Should I refinance if I’m already a few years into my mortgage?

In my communication with customers who are considering a refinance mortgage I can often sense a general sense of reluctance to “restart” their mortgage on a new 30 year or 15 year amortization schedule.  Sometimes I get asked questions such as “If I refinance won’t I lose all those payments that I’ve already made?”.  The truth is that consumers can pay their mortgage balance down sooner even if it means taking out a new mortgage with a new amortization schedule.  To see how click on the video below.

Click HERE to view the report that is highlighted in the video for yourself.

Fixed mortgage rates hit all time low!

It’s official, each Thursday Freddie Mac releases it’s weekly survey of “average” mortgage rates across the country (which is syndicate on this blog in the left hand column).  This week the 30 year fixed rate hit 4.44% which is the lowest since they started keeping track in 1971.  Let me know if you’d like a no obligation review of like THIS ONE.  This review allows us to compare your existing mortgage (in column 1) to multiple refinance options including standard costs mortgage with low rates or no closing cost mortgages.

Fed’s expand housing-rescue refinance program

The Obama Administration announced yesterday that they were expanding the criteria for homeowners who wish to refinance their existing mortgage under the housing-rescue program.  The program, which is known as refi plus in our industry, is now allowing homeowner’s whose mortgages are now worth up to 125% of the home’s current value to refinance under this program.  Previously the program only allowed loans to be refinanced up to 105% of the homes value.

In addition, they announced enhanced pricing on these programs which should improve mortgage rates.

The expansion is not likely to benefit many homeowners in the Portland-metro area because home prices have not fallen so significantly.  Other criteria still exist:

Among others here are the main criteria that we find inhibit our clients ability to utilize this program:

*When the existing mortgage was originated it could not have exceeded 80% of the homes value.  In other words, the homeowner must have had 20% down OR taken out a 2nd mortgage in place of having 20% equity.

*If the borrower has a 2nd mortgage then we need to obtain a subordination agreement with that lender stating they agree to resubordinate the existing 2nd mortgage behind a new first mortgage.  In this credit environment we don’t know of any 2nd lenders who are allowing this.

*The borrower’s existing mortgage must be a Fannie Mae or Freddie Mac mortgage.  Jumbo loan amounts are NOT covered nor are loans owned by “portfolio lenders” such as Washington Federal Bank or ING Direct among others.

If you have questions about this program and if it can benefit you please let us know.

Good article in about refi’ing

After being gone for 6 months Tina and I landed on US soil on Wednesday AM in LAX.  Upon landing I couldn’t wait to get my hands on two things that are scarce overseas- filtered coffee & the WSJ.  I was able to acquire both shortly after clearing customs (suckers).

Anyways, in the Wednesday edition James B. Stewart wrote a good piece on the process of refi’ing in today’s environment.  Here is a link to the article along with a couple excerpts-

Underwriting has gotten much more difficult-

Little did I know the ordeal I was about to embark upon. Getting to a successful closing became something of an obsession, and what seemed at times a second occupation. Several times I thought I’d reached the point where I couldn’t take yet another request for a document (often in the possession of third parties who never answer their phones). And I have a reasonably high credit rating, a low loan-to-value ratio, a low loan-to-income ratio, and a history of never having missed a mortgage payment. Can it be only a few years ago, anyone with a pulse got a mortgage?

Solutions?  Make the process SIMPLER.  Also, work with a professional who will educate you on your options in lawman terms-

So-called reforms that deprive people of choice and opportunity strike me as counterproductive. I’m all for reforms that clarify, simplify, and educate consumers to make better decisions, and I hope the Obama proposals will help achieve this.

Refinancing: principal balance is different from pay-off amount

Are you considering refinancing your existing mortgage?  If so you may be interested to learn that the amount of money it will take to satisfy your existing mortgage (known as the “pay-off amount”) will be MORE than the principal amount you owe.  Why?

Your existing mortgage lender will not only request that you pay-off the principal balance but also the per diem interest that has accrued from the date of your last mortgage payment.

For example, let’s assume you have a mortgage with a remaining principal balance of $250,000 and an interest rate of 7% ($48.61 per day) and you are planning on refinancing it.  The scheduled close date is set for November 15th.

When you go to close, your pay-off amount will be $250,729.17 ($250,000 + $48.61* 15 days)

Therefore, your pay-off amount is equal to:

Pay-off amount= Principal amount + per diem interest

As a side note, the new lender will collect per diem interest on the new mortgage from November 15th- November 30th which should be reflected on your good faith estimate provided by the new lender.

