is easy to quantify with the use of a mortgage calculator.
After your previous mortgage is paid off with the cash out refinance home loan, the balance can be used for anything you choose to use it for. Debt payments, tuition, investing, home improvement, anything that you need a large sum of money for. If your interest rate on your cash out refinancing is lower than the original mortgage you had, the monthly rise in payments may be partly offset. If the interest rate is higher make sure you understand the implications on your financial position of extracting the cash out. Cash out refinance for conspicuous consumption can lead to budget problems down the road when refinancing no longer becomes an option.
Evaluating the costs and benefits of a refinance can include more than just how much money you save per month. Remember, if you pay off a four year auto loan with a 30 year mortgage, there better be a payment savings. In these cases you must factor in the total cost of interest and whether you will repay the mortgage faster with the additional cash flow. Evaluating inflation and the direction of interest rates should also be measured. Granted, this is almost impossible. But it hard to ignore the value of borrowing money at 5.75% fixed for 30 years in 2008 and discovering that inflation will be running over 5% in the ensuing years. Very little is paid to the terms of home equity lines of credit. These loans are almost always adjustable mortgage rates. The reason is that no financial institution provides a line of credit good for 15 or 20 years at a fixed rate giving the borrower to access the funds when market rates rise and the value of that line of credit at a low fixed rate skyrockets. Interest rates move based on various market forces. The most significant impact on rates is inflation.
There are clearly many factors to consider should you want a cash out refinance. The following considerations are the ones to address as you start to evaluate your individual needs.
Compare the mortgage rate and closing costs for the new home loan.
Compare those terms to your existing mortgage loan and its remaining term to avoid refinancing the existing balance at a higher overall cost.
The amount of cash you need including the amount to pay off the existing mortgage.
The purpose for the cash (This one has led many a borrower astray).
The amount of time you expect to be in the home or have this mortgage for.
Consider your tax bracket, other opportunities, and the overall direction of interest rates as well as your financial balance sheet.
In order to secure the loan request, cash out refinances are approved or rejected just like any other mortgage loan. Banks and mortgage lenders will sometimes allow you to finance up to one hundred percent of your homes value, provided that your credit is excellent. More often, the loan amount will have to be 95% or lower than properties appraised value. If income or credit situations tighten the restrictions you may be reduced even further on the amount of equity you can draw out. Depending on the amount of money that you owe on your first mortgage, the lender will often require private mortgage insurance in high loan to value requests. And as the amount financed becomes a higher percentage of your home’s value, the mortgage rate you are offered will increase as well.
Consider your needs, your existing financial health and what the future may hold. Research all loan types to see which best fits your needs. Be a proactive, be an educated mortgage shopper by reviewing all terms, the mortgage rates available and close on the new mortgage refinance that best fits your needs.
What Is PMI or Mortgage Insurance
PMI or private mortgage insurance is an insurance policy and premium payment that mortgage lenders require from most home buyers who obtain home loans that are more than 80 percent of their home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay mortgage insurance or PMI. PMI protects a portion of the mortgage lenders loss in case the borrower defaults on the mortgage. Should a default occur, the lender sells the property to liquidate the debt, and is reimbursed by the PMI company for any remaining amount up to the policy value.
A borrower may need to pay up to a year’s worth of premium for this coverage at closing, which can amount to as much as several hundred dollars. PMI is protection only for the lender but its advantage is that by displacing part of the risk, a lender accepts mortgage loans with less than 20% down payment. One obvious way to avoid this extra cost is to make a 20% down payment. There are also other ways to eliminate PMI such as piggy back loans such as; 80-10-10 financing. With a piggy back loan, the borrower takes out a first mortgage for 80% of the properties value and a second mortgage for 10% with 10% of the their own funds. If possible, a piggy back loan can be a first mortgage of 80% LTV and a second for 20%, for a total 100% financing.
Costs vary from mortgage insurer to mortgage insurer, as well as from plan to plan, depending on the loan-to-value ratio, and the particular mortgage loan program involved. For example, a highly leveraged adjustable rate mortgage would require the borrower to pay a higher premium to obtain coverage. Buyers with 5% down payment can expect to pay a higher premium than a borrower with a 10% down payment. Buyers on adjustable rate mortgage generally pay higher premiums than fixed rate mortgages.
