Wednesday, July 23, 2008

Refinancing Your Home Mortgage

As a first time home buyer you can not always get the best rate. Maybe you did not have twenty percent to put down or maybe your credit needed a little rebuilding. If you have been in the house for a few years now and you have built up some equity, it may be time to refinance and get a better rate. Refinancing your first home mortgage is very easy and painless, especially if you use your regular mortgage broker. The process still requires an application, a home appraisal and some of the same financial documents you needed to provide for your first time home buying, but the processing and closing should be faster and this time there is no seller involved to slow the process. Speak with your mortgage broker about first home mortgage refinancing options. You will probably save some money and maybe you can pull out some equity and fix that master bathroom too.

Differences in a Refinance Mortgage Application

What is the difference between a mortgage application and a refinance mortgage application? The nuances are minor but important, so here they are:

A refinance mortgage application related to a single property – the home you own whereas a mortgage application may end up being used on any number of properties. Many mortgage applications are submitted to secure pre-approval and this means it will not be associated with any single specific home. You will need all the information about your current mortgage to move forward with a refinance so get together the documentation from your last closing.

With most refinance mortgage applications, you will have already chosen what type of refinance loan you want. Your choices come down to various rates and terms or if you want cash out refinance. Some lenders require proof of payoff for debt consolidation refinances or they require proof of the home improvements completed with a home improvement refinance loan. Refinancing is typically easier than home buying and if you are prepared, your refinance mortgage application process will be smooth and easy.

Researching Refinance Rates

As part of an effort to revitalize the housing market and stimulate the economy in general the Fed has cut interest rates several times since the beginning of 2008. If you had an adjustable rate mortgage (ARM) you definitely need to consider refinancing with a lower fixed rate loan. Start with your current lender to see if they have refinancing options. If your current lender can not refinance you, look elsewhere. Look online. Tons of sites list current refinance and mortgage rates free of charge and many of them can even provide you a refinance or mortgage quote at the same time.

Check your local paper and keep abreast of any major interest rate fluctuations. Develop a long term relationship with a mortgage broker. These folks can proactively call you when there is a change in the interest rates or a new program that might fit your needs. Look at you credit profile and pay down some of your account. The credit market is tight and lenders have raised the standards, therefore you need to work on your credit if you want to get a good refinancing deal.
Rate and Term Refinancing Rates

What is a rate and term refinance? This is when you refinance just to change the interest rate and the term of your mortgage. You are not pulling out any cash or equity - you are hopefully just negotiating a better deal for yourself. Your new interest rate will depend on how much money you are borrowing and for what length of time. Mortgage companies use something called a 'loan to value' ratio to calculate this. For instance, if you had an $80,000 home and an existing mortgage of $40,000, you would have a loan to value ratio of 50%. Basically, the higher your loan to value (LTV) ratio, the higher the interest rate.

Cost of Refinancing

Buying Down Mortgage Rates

If you are one of the lucky Americans that have control of their finances, or come into some money, you may want to consider a buy down mortgage refinance. Basically, you take that money and pour it into the equity of your home in one lump sum. By doing this you reduce your principal and your can reduce your interest rate. Buy down interest rates will depend on the lender and this is a situation in which you definitely want to shop around. Investing in your home equity is never a bad idea, and if you have the flexibility to do this, go for it.

Negotiating the Lowest Mortgage Rate Possible

Just like buying a car, you can negotiate with your mortgage broker on fees, interest rates and programs. A mortgage broker gets a commission based on how much a bank is willing to buy a loan from his company for - whether it is a percentage or a flat fee. In some cases, the mortgage broker even makes enough commission to pay for all of your closing costs and still nets a solid payment. The best way to make this work for you is to let banks vie for your business. Work with a couple of mortgage brokers and play them against each other. This may be a little painful if you are not used to doing it, but you need to focus on getting the best deal possible for yourself - not on their feelings.

