Guide To Refinancing Your Mortgage

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550

Summary:
Refinancing can be worthwhile, but it does not make financial sense for everyone. It is a balancing act between the potentially huge savings over a 30 year mortgage vs. the large cost of refinancing. Whether or not refinancing is a wise decision is purely a numbers matter.

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mortgage

Article Body:
Refinancing your mortgage can mean great savings for you and your family. Replacing your existing mortgage with a lower interest loan, changing the term of your loan, or even consolidating all your debts into this new loan could save you money, both monthly and over the life of the loan.

The rule of thumb is when interest rates are 1.5 to 2% lower than you are currently paying on your mortgage, it’s time to consider refinancing.

Would Refinancing Be Worth It?

Refinancing can be worthwhile, but it does not make financial sense for everyone. There are a number of items to consider, such as how long you plan to stay in the house. Most sources say that it takes at least 3 years to fully realize the savings from a lower interest rate, given the costs of the refinancing.

Refinancing can be a good idea for homeowners who:

* Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.
* Want to build up equity more quickly by converting to a loan with a shorter term.
* Want to draw on the equity built up in their house to get cash for a major purchase or for their children’s education.

What Are the Costs of Refinancing?

Costs can vary significantly from area to area and from lender to lender, so the following are estimates only. Your actual closing costs may be higher or lower than the ranges indicated below.

Application Fee $75 – $300. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.

Appraisal Fee $150 – $400. This fee pays for an appraisal, which is a defensible estimate of the value of the property.

Survey Costs $125 – $300.

Homeowner’s Hazard Insurance $300 – $600.

Lender’s Attorney’s Review Fees $75 – $200. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender.

Title Search and Title Insurance $450 – $600. This charge will cover the cost of examining the public record to confirm ownership of the real estate, and the cost of an insurance policy.

Home Inspection Fees $175 – $350.

Loan Origination Fees 1% of loan. The origination fee is charged for the lender’s work in evaluating and preparing your mortgage loan.

Mortgage Insurance 0.5% – 1.0%. Depending on the type of loan you have and other factors, another major expense you might face is the fee for private mortgage insurance.

Points 1% – 3%. Points are prepaid finance charges imposed by the lender at closing to increase the lender’s yield beyond the stated interest rate on the mortgage note. One point equals 1% of the loan amount.

Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The mortgage documents for your existing loan will state if there is such a penalty. In some loans, you may be charged interest for the full month in which you prepay your loan. In the future, always make sure there is NO prepayment penalty.

In Conclusion

A homeowner should plan on paying an average of 3 – 6 % of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.

Whether or not that is a wise decision is purely a numbers matter.

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It’s tempting to sit back and relax once you’ve moved into your new home ? but hang on, have you made sure that you’re insured against all the risks that could stop you from paying your mortgage? Many things could go wrong and make it impossible for you to work, and in this article we go through each risk, and assess how important it is that you take that into account. If you are responsible for a family, then it is particularly important that you take heed of the following five issues:

What happens if interest rates increase and you can no longer afford your monthly repayments

What if you get made redundant

What happens if you become ill or have an accident and you can’t go to work

What if you have a serious accident or become critically ill, and you can never go back to work

What if you die and your family is left to cope with the outstanding mortgage

These are all questions that new homeowners have to ask, and find answers to. The good news is, the insurance industry have it covered, and there are policies out there that can provide peace of mind against all these possibilities.

On the subject of rising interest rates, you are unfortunate if you end up in the position where you can’t afford the repayments, because there are mortgages that help protect you from this. The fixed rate mortgage sets a rate for an agreed period of time in which your interest rate remains the same irrespective of the Bank of England base rate. A capped mortgage allows your payments to fluctuate, but there will be an agreed rate at which the interest rate that you pay will be capped. Capped mortgages protect you for an average of 3-5 years, and then, as with the fixed rate mortgage, it will revert to the standard variable rate.

