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What everybody ought to know about refinancing your mortgage
When mortgage rates are low, some people refinance their mortgage to a lower rate to lower their monthly payment. Whether you should refinance or not depends on your LTV and how much principal money that you still owe to your current lender.
Refinance to a lower rate would work for people who currently have higher mortgage rate and higher loan-to-value loan and who have been paying their current mortgage loan into the first few years.
For example, if you have a 7.0% rate with 95% LTV mortgage and been paying the mortgage for 5 years, then refinance to a 5.0% interest rate under the same fixed 30 years term would save you money in the long run. During the first 5 years, you were actually paying more money for your interest than principal. Therefore doing a refinance under this condition will be good for you. The total cost of borrowing becomes smaller under the same 30 years fixed term with a lower rate.
Let's look at the analysis here:
If you have paid down your initial $100,000 mortgage loan (30 years fixed term)for 5 years at 7% interest rate, you should have paid $5,868,24 in principal and $34,049.76 in interest:
To do a refinancing for 5.0% for your remaining loan amount of $94,131.76:
The total remaining interest that you need to continue to pay if you don't refinance(for the initial $100,000 loan): $105,461.98
If you would refinance at 5.0% interest rate for the loan amount left from your current mortgage ($87,780.28), the total cost of credit at fully amortized 30 years term: $87,780.28
There is a saving of $17,681.70! Obviously you should refinance in this case.
However, not all refinance for lower monthly payment is good. Refinance is definitely a bad idea for people who have already paid down a significant chunk of their principal for many years even though they can get a lower rate to lower their monthly mortgage payment.
Let's look at the analysis below:
If you have paid down your $100,000 mortgage for 10 years at 7% rate for a 30 years fixed term, you should have paid $14,187.22 in principal and $65,648.78 in interest::
To do a refinance for 5.0% of your remaining loan amount of $85,812.78:
The remaining interest that you need to continue to pay if you don't refinance(for the initial $100,000 loan): $73,862.20
To refinance at 5.0% interest rate for the loan amount left from your current mortgage ($80,026.91), the total cost of credit at fully amortized 30 years term: $80,026.91
In this case, you are actually paying more interest for the loan that you get with lower rate and lower monthly payment if you look at the big picture.
Tips for considering refinancing option:
1. Find out the total remaining interest that you would have to pay for your current mortgage loan and the proposed one with lower rate.
2. If you don't plan to keep your loan for more than 5 years from now, don't refinance because it won't pay off your closing costs, and the hassle of spending time in applying for the loan even though the rate is lower than your current loan.
3. Don't refinance if the interest rate is not at least 2% lower than your current one.
3. Don't refinance from your current fixed rate mortgage to a adjustable rate mortgage unless you are sure that it will best fit your circumstance (such as you will be selling the house soon and you need money right now). Adjustable rate mortgage is good for some people who can take advantage of the "teaser rate"-rate that is extremely low at the beginning.
4. Always ask your mortgage broker or loan officer to analyze your loan options and let them do the calculation for you and you be the one who make the decision. Sub prime mortgages - a hidden time bomb
Sub prime mortgages are generally made to those borrowers with poor credit ratings - a group generally defined by FICO scores below 620 on a scale that ranges from 300 to 850.
Most home loans don't fall into this category because most lenders have stringent underwriting guidelines for financing the purchase of homes by the borrowers.
Sub prime mortgages have proliferated in recent years due to the historically low interest rates and housing boom in the early 2000-2005. Sub prime lenders were wiling to take more risks thinking that their borrowers could somehow afford their higher payment mortgages down the road or they could refinance the mortgage later.
The dangers of Sub Prime Mortgages
The typical financing for most homeowners is the standard home loans ("Prime Mortgages") that have a stringent underwriting guidelines to qualify borrowers. Every borrower in this prime mortgage category are subjected to standard verification of credit, income, assets, and liabilities. Therefore the default rate for prime mortgage borrower is very low compared to the sub prime mortgage borrower.
Sub prime lenders made too many loans to borrowers who didn't make enough money to make the monthly payments. In some cases, lenders didn't even bother to verify borrowers' incomes. All the lenders do were to close as many sub prime mortgages as possible without considering the consequence of avalanche defaults by these borrowers when their rates are reset a few year later.