Do not Get Greedy – Lock in the Current Mortgage Rate

When you are shopping around for a mortgage, do not wait around for the market to potentially improve, lock in that low rate as soon as possible. If you get greedy and wait too long, you may lose out on a full percentage point of savings or more. If you have developed a relationship with a mortgage broker, follow their advice. They want you to get the best deal possible so you will come back to them in the future, so do not be afraid to be guided by expert advice.

Cash-Out Refinance Rates

What is a cash-out refinance? Basically, this means that you refinance your mortgage - often for a different interest rate and loan term and you get a mortgage for higher than what you currently owe, leaving cash on the table for you. This is cashing out equity in your home for home improvement, large expenditures and even debt or credit card consolidation. The interest rate on a cash-out refinance is usually lower than what you would get from a credit card. In some cases, specific loan programs will require the closing company to disburse checks to your creditors or they may want proof of home improvements, but it is worth it to get such a low interest loan.

Getting a Mortgage to Finance your first home

Probable the biggest and most expensive asset that an average individual will buy in a lifetime is a home. Very few people can afford to save and pay cash for a house. Most people will need to apply for a loan to buy a house. The newly purchased property is mortgaged, or used as security for the loan – hence mortgage loan. Individuals and companies use mortgage loans to purchase commercial real estate. Principles of mortgage finance are generally the same, however on this page our focus is on residential property mortgages.

Buy or rent?

Most people live in rented housing before they purchase a home. There are several factors you need to consider to decide whether to buy or continue to rent:

Advantages of renting

Flexibility – it is easy to get into a rental contract, and most of them are for a year, you can therefore terminate it at the end of the lease term and move to another town. By contrast selling your house if you have to move may not be easy especially in the current market conditions (2007 -2008)

Low initial cost – in most cases the rent deposit is just a month’s rent. To purchase a home, you will generally be required to come up with a down payment or at least pay for closing costs that can add up to thousands of dollars.

No maintenance cost – most rental contracts require the landlord to keep the property in a habitable condition, that cost should already be factored in your rent. In some apartments, some utility costs are inclusive in the rent and that makes it even better. When you are a home owner, you pay for your maintenance costs, all your utility bills, home insurance, sometimes home owner’s association fees and real estate taxes on your property.

Advantages of buying

A home is a secure long term investment. You are probably thinking I wrote this before the 2007 – 2008 housing market crisis. There are distortions in the market, created by speculative investors and aggressive lenders that have led to this crisis. The market is going through a correction, and there is going to be casualties, but at the end with all the attention given to this crisis by the Federal government the housing slump may bottom up probably in the 2008 – 2009 period. Historical data shows that besides the occasional housing market slumps, property values go up overtime.

The mortgage interest rate expense is deductible on your tax return, when you itemize your deductions. Put in another way, the Fed is picking up a portion of your cost for home ownership. This tax benefit is far much greater than the renters’ credit that renters receive in some states.
Privacy – if you are living in your own home you have a sense of security that comes with ownership and you have more privacy compared to a renter who has to deal with land lord inspections.

Advice for first time home buyers

Shop Around

Just because you are a first time home buyer does not mean you can not be choosy. When you are looking for your first home, make a list of the criteria of utmost importance and do your best to stick to it. First time home buying is stressful but if you prepare yourself with a good plan, a good real estate agent and a list of what is important to you and on what you are willing to compromise, you'll find a starter dream home that really fits the bill.

Reasons to Use a Real Estate Agent as a First Time Home Buyer

Why should you use a real estate agent as a first time home buyer? They have the professional knowledge and experience to find you the home you've always dreamed of. Here are some basic reasons why using a real estate agent as a first time home buyer is a good idea:

Negotiation Skills - Great real estate agents know how to negotiate. They represent their clients in negotiating the home price, anything that needs to be addressed after the home inspection, closing details and the like. They have an impact on every aspect of your home buying process and using a real estate agent can mean saving thousands of dollars.

Experience - Looking for a home and getting through the closing process the first time can be incredible intimidating. Real estate agents have the experience to guide you through this process and they have the knowledge of neighborhoods, homes or condos on the market and properties coming on the market that you should absolutely tap into.