Keep in mind that when you refinance you effectively “skip” a payment.  The per diem interest that is collected through the closing essentially is the interest that otherwise would have been paid had you not skipped a payment.

Federal Reserve Board sets up new website on refinancing

The Federal Reserve Board recently created this website  which is designed to help consumers evaluate whether or a refinance of their existing mortgage makes sense.  Typically I am skeptical of the Federal Governments ability to simplify this process for consumers.  After all they were the ones who brought us the Good Faith Estimate & Truth in Lending disclosure forms as a way of “simplifying” the home loan process.  I think we can all agree that these two disclosure forms are anything but simple for consumers.

But I will admit that this website does have some good information presented in an easy to read format.  I do take issue with a couple of the comments made on the site:

-The break-even worksheet on the site does not account for changes in amortization schedules between the existing and new mortgage in determining the break-even period.  This means the result will favor refinancing more often than not because an existing mortgage will typically have greater principal to be paid in the near-term compared to new mortgage. 

-The site also states, “Many financial advisers caution against cash-out refinancing to pay down unsecured debt (such as credit cards) or short-term secured debt (such as car loans).”  When done properly using idle equity in a person’s home to pay-off unsecured debt can free up significant cash-flow to use towards savings and investment goals.  I don’t know too many financial advisors who believe that is an adverse plan. 

Overall the site is pretty good but I still think its most important for an individual to clearly establish their objectives for refinancing before making an ultimate decision.  Here is a blog I posted about the subject a while back.

I encourage you to make comments about this posting below.

Refinancing when your home has recenlty been listed

Has your home recently been listed for sale? If so, did you know that by having your home listed for sale your ability to refinance your mortgage is severely limited?

95% of banks will not lend on homes that have been recently listed for sale because they are concerned that the home might go back up for sale as soon as the loan is funded or that the borrowers are in dire financial straights. Lenders make their money by putting a mortgage in place and collecting interest over long periods of time. Therefore, anything that threatens the length the mortgage is typically a roadblock for loan approval.

That said, because we have the ability broker loans we have targeted a couple investors who will allow us to refinance a home that has been recently listed so as long as the home is off the market at the time when the formal application is made.

These lenders are limited to owner-occupied homes only and will only allow us to provide a rate/ term refinance (meaning that we cannot pull-cash out). Extenuating circumstances such as a job transfer that fell through may override this restriction.

So, if your plan is to put your home up for sale and there is a chance that you may instead decide to stay in the home and refinance it’s best to have a conversation with us first.

Article about debt snowball pay-off for consumer debt

Here’s an article I read recently:

During my twenties, I accumulated nearly $25,000 in consumer debt. I had a spending problem. With time, I was able to get my spending under control (mostly), but I still owned overwhelming debt. How could I get rid of it?

The personal finance books all suggested the same approach:

Order your debts from highest interest rate to lowest interest rate.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except the one with the highest interest rate.

Throw every other penny at the debt with the highest interest rate.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-highest interest rate.
This made perfect sense. By doing this, I would be paying the minimum amount in interest over the long term. The trouble was, my highest-interest rate debt was also my debt with the biggest balance (a fully-maxed $12,000 credit card at 19.8% interest). I’d plug away at this debt for several months at a time, but then give up because it felt like I was never getting anywhere.

This happened over and over. I’d start and fail. Start and fail.

Then I read about the Debt Snowball method in Dave Ramsey’s The Total Money Makeover. The Debt Snowball method is similar to the traditional approach except that instead of attacking high-interest rate debts first, you attack low-balance debts first. Why? Because you’ll get the psychological lift of pinging debts off in rapid succession. And if you’re like me, this makes all the difference. The Debt Snowball approach is:

Order your debts from lowest balance to highest balance.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except the one with the lowest balance.

Throw every other penny at the debt with the lowest balance.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

When I read about the Debt Snowball method, I was skeptical. I knew it would cost me more in the long run, at least on paper. But I figured I had nothing to lose. I tried it. In four months I’d paid off most of my debts. I was shocked. I’d been trying and failing for years, and now I was able to make a huge dent in just months? It was all because I had changed my approach just slightly.

Humans are complex psychological creatures. They’re not adding machines. Many of us know what we ought to do but find it difficult to actually make the best choices. If we were adding machines, we wouldn’t accumulate $20,000 in consumer debt in the first place! It’s misguided to tell somebody so deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing to do is to set up a system of positive reinforcement, and that’s exactly what the Debt Snowball method does.