You may wonder how could these borrowers afford the sub prime mortgages in the first place if they didn't have enough money to make the monthly payment? Well, it took a while for the problems to surface because many of the sub prime mortgages carried extremely low interest rates ("teaser rates") during the first few years of the loan. But when the rates are reset, the sub prime borrowers could possibly face a shock in the significant increase of their monthly mortgage payment.
Some of this trouble might have been avoided if home prices had continued to climb like they did between 2000 and 2005. As a home appreciates, even borrowers who aren't paying the principal loan amount build up more equity. That in turn would have made it easier for sub prime borrowers to refinance into yet another loan with a low interest rate.
Now that home prices have weakened in many parts of the country and lenders are being more vigilant, refinancing isn't an option for many sub prime borrowers facing dramatically higher payments.
The financial trouble facing these sub prime borrowers could affect anyone hoping to sell a house in the next few years. Because there will be a lot more foreclosure homes coming into the market. Inevitably, there is a glut of real estate inventory of new and existing homes in the market.
Consider these 3 points when buying a home:
National Average
30 year fixed: 5.98%
15 year fixed: 5.64%
Rates may include points and subject to change, please see bankrate.com for details. Why you may not get that attractive low rate?
Often times, lenders will make assumptions on certain factors that can affect the rate, such as the size of the loan, the amount of down payment, if a primary residence will secure the loan, if the credit scores are high enough, etc., etc. when you call for a quote.
If you don't fall into that box of assumptions, then it's unlikely you would be able to get "the best rate" that they quoted for you. However, good lender will ask you more questions when you ask for a quote and they will be able to figure out the loan program that most suits your needs.
There are many loan programs out there and you should find out which program is best for your circumstances, and then find the best rate from that program. Most people go the opposite way which is technically wrong; they asked for the best rate and disappointed just to find out that they weren't qualify for the loan program. Loan programs span from Full Doc, Stated Income/Stated Asset (SISA), Stated Income/Verified Asset (SIVA), Low Doc, and No Doc. Each program has its own underwriting guidelines and rate quotes.
Bear in mind that interest rates can fluctuate as you shop for a loan or during your loan application. It is wise to find out the average going rates first and lock in the one that you feel comfortable with.
Remember that a lender must also disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
Factors that determine your mortgage interest rate are the following:
A research done recently by Yan Chang, a doctoral student from Penn State University concluded that paying points seldom pay off for most borrowers. Her doctoral thesis titled "Do borrowers make rational choices on points, and refinancing?" shows that in order to at least break even on the money you pay for points, you will have to keep the property for at least 62 months. Mortgage Rate Trend
Sources: Bankrate.com
This week (Sept. 13-Sept. 19) the experts say: Rates probably are going to fall further. Mortgage Insurance Premium is deductible for 2007
For loans originated in 2007, the mortgage insurance premiums will be deductible from federal income tax according to the 109th Congress when both houses passed the tax law with caveats. Read more >>
When mortgage rates are low, some people refinance their mortgage to a lower rate to lower their monthly payment. Whether you should refinance or not depends on your LTV and how much principal money that you still owe to your current lender.
Refinance to a lower rate would work for people who currently have higher mortgage rate and higher loan-to-value loan and who have been paying their current mortgage loan into the first few years.
For example, if you have a 7.0% rate with 95% LTV mortgage and been paying the mortgage for 5 years, then refinance to a 5.0% interest rate under the same fixed 30 years term would save you money in the long run. During the first 5 years, you were actually paying more money for your interest than principal. Therefore doing a refinance under this condition will be good for you. The total cost of borrowing becomes smaller under the same 30 years fixed term with a lower rate.
Let's look at the analysis here:
If you have paid down your initial $100,000 mortgage loan (30 years fixed term)for 5 years at 7% interest rate, you should have paid $5,868,24 in principal and $34,049.76 in interest:
To do a refinancing for 5.0% for your remaining loan amount of $94,131.76:
The total remaining interest that you need to continue to pay if you don't refinance(for the initial $100,000 loan): $105,461.98
If you would refinance at 5.0% interest rate for the loan amount left from your current mortgage ($87,780.28), the total cost of credit at fully amortized 30 years term: $87,780.28
There is a saving of $17,681.70! Obviously you should refinance in this case.
However, not all refinance for lower monthly payment is good. Refinance is definitely a bad idea for people who have already paid down a significant chunk of their principal for many years even though they can get a lower rate to lower their monthly mortgage payment.