55% of all new mortgages are fixed rate deals, so they are by far the most popular type of mortgage. The capped mortgage is less popular because it still retains an element of risk, and they can be more expensive at the outset, which deters a lot of potential customers. At the end of the protected period, for both types of mortgage, you can choose to re-mortgage with another company without paying any penalties. It’s a good idea to keep your eye on the available offers as the end of the protected period approaches, because there are likely to better deals out there. The market is so competitive that new offers are always arising, and they are particularly focused on attracting re-mortgaging customers. Ask a mortgage broker to see what else is out there, as they have all the latest information to hand. You don’t have to commit yourself to anything.

If you want to insure yourself against the possibility of losing your job, then you need Mortgage Payment Protection Insurance. However it’s important to be aware that this type of insurance is designed to protect those that are made redundant, not those that resign or are dismissed. We found quotes on the Internet for around £2.45 per £100 of monthly mortgage payment. Once you stop working, the insurance will start paying after 30 days and then for a maximum of 12 months. You can buy this insurance through your mortgage lender but we don’t recommend it, they always charge more than their internet rivals.

You also have the choice of covering your mortgage payments due to sickness or illness keeping you from working. However we recommend checking with your employer first to see if they have a sickness payment plan in place. Some companies will give their employees full pay for six months for accident or illness. Even in this case, it’s still worth getting the insurance because you could be off work for more than six months. It would be very difficult to meet the mortgage repayments on statutory sickness benefits alone. This type of insurance also costs £2.45 per £100 of monthly mortgage payment, but you can combine it with unemployment cover and it’s £3.95 per month, which is less than buying the two separately. Both will cover you for a maximum of 12 months, so you really need to consider what would happen if a serious accident or illness left you permanently unable to work.

The insurance industry estimates that 1/5 of men and 1/6 of women have to permanently leave work before retirement age because of a serious illness or accident. Think about it, if you have a heart attack at the age of 45 then you are unlikely to go back to work again. With a family to support, this could be disastrous.

In this case, then you would need Critical illness insurance ? it covers the outstanding mortgage in full if you are unable to work again. Look out for “total and permanent disability” cover ? it is essential that it is included in the policy as it specifically covers the possibility of you not working again due to accident.

There are a few options to look out for with Critical Illness Insurance ? for example you need “decreasing cover” if you have a repayment mortgage. This is so the value of the payout decreases in line with the value of your outstanding mortgage. It is also cheaper than the alternative: “level cover”. You need this if you have an interest only mortgage because the outstanding mortgage balance will remain the same.

Make sure you know all the facts about the insurance you buy, because there will be times that you can’t make a claim. For example, Critical illness Insurance requires you to survive for a period following an accident or diagnosis of a critical illness, usually 28 days but sometimes 14 days. If you die before that time, then no claim can be made on your policy.

To cover the possibility of you dying within 28 days, then you need mortgage life insurance. Many lenders require you to set up a mortgage life insurance policy as a condition of you taking out the mortgage. You don’t have to buy it through the lender however, in fact it will be a lot cheaper if you don’t. Also if you live alone and do not have to support a family, you don’t necessarily need this type of insurance as the lender will recoup the money for the outstanding mortgage by selling off the property.

Mortgage Life insurance is the most popular kind of mortgage protection, and like critical illness insurance, you can choose between “decreasing cover” and “level cover” depending on whether you have a repayment or an interest only mortgage.

There’s no denying that buying all these insurance policies to protect your mortgage will cost, but there are a few ways to get the best value. Firstly, if you combine accident and illness with unemployment cover then you will save around 20%, compared to buying them separately. Some insurance companies may refer to this as “unemployment and disability” cover. Critical illness and mortgage life insurance also become cheaper if you combine the two, and we predict an average saving of 20-25%.