The Homeowners Protection Act of 1998 establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. The protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI. For home mortgages signed on or after July 29, 1999, your PMI must, with certain exceptions, must be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current. Your PMI also can be canceled, when you request, with certain exceptions, when you reach 20 percent home equity in your home based on the original property value, if your mortgage payments are current.
PMI fees can be paid in several ways, depending on the mortgage lender and mortgage insurance company used. Home loan borrowers can choose to pay the first-year premium at closing; then an annual renewal premium is collected monthly as part of the house payment. Or the borrower can choose to pay no premium at closing, but add on a slightly higher premium monthly to the principal, interest, tax, and insurance payment. Buyers who want to sidestep paying PMI as a separate payment can use lender paid PMI. In this case the lender raises the interest rate on the loan to absorb the cost of the PMI and no separate payment is passed to the borrower.
Either way it is paid, mortgage insurance is an added cost for obtaining a home loan when the loan amount is greater than 80% of the value of the home. The mortgage insurance is a cost that can adversely impact the budget to buy a home or the budget for mortgage refinancing if not measured and evaluated in advance. To understand all the costs of obtaining a new home and home loan with less than 20% down payment or a refinance above 80% loan to value it is imperative to know what and how mortgage insurance functions.
Home Mortgage Right of Rescission
Under the Truth in Lending Act, the right of rescission is a protection that is given to borrowers that are obtaining certain types of loans. This gives the borrower the right to cancel within three working days of signing the documents for the loan. They can also get a full refund of any funds that have already been paid. The right of rescission is designed to give you the three days to reconsider whether you want the loan in question, which uses your home as collateral. You may have reconsidered a refinance or a home improvement loan that uses your home as collateral, or may have decided to look for other loan options, for example. This three-day period is often called a cooling-off period, and gives you a chance to decide if the loan is what was expected and what you really want to do.
The right of rescission applies to certain types of loans. For example, a refinance with a new lender or a cash-out refinance, in which you are taking money out that is greater than your current mortgage for whatever purposes. It doesn’t apply in every case where you use your home as collateral on a loan. For example, you can’t use a right of rescission on a loan which is used to build or purchase your primary home, when a creditor for your loan is a state agency, or if you refinance or consolidate with your current mortgage lender without borrowing additional funds. The right applies to your primary residence only. It applies regardless of the type of residence; single family home, 2 units, mobile home, condominium or townhouse. It also applies to some installment loans, where a fixed amount is borrowed and the payments are made on a schedule, or to a HELOC (home equity line of credit).
After you sign the loan documents, you have the right to cancel, or rescind the transaction until the third business day at midnight. Business days for the purpose of rescission do not include Sundays or public legal holidays, but they do include Saturdays. The day you sign the contract is considered to be the first day. A Truth in Lending disclosure form will be given to you, which informs you about important disclosure in the contract. The disclosures on the truth in lending form inform you about the credit terms such as the amount you have financed, the annual percentage rate, the finance charge, the payment schedule and the total number of payments. You are also given two copies of a right of rescission notice that explains your rescission rights.
While your transaction is in the three-day waiting period you won’t receive any funds from the loan until after this waiting period is over. If you use your right to rescind when mortgage refinancing and decide to cancel the transaction, you must provide written notice of cancellation to the lender. Be sure to follow the procedures outlined regarding your right of rescission carefully. Visiting the lender without putting something in writing or making a telephone call does not qualify. The lender is required to return any property or money that was given in connection with the loan within twenty calendar days after receiving your notice of rescission, and is required to make sure any action that is necessary to show that the termination of the security interest has been completed.
You can rescind the loan you sign within the three business day for whatever reason you choose as long as the loan type falls under the federal laws for having a right of rescission. During those three days after you sign for a loan, if you find better terms at another lender or change your mind, you may cancel or rescind the loan. All fees or costs to obtain the mortgage loan must be returned to you when you rescind a home loan.
Can You Save Money by Closing a Home Loan at the End of the Month?