Which method should you choose? Do what works for you. The first method can save you money in the long-run. But if you’ve tried it and failed, give the Debt Snowball method a shot. It might be the answer you’re searching for!

Thinking about refi’ing? Read this first….

The purpose of this article is to give consumers a guide for determining whether or not a proposed refinance makes financial sense for them. Through my interactions with many of my clients over the years I’ve found that much of the population is left confused when evaluating mortgage refinance options. I hope that I can shed some light through this article so that you can make better decisions about your own situation.

Because evaluating proposed refinance options is often confusing and overwhelming, many “rules” have been created over the years in an attempt to simplify the formula. Among the most common of these is the “1% rule” in which loan holders are to refinance ONLY if they can lock a rate 1% below their existing mortgage rate. Although I applaud the simplicity of such a rule I do not think it is effective in helping people make wise financial decisions.

The truth of the matter is that every single household’s situation is different and therefore there is no blanket rule that can apply to all people. We may advise two households differently even though they have the exact same mortgage balance and the exact same interest rate evaluating the exact same refinance proposals because each has different objectives.

So how do you decide whether or not a proposed refinance makes sense for you? Here is a methodology that we use with our clients:

The first step is to identify what your objectives are.

For most people the biggest consideration in deciding whether or not to refinance is cost. If they can replace their existing loan with a lower cost option then the refinance makes sense for them. For these people we’d like to remind them that costs can be expressed in a variety of ways such as closing costs, interest costs, opportunity costs, etc.

For other people the monthly payment or loan program may be their biggest consideration. For example, maybe someone is anticipating going back to school and wants to refinance into an interest-only loan to reduce their monthly payments. Or, maybe a person has an adjustable rate mortgage (ARM) that is scheduled to adjust in the coming months and they think that it would be a good time to lock in a fixed rate. These considerations may not be motivated by cost in the near term but instead by lifestyle changes.

The bottom line is that the objectives can vary depending on the person and the circumstance. It’s important that a person identifies what is important to them and communicates it to their mortgage professional.

The second step is to evaluate your options.

Once your mortgage professional understands what you’re after, they should be able to provide you with multiple refinance options based on those objectives. This is where the art of evaluation comes into play.

At the heart of evaluating a refinance proposal is a cost-benefit analysis. As a consumer you must weigh the cost associated with the refinance (as measured by the closing costs) against the proposed benefit (your objectives).

If your objective is anything other than cost the evaluation is much more subjective in nature. You will have decide if the closing costs you’ll incur for refinancing is worth whatever benefit you are seeking.

If cost is of most importance, then the cost-benefit analysis is relatively easy to complete. With this analysis we’ll evaluate the proposed cost of the refinance, in terms of closing costs, and weigh it against the proposed interest savings over time.

The cost-benefit analysis looks like this:

Proposed closing costs ($)/ Proposed Interest Savings ($ per month) = break even period: # of months in which it would take to recoup the closing costs and begin saving money

Once a person has calculated the length of time it would take for them to recoup their closing costs they can then decide if they expect to hold the loan long enough in order to experience significant savings.

In order to make sense of this concept lets evaluate a hypothetical situation:

Johnny Homeowner bought his home in January of 2006. At that time he took out a 30 year fixed rate mortgage @ 6.50% which he’s made standard payments on ever since. As of March of 2008 his loan balance is $296,067 and his monthly principal and interest (P & I) payment is $1,871.

He is currently evaluating a refinance proposal which would replace his existing mortgage with a new 30 year fixed rate mortgage @ 5.875%. The closing costs associated with the refinance are $3,000 which he has decided to include in the new loan so that he doesn’t have to pay them out of pocket. The new monthly payment would be $1,769 which represents a savings of $102.

Here is the analysis for him:

$3,000 (closing costs) / $102 (monthly interest savings)= 29 months.

What the analysis suggests is that he would have to maintain this mortgage for 29 months in order to recoup the initial closing costs he paid for the refinance. From that point forward he’s in better shape than he would have been had he not refinanced. So, for him to evaluate whether or not this makes sense he’d probably want to feel confident in the fact that he’ll have this loan for at least 30 more months.

The last step is to make your decision.

Since everyone is different there is no right or wrong answer when it comes to refinancing. We can help you best understand the implications of refinancing but ultimately it’s up to you to decide whether or not you should do so.

Typically we try to provide our clients with little to no closing cost refinance options because we believe there is less risk of making a bad decision when the break-even period is relatively soon. The tradeoff in that the borrower may not be locking an interest rate that is as low as they could get if they were willing to incur more costs.