And don’t forget the most obvious way to save money ? shop around. Your lender will quote you on these insurances, and may even give you the impression that you have to buy your insurance through them, but you are free to buy it from any company you please. So it had might as well be the cheapest! Go online for the best deals, even better ? contact a specialist life insurance broker and ask them to find the best deals for you. They can do all the legwork and, if you’re not impressed, then you don’t have to buy through them. The advantage they have on price is due to the hot competition on the Internet, especially for insurance. Brokers offer better deals by slashing their commission and giving you a further discount. Search using any of the following terms: “cheap life insurance”, “life insurance”, “life insurance quotes” or “Mortgage Protection Insurance”, and you will come across a number of cost-effective options.

The other advantage to using a broker is that you have full access to their expert advice. When faced with the option of getting a “Guaranteed Premium” or a “Reviewable Premium” for your critical illness insurance, will you know what it means? Even if you do, which one is best? That’s when a life insurance adviser is worth their weight in gold. So we recommend picking up the phone and talking to an expert in person, it doesn’t take long and it guarantees you getting it right first time.

The bottom line: peace of mind comes at a price ? but it doesn’t have to be expensive!

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An offset mortgage comparison is not as straightforward as it would first seem. This article will give an overview of an offset mortgage and discuss how to compare offset mortgages to help you find the right one.

Offset mortgages are fairly new to the UK market place. They were introduced to the UK in the late 1990s and originated from Australia. They were seen as a niche product, but this has changed since interest rates have decreased and the market has opened up. The principle of offset mortgages is relatively simple ? when a borrower takes out an offset mortgage, it is linked to their savings and/or current account. This allows the borrower to offset their mortgage debt against the money in their accounts, thus reducing the amount of interest owed. For example, if a borrower has a £250,000 mortgage and £50,000 in savings, interest will only be charged on the difference, i.e. £200,000.

The range of offset mortgages within the market place has increased in recent years and consequently, offset mortgages have becoming increasing complex. For an offset mortgage comparison, you can’t just compare the Annual Percentage Rate (APR) as you would with a traditional type of mortgage. The APR has limited value with an offset mortgage because nothing else is taken into account, such as the flexibility of the account, set-up charges, and Early Redemption Charges (ERC).

To obtain an offset mortgage comparison, it is important to look at the key aspects of an offset mortgage and to ask yourself ? ‘what can my offset mortgage do for me?’ Key aspects include:

Flexibility of the account

Overpayments – are you likely to make frequent overpayments into your mortgage account? If so, you will want an offset mortgage that does not penalise for frequent overpayments or penalise you for paying off your mortgage early.

Underpayments and/or payment holidays – do you want a career break with underpayments or payment holidays from your mortgage? Not all offset mortgages offer underpayments or payment holidays, whereas some types of offset mortgage offer the service, but you usually have to make a certain amount of overpayments before you are eligible.

Credit limit – will you need a lump sum of cash in the future, for example, home renovations? Some offset mortgages allow a credit limit on top of the agreed mortgage, depending on the amount of equity in the property, which acts as a loan facility.

Debt – are you carrying credit debt and personal loans? Some offset mortgages allow the debt to be incorporated into the mortgage package, possibly leading to a lower repayment rate. The debts can also remain unsecured.

Number of accounts – can you add more than one savings/current account to your mortgage? Do you have family members that are willing to link their bank accounts to your mortgage debt? If so, you can further reduce your interest payments.

Charges and interest rates

At first glance, an offset mortgage with an initial low APR for two years and low arrangement fees may look appealing, but if it has an ERC and no underpayment facilities, it would not be suitable if you wanted to make frequent overpayments to pay your mortgage off early, but were planning to have a career break in the future.

There are many lenders in the mortgage market that offer different types of offset mortgages. To guide you through the intricacies of an offset mortgage comparison it would be best to seek advice. An independent mortgage broker can advise you and help you with an offset mortgage comparison to ensure you can have the best offset mortgage for your needs.

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If you plan on staying in your home for 10 or more years and want your mortgage payments to stay at one stable rate, you should consider a fixed rate mortgage. Available for 10, 15, and 30 years, fixed rate mortgages give you the comfort of knowing your monthly payments will never increase. This is especially advantageous when interest rates are low ? you’ll lock in the current rate for the duration of your loan, whether it’s 10, 15, or 30 years, so you’re safeguarded from rising interest rates in the future.

