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What is a mortgage refi or refinancing
Refinancing is the process of getting a new mortgage to replace an existing mortgage. The proceeds from the new loan will be used to pay-off the existing mortgage and the current mortgage holder’s lien on the title will be replaced by the new mortgagee.
Why refinance a mortgage
Common reasons for refinancing a mortgage are:
- Lowering the existing mortgage interest rate
- Combining first and second mortgages into one loan
- Tapping into home equity to consolidate high-interest debt with a cash-out mortgage
- Changing the terms of the mortgage:
- lowering the mortgage interest rate
- converting an adjustable-rate mortgage into a fixed interest rate mortgage
- Converting a 30 year fixed to a 15 year fixed mortgage or any other amortization terms.
What are the closing costs for refinancing
The basic closing costs associated with every refinance are:
- Title and escrow fees (some states don’t have escrow): Title and escrow fees are third party fees and lenders don’t have any control over them.
- Appraisal (if required): Lenders don’t have control over the appraisal fee and it has to be done by an independent third party.
- Lender processing fees: All brokers and lenders have a processing fee. It could range anywhere from $500 to $1000 per loan.
- Lender underwriting fees: All lenders have an underwriting fee and it’s not negotiable.
- Credit report: Most lenders and brokers charge a fee for running credit. The credit is checked up front before you are quoted a mortgage interest rate and the charge is disclosed in the good faith estimate, but you don’t pay for it till the end at closing.
- Termite and other reports (if necessary): Based on underwriting and appraisal reports, some borrowers may require a report of sorts before closing. For example, if you live in a region affected by damage after your appraisal was done, the lender will require an addendum stating the house is still in good shape.
- Mortgage points: 1 point equals 1% of the loan amount. For example, 2 points on a $100,000 mortgage is $2000.
What are mortgage points
When refinancing a mortgage you have two options: A. get a mortgage with no points or B. pay points to buy down the rate. Buying down the rate means paying to get a lower interest rate. For example, if you are quoted 5% on a 30 year fixed mortgage, you may be able to pay 1 point (1% of the loan amount) to get 4.625%.
Should you pay mortgage points to refinance a mortgage
You should only pay a point to buy down the rate if you plan on living in the house long-term and the savings from the lower interest rate justifies the cost. In low-interest market conditions, it’s usually smarter to get a no-point mortgage.
Should you pay the closing costs out of pocket
It’s a personal preference and it depends on the mortgage interest rate the lender is offering. For example, if the loan has a 5% interest rate and you can earn 8% by investing the money, you should not pay the closing costs out of pocket. However, if you the rate is 5% and you can only estimate a return of 3% on your cash, paying the closing costs out of pocket could make sense.
Should you get a No Closing Cost mortgage
If you think the interest rates are going to drop or if you are not planning to own the house for more than 7 years, a no closing cost mortgage is a great option.
What is a no closing cost mortgage
A no closing cost mortgage has a slightly higher interest rate and zero costs. Basically, if a loan at 5% has a $2500 closing cost (Title, escrow, appraisal, etc.) a mortgage loan at 5.25% can have $0.00 closing cost. The lender will get compensated in the open market when they sell the loan at a higher interest rate.
How to negotiate for the lowest closing costs
This is a common question amongst all borrowers looking for a new mortgage. Our advice is to call a few lenders and ask them about their lender fees. Start by clicking here to request a low interest rate mortgage with minimal closing costs.
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Jumbo and conforming mortgages
Any residential mortgage that exceeds the $453,100 limit set by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac) is a jumbo loan. Jumbo mortgages are usually priced 25 to 50 basis points higher than conforming loans. Any loan below the $453,100 limit is considered conforming. Both jumbo and conforming loans are offered as fixed and adjustable rate mortgages.
Fixed or adjustable mortgage
In a low interest rate market, homeowners tend to refinance away from an adjustable rate mortgage to a fixed rate mortgage to lock in a low interest rate for years to come. If you are not planing to keep the house for years to come, refinancing with an adjustable rate loan at a lower interest rate should be considered as an option. The benefit of a fixed interest rate mortgage is the security of a fixed payments for the duration of the loan while the advantage of an adjustable rate mortgage is the lower monthly payments.
Fixed rate mortgages
The interest rate on a fixed rate mortgage never changes. The most common fixed rate mortgages are fixed for 30, 20 and 15 years. Usually the shorter the amortization period the lower the interest rate. The major benefit of a fixed rate mortgage is the security of fixed payments (principal and interest) for the life of the loan.
Adjustable rate mortgages (ARM)
Or Hybrid ARM loans carry a fixed interest rate for a predetermined period after which it will convert to an adjustable rate mortgage. The fully indexed rate is index (usually treasury bill or libor) + margin (a predetermined rate). The margin will vary based on a number of factors such as credit score, LTV, property type and etc. Popular adjustable rate mortgages are:
- 3/1 (rate is fixed for the first 3 years)
- 5/1 (rate is fixed for the first 5 years)
- 7/1 (rate is fixed for the first 7 years)
- 10/1 (rate is fixed for the first 10 years)
Adjustable rate mortgages are amortized over a 30 year period.
Common terms important to understanding adjustable rate loans and calculating potential future costs:
- Initial interest rate is the beginning interest rate on an ARM.
- Adjustment period is the amount of time between interest rate adjustments of adjustable rate mortgages. The rate resets at the end of this period and the monthly payments will be recalculated.
- Interest rate cap is the limit on how much the interest rate can change at the end of each adjustment period or over the life of the loan.
- X/Y is the how Hybrid arm loans are referred to. X is the number of years during which the initial interest rate is fixed prior to the first adjustment and Y is the interval between adjustments (common terms are 1 for one year and 6 for six months). For example, a 5/1 ARM means that the initial interest rate is fixed for five years (or 60 months) and after the 60th payment the interest rate will be adjusted annually.
- Fully Indexed Rate is the actual interest rate of the loan after the fixed period. Index + Margin = Fully Indexed Rate.
- Margin is added to the index to calculate the actual interest rate. The lower the margin the lower the fully indexed rate.
- Index is a published financial index such as the treasury bills or libor used to periodically adjust the interest rate.
- Start Rate the introductory rate for some adjustable rate loans. The start rate is like a teaser, because the initial interest rate is lower than the actual rate.
- Payment Shock is the industry term for the increase in monthly mortgage payments generally caused by changing interest rates.
- Cap is any clause that sets a limitations on the amount and or the frequency of rate and payment changes.