Let's look at the analysis below:
If you have paid down your $100,000 mortgage for 10 years at 7% rate for a 30 years fixed term, you should have paid $14,187.22 in principal and $65,648.78 in interest::
To do a refinance for 5.0% of your remaining loan amount of $85,812.78:
The remaining interest that you need to continue to pay if you don't refinance(for the initial $100,000 loan): $73,862.20
To refinance at 5.0% interest rate for the loan amount left from your current mortgage ($80,026.91), the total cost of credit at fully amortized 30 years term: $80,026.91
In this case, you are actually paying more interest for the loan that you get with lower rate and lower monthly payment if you look at the big picture.
Tips for considering refinancing option:
1. Find out the total remaining interest that you would have to pay for your current mortgage loan and the proposed one with lower rate.
2. If you don't plan to keep your loan for more than 5 years from now, don't refinance because it won't pay off your closing costs, and the hassle of spending time in applying for the loan even though the rate is lower than your current loan.
3. Don't refinance if the interest rate is not at least 2% lower than your current one.
3. Don't refinance from your current fixed rate mortgage to a adjustable rate mortgage unless you are sure that it will best fit your circumstance (such as you will be selling the house soon and you need money right now). Adjustable rate mortgage is good for some people who can take advantage of the "teaser rate"-rate that is extremely low at the beginning.
4. Always ask your mortgage broker or loan officer to analyze your loan options and let them do the calculation for you and you be the one who make the decision. Sub prime mortgages - a hidden time bomb
Sub prime mortgages are generally made to those borrowers with poor credit ratings - a group generally defined by FICO scores below 620 on a scale that ranges from 300 to 850.
Most home loans don't fall into this category because most lenders have stringent underwriting guidelines for financing the purchase of homes by the borrowers.
Sub prime mortgages have proliferated in recent years due to the historically low interest rates and housing boom in the early 2000-2005. Sub prime lenders were wiling to take more risks thinking that their borrowers could somehow afford their higher payment mortgages down the road or they could refinance the mortgage later.
The dangers of Sub Prime Mortgages
The typical financing for most homeowners is the standard home loans ("Prime Mortgages") that have a stringent underwriting guidelines to qualify borrowers. Every borrower in this prime mortgage category are subjected to standard verification of credit, income, assets, and liabilities. Therefore the default rate for prime mortgage borrower is very low compared to the sub prime mortgage borrower.
Sub prime lenders made too many loans to borrowers who didn't make enough money to make the monthly payments. In some cases, lenders didn't even bother to verify borrowers' incomes. All the lenders do were to close as many sub prime mortgages as possible without considering the consequence of avalanche defaults by these borrowers when their rates are reset a few year later.
You may wonder how could these borrowers afford the sub prime mortgages in the first place if they didn't have enough money to make the monthly payment? Well, it took a while for the problems to surface because many of the sub prime mortgages carried extremely low interest rates ("teaser rates") during the first few years of the loan. But when the rates are reset, the sub prime borrowers could possibly face a shock in the significant increase of their monthly mortgage payment.
Some of this trouble might have been avoided if home prices had continued to climb like they did between 2000 and 2005. As a home appreciates, even borrowers who aren't paying the principal loan amount build up more equity. That in turn would have made it easier for sub prime borrowers to refinance into yet another loan with a low interest rate.
Now that home prices have weakened in many parts of the country and lenders are being more vigilant, refinancing isn't an option for many sub prime borrowers facing dramatically higher payments.
The financial trouble facing these sub prime borrowers could affect anyone hoping to sell a house in the next few years. Because there will be a lot more foreclosure homes coming into the market. Inevitably, there is a glut of real estate inventory of new and existing homes in the market.
Consider these 3 points when buying a home:
- Figure out your minimum monthly housing payment that you can afford easily and find a mortgage that requires a monthly payment which is within your range. The bottom line is to choose a mortgage that best suits your financial needs.
- Avoid mortgages that require prepayment penalty. A mortgage without prepayment penalty will let you refinance easily to a lower rate when there is an opportunity.
- If you have bad credit and can't qualify for a prime mortgage, don't be tempted to get a sub prime mortgage just to own a home outright, it is better for you to stay put for a few years to rebuild your credit and then afford a home with a prime mortgage. Another alternative may be to lease purchase a home while rebuilding your credit.
- Is my mortgage interest rate fixed? If yes, for how long?