When choosing between the different types of fixed rate mortgages, there are a few things to consider. A longer term mortgage (such as the 30 year fixed rate mortgage) has lower monthly payments than 10 and 15 year mortgages. On the flip side, it also has higher interest rates. And, since you’re locked into your interest rates for the entirety of the loan, there may be times when interest rates go down but you’re stuck paying higher interest rates.

Of course, with a 10 or 15 year mortgage, you may also risk paying higher rates than the current interest rates ? but since they are shorter term, there’s less opportunity for this to happen. And shorter term fixed rate mortgages benefit from lower interest rates than 30 year fixed mortgages. In addition, you will build up equity on your home in a shorter amount of time, because you are paying more off the principal with each monthly payment. However, in order to do this, your monthly payment is higher than the payments on longer term mortgages.

Find out about 50 year mortgages

With housing prices in some parts of the country hitting record highs, many people’s dream of owning a home seems too far out of reach. Add to that the threat of rising interest rates, and that dream can become a nightmare for some. That’s why several of the country’s mortgage lenders have introduced longer term loans like 40 year and 50 year mortgages to meet the needs of more prospective home buyers.

These newer mortgage options open up the housing market to a larger group of buyers by spreading the loan into lower monthly payments over a longer period of time. It’s easy to see why the monthly installments are lower: Imagine dividing payments on a $400,000 home into 360 monthly payments for a 30 year mortgage or 600 payments for a 50 year mortgage. The 50 year mortgage installments would be significantly lower.

Although total interest paid on the lifetime of a longer-term loan will be greater than the interest paid on a 15 or 30 year mortgage, you’ll still benefit from building up home equity because you are making payments on both the principal amount of the loan and interest. This makes 40 year and 50 year mortgages attractive alternatives to old standbys like interest-only and payment-option adjustable-rate mortgages, which can be more costly in the long term because little to no principal is paid off.

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Three or four years ago, interest rates on home loans dropped to levels not seen since the 1960′s. Millions of Americans took advantage of the favorable rates, which bottomed out near 5% for fixed rate, 30-year loans. For adjustable rate mortgages, they rates were even lower. Many buyers passed on the opportunity to lock in at fixed rates and gambled on the lower payments afforded by adjustable rate loans in order to buy either larger or more expensive homes. That worked out fine at the time, as the rates kept the monthly payments affordable. Unfortunately, the sixteen increases in the Federal interest rates since 2004 are about to have a dramatic effect on those buyers, many of whom many find out that they can no longer afford to pay for the homes in which they live.

Many adjustable rate loans are set up in such a way that the interest rate is fixed for the first three years of the loan’s repayment schedule. After that, the interest rate adjusts regularly, based upon prevailing market rates. For the millions of homeowners who gambled and took out these loans in 2003, the Big Adjustment is going to come soon, and it isn’t going to be pretty. As the rates adjust to current rates from the low rates of 2003, many homeowners are going to be shocked to see that their monthly payments rise by as much as 50%. Some will be fine with that, having anticipated this increase for some time. Others will suddenly find themselves unable to pay for a house that they have long thought they could afford. This will undoubtedly lead to an increase in the foreclosure rate, which is already some 60% above the rate of last year. In Michigan, the rate is up by 90% over last year, as hundreds of owners have walked away from their home loans.

What can you do if you have an adjustable rate loan that is about to become unaffordable and may yet become even more so? Your best bet may be to refinance and take out a 15 or 30-year, fixed-rate loan. The benefit of doing so is the security that comes with knowing that your payment will remain stable over a long period of time, no matter what happens to the interest rates in the marketplace. If you cannot afford your loan now and refinancing with a fixed-rate loan will still leave the payments unaffordable, you may have no choice but to sell the property and move to something smaller and/or less expensive. You will not be alone.

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