Resources - Finding a home inspector, a closing attorney or agent, an appraiser, a mortgage broker can all be arduous and painful. Your real estate agent will have contacts in all of these areas. You may find better mortgage rates online, but it doesn't hurt to explore all of your options and tap your real estate agent's network.

Low Down Payments with a First Time Home Buyer Program

Are you worried about coming up with a down payment as a first time homebuyer? There are many programs out there that are specifically designed to help with this very concern. Several programs require little or no money down. Did you know the federal government even allows for a one time withdrawal, up to $10,000, from an IRA or retirement account with no penalty for first time home buying? It is hard to decide between the various mortgage programs out there, which is why you need to develop a relationship with your mortgage broker. They can help you find the right first time homebuyer program for you and explain all of your options thoroughly.

Getting Your First Home Mortgage

If you are ready to start your first time home buying process, make sure you educate yourself on your options and do not just depend on the advice of others. For instance, first time home buyers are often entitled to special government funded mortgage programs that have
low interest rates and low down payments. If you arm yourself with knowledge, you can explore all the options you have.

You may still be renting because you think you can not get a mortgage as a first time home buyer. This is often not the case, so you should really find a mortgage broker online or locally to consult with. The best thing about mortgage brokers is that they will coach you on what you need to do to get into a better position if you need to.
Additionally, they will work harder to find you better programs if you prove your loyalty to them. When you talk to your mortgage broker you need to ask what kinds of programs you qualify for. They will get your credit score and analyze your financial data to assess what you can get and what you can afford. Take this information to your real estate agent and begin your search only looking at the properties you can really afford.

What do you need to look for in a mortgage program as a first time home buyer? Here are a couple of tips and guidelines:

Flexibility - Make sure you get a program that offers a monthly payment you can really afford. Be honest with your mortgage broker if your payment seems out of reach. They may be able to suggest a three or five year ARM mortgage with a lower interest rate and lower payments or an interest only loan to get you into your home without giant mortgage payments.

Building Better Credit - If your credit isn't perfect, your mortgage broker can probably find you a program that will help you build your credit. The payments may be flexible and as you make more payments on time, your interest rate may even drop!

Long Term Goal - Are you planning on staying in this home forever, for three years, for five years? Communicate your goals to your lender because in situations like these they may have several mortgage options from which you can choose.
Why are mortgage applications so painstaking, long and detailed?

You are borrowing a huge amount of money here, and they want to make sure they know everything about you. Here are the most important things on which to focus during the mortgage application process.

Employment Information – Mortgage lenders calculate their risk based on your habits and your employment and income habits are of paramount importance.
Credit History – First, you should know exactly what is on your credit report and what your credit score is before you fill out a mortgage application. They will pull your credit report but sometimes, if a loan has been paid off and not yet removed, they will need explanations about debts that show up. Accurately report your expenses and payments. They calculate what you can really afford, do not lie to get more than you can afford, let your lender guide you on what will be feasible for your budget.

Housing Ratio and Debt Ratio – these ratios are not as complicated as they sound. They are simply percentages of your monthly income.
The Housing Ratio (typically 28%) is the percentage of your income a lender will allow you to use for housing expenses. If your gross monthly income is $5,000 and the Housing Ratio is 28, then the lender will allow you 28% of the $5,000 for housing expenses when you qualify for a mortgage loan. 28% of $5,000 is $1,400.
The Debt Ratio (typically 36) is the percentage of your income a lender will allow for long term debt. Your housing expenses are long term debt, but all of your other loans and credit accounts that will not be paid off within 10 months are considered long term debt, too. Using the gross monthly income of $5,000 mentioned above and a Debt Ratio of 36, your maximum monthly debt allowance is $1,800.

To continue this Debt Ratio example, if you have minimum monthly payments due of $900 for a couple of cars and credit cards, you will have to subtract them from the $1,800 leaving only $900 for your monthly housing payment. Subtract about 10% from this for insurance and taxes and you qualify for a loan with a monthly payment (principal and interest) of $810.00.