- Is there any prepayment penalty?
- If my mortgage interest rate is not fixed-adjustable rate mortgage, what is the maximum rate that could hit me in the future? What is the cap?
- How much is my minimum monthly mortgage payment going to be?
- Is my mortgage payment positively amortized over the term of the loan?
- Do I have to pay for PMI (Private Mortgage Insurance)?
- Can you structure my mortgage so that I will have the biggest saving over the other mortgages? For example, consider piggy-back loans, Home equity line of credit, and etc.
- What are the closing costs?
National Average
30 year fixed: 5.98%
15 year fixed: 5.64%
Rates may include points and subject to change, please see bankrate.com for details. Why you may not get that attractive low rate?
Often times, lenders will make assumptions on certain factors that can affect the rate, such as the size of the loan, the amount of down payment, if a primary residence will secure the loan, if the credit scores are high enough, etc., etc. when you call for a quote.
If you don't fall into that box of assumptions, then it's unlikely you would be able to get "the best rate" that they quoted for you. However, good lender will ask you more questions when you ask for a quote and they will be able to figure out the loan program that most suits your needs.
There are many loan programs out there and you should find out which program is best for your circumstances, and then find the best rate from that program. Most people go the opposite way which is technically wrong; they asked for the best rate and disappointed just to find out that they weren't qualify for the loan program. Loan programs span from Full Doc, Stated Income/Stated Asset (SISA), Stated Income/Verified Asset (SIVA), Low Doc, and No Doc. Each program has its own underwriting guidelines and rate quotes.
Bear in mind that interest rates can fluctuate as you shop for a loan or during your loan application. It is wise to find out the average going rates first and lock in the one that you feel comfortable with.
Remember that a lender must also disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
Factors that determine your mortgage interest rate are the following:
- Loan programs (Full Doc., Low Doc., No Doc., SISA, SIVA)
- Loan types (Fixed 30-, 15-, 20-year, and etc., Adjustable 3-, 5-, 7-year, and etc.)
- Credit score
- Loan Amount/Down Payment/Loan-To-Value (LTV-the percentage of loan based on the appraised home value)
- Purpose of loan (purchase, term-rate refinance, cash-out refinance, construction, construction to permenant, etc.)
- Debt-to-Income ratio
- Lien position to the property (first or second)
- Holding status of the property (primary residence, second home or investment property)
- Prepayment penalty
A research done recently by Yan Chang, a doctoral student from Penn State University concluded that paying points seldom pay off for most borrowers. Her doctoral thesis titled "Do borrowers make rational choices on points, and refinancing?" shows that in order to at least break even on the money you pay for points, you will have to keep the property for at least 62 months. Mortgage Rate Trend
Sources: Bankrate.com
This week (Sept. 13-Sept. 19) the experts say: Rates probably are going to fall further. Mortgage Insurance Premium is deductible for 2007
For loans originated in 2007, the mortgage insurance premiums will be deductible from federal income tax according to the 109th Congress when both houses passed the tax law with caveats. Read more >>
Georgia mortgage ratesDisclaimer: The rates shown are based on average rates for the best qualified borrower in Atlanta area. Due to market fluctuations, interest rates are subject to change at any time and without notice. Interest rates are also subject to credit and property approval based on secondary market guidelines. Individual rate may vary. Use this information as reference to current mortgage interest rates. Sources: Bankrate.com | |||
| Rate | Apr | Points | |
| Rate | Apr | Point | |
| 30 years fixed | 6.125% | 6.125% | 0.000% |
| 15 years fixed | 5.625% | 5.625% | 0.000% |
| 7/23 Balloon | 5.750% | 5.750% | 0.000% |
| 5/25 Balloon | 6.000% | 6.000% | 0.000% |
| 3/1 ARM | 5.750% | 5.750% | 0.000% |
| 5/1 ARM | 5.875% | 5.875% | 0.000% |
| 15 years fixed (2nd Mtg) | 6.500% | 6.500% | 0.000% |
| 30/15 Balloon | 6.750% | 6.750% | 0.000% |
 |
|
Disclaimer: The rates shown are based on average rates for the best qualified borrower in Atlanta area. Due to market fluctuations, interest rates are subject to change at any time and without notice. Interest rates are also subject to credit and property approval based on secondary market guidelines. Individual rate may vary. Use this information as reference to current mortgage interest rates. Sources: Bankrate.com
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