In order to understand if you will be able to save money from closing at the end of the month, you have to learn some background information on how the mortgage loan closing costs are determined. You will want to start by comparing renting or rental payments to a mortgage payment. When you pay rent, you normally have to pay the bill at the start of each month for the forthcoming month, which is basically paying in advance. However, with your mortgage payments, the monthly mortgage payment normally pay off the interest that was built up on the principle balance throughout the previous month. Mortgage payments pay the interest in arrears as opposed to how the rent payment is paying for future use.
When you want to close on your house, you are generally able to do so at any time during the month. As an example let’s say your closing date is on October 15, which would mean that your first mortgage payment is due on December 1st. In order to maintain a level of homogeneity in the mortgage securities market most all primary mortgage payments are due on the first of the month. This payment on December 1st would include the interest for November since monthly mortgage payments pay the interest in arrears. However, what about the 16 days of October that remains between the closing on October 15 when you receive the money or the keys to the new home and November 1? The amount of interest that would be due for the rest of that month is paid at closing, which is sometimes called pre-paid interest or interim interest. You will notice that the closer to the latter part of the month you close on your house, the smaller the interim interest payment will be since there are fewer days from the home loan closing to the beginning of the next month.
If you are currently renting, but intend on purchasing a home, you will probably want to settle for an end-of-the-month closing because you will be able to be moved out of your rental home and into their new house before the next month’s rent is due.
Because of this, many people decide to close at the end of the month. By closing at the end of the month you wont save money but since the purchase closing requires the down payment, closing costs and the interim interest, it does reduce the cash needed to close significantly. On a standard purchase transaction this is a real financial outlay, which many homebuyers could desperately do without. However, if you aren’t concerned with having to pay an interim interest payment, than you will not likely be concerned about which day you close on the new home loan.
The role of interim interest in a refinance may be very different. In many cases a homeowner will add the amount of money needed for their refinance based on their home mortgage balance including any type of closing costs and escrows and any interim interest that is involved. Therefore, many homeowners considering a mortgage refinance assume that if they close at the end of the month the closing costs are lower. However, the main calculation many borrowers forget is the build-up of interim interest within their old mortgage loan.
You will find that many borrowers will call their current mortgage lender at the very beginning of the month to find out how much their principle balance is so they can make a payoff. The borrowers intention is to make the last payment on the old mortgage and keep the interim interest down on the new one. Many borrowers will find that if they decide to close near the end of the month, their payoff is much higher than the original quote. This is because of the amount of interest that has accumulated throughout that month on this home loan.
These individuals who are considering a mortgage refinance will not pay that month’s mortgage payment. An example of this would be if the closing on your mortgage refinance wasn’t until October 15, many borrowers wouldn’t pay their October 1st payment. They can successfully do this because many mortgage lenders will not count a payment as late till the 15th of each month. While this is not suggested many individuals still continue to perform their home mortgage refinance in this manner. However, they will quickly find out that at closing they will have to pay interest not only for September (which was what the October 1st bill was covering) but also interest for half of October.
If you wait to close at the end of the month it may seem like you are saving money. Of course, you are doing a mortgage refinancing for a reason. If that reason is a lower mortgage interest rate or a consolidation to pay off debts at a higher rate, it never pays to wait. The longer you wait to close the more interest you are accruing on your existing mortgage, since its rate is higher than the new mortgage refinance, you are paying more money each day you wait to refinance. Better to pay interim interest on the lower mortgage rate of the new home loan than a higher mortgage rate on the home mortgage you are refinancing.
There are some mortgage lenders that will give you something called an “interest credit” when you close for the first five days of a month. This is a credit of interest during these five days, which will ultimately be included within the upcoming payment. When there is an interest credit, the first payment will be on the very next month. An example is if you close on the 2nd of January, instead of 28 days of interim interest and a first payment March 1st, you will get a two day interest credit and the first payment will be due February 1st.
FHA loans actually accumulate interest from the beginning of the month to the end of the month no matter when they were paid off. Because of this, when you’re paying off an FHA home loan, you will need to properly time the closing so you do not have to pay double interest. FHA does not calculate the interest daily on an existing mortgage loan.
The bottom line is that the closing date may save money for out of pocket costs versus costs added to the loan amount but the ultimate savings is really only an accounting issue. The interest for the mortgage loan has to be paid one way or another regardless of when the loan closes.