If you decide that the refinance terms are not good enough to justify the cost then be sure and communicate that to your mortgage professional. Often times they can keep a lookout for you so that if/ when the opportunity does present itself they can pro-actively let you know.

In summary, deciding whether or not to refinance can be a difficult decision. In order to make sense out of it we’d first encourage you to identify what your motivation for refinancing is. Second, communicate that to your mortgage professional and have them work up some options for you to review. Evaluate these options using a cost-benefit analysis to decide whether or not the proposed benefit outweighs the cost of the loan. Finally, remember that there is no right or wrong answer. If you think that it makes sense then go for it and if not be sure to inform your mortgage professional what it is you’re looking for so that they can keep an eye out for you.

No-Closing Cost refinances- How do they work?

For most of our clients, the idea of a “no closing cost” (NCC) refinance seems too good to be true. We think that these loans are great tools for helping our clients save money; but it is critical that our clients understand how they work. The purpose of this posting is to explain how we can offer NCC refinances and how we use them to help our clients manage their mortgages most effectively.

The first thing to understand when it comes to NCC refinances is how they are even possible. As a mortgage lender, there are two ways in which we can generate revenue for our work in originating a new mortgage. The first and most common way is by charging an origination fee to our clients, also known as “points”. Some lenders charge a 1% point in addition to standard closing costs (lender, appraiser, title/ escrow, etc.).

The second way we can generate revenue is by selling the servicing rights of a loan we originate. In other words, lenders are willing to pay us a fee in exchange for the stream of payments that our clients pay as a part of their mortgage obligation. NCC refinances become possible when we can use the revenue from the sale of the servicing rights to cover all of the closing costs that our client would normally incur.

So what is the tradeoff? The tradeoff is that in order to generate enough revenue to make a NCC refinance feasible, we have to assign a premium to the interest rate above what a borrower could lock in if they were willing to pay their own closing costs.

As an example, here is list of available 30 year fixed rates with the associated closing costs:

4.75% w/ $3,500 closing costs + 1% point ($3,500)= $7,000 closing costs

5.00% w/ $3,500 closing costs

5.25% w/ $0 closing costs (in fact there is a $3,500 lender credit that is used to offset the $3,500 in costs)

For most of our clients it can be difficult to justify the standard closing costs associated with a refinance because the fixed rate being offered is only modestly better than their current situation. For example, for a client who has a current fixed rate of 5.50% the 4.75% would only create approximately $3,000 in annual interest savings & the 5.00% option only about half that. A borrower would need to hold the mortgage for over 3 years in order to save enough interest to recoup the closing costs associated with these options. For most people the “break-even” period is simply too far away to make the proposed refinance attractive.

However, this person could take advantage of our NCC refinance option @ 5.25% and immediately begin saving approximately ~$800 per year. This amount would not change their life but the fact that they incurred $0 closing costs to obtain the new rate would make it beneficial to them from day 1.

Here are some FAQ’s we’re commonly asked about NCC refinances:

Should we wait to see if rates go lower?

The best part about NCC refinances is that typically we can continue to provide them. If a borrower took advantage of the aforementioned 5.25% option and rates continued to decrease over the following months we could always provide another NCC refinance in the future. Since there is no cost to them there is no drawback in doing it multiple times, even within a short time period. We call this the “ratchet effect” because we effectively “ratchet” your mortgage rate lower as long as it makes sense but the rate will never move higher from the fixed point.

Will we have to bring any cash into closing?

It is likely that you’ll have to bring some money into closing. The amount will vary on a case-by-case basis but lenders will essentially collect what equals to one mortgage payment because by refinancing you’ll skip your next one. For example, if you closed the NCC refinance on June 15th you’d be responsible for the interest on your current loan from the date of your last payment (June 1st) to the 15th (when the loan would be paid off). You would also be responsible for the interest that will accrue on the new mortgage from the close date, to the last day of the month (June 15th –June 30th). You WOULD NOT have to make a mortgage payment on July 1st.

Depending on whether or not you pay your real estate taxes & homeowner’s insurance with your monthly mortgage payment, the lender may also need to collect funds to re-establish a tax/ insurance reserve account. Often times these amounts can be included in your new loan amount so that you don’t have to fund this with cash out of your pocket. Keep in mind that when you pay-off your existing mortgage the lender will refund any amount that you currently have on deposit with them and therefore this amount that is collected is effectively a “wash”.

If you pay your real estate taxes and homeowner’s insurance separate from your mortgage payment then the lender may require that your current homeowner’s insurance be renewed (if it set to be renewed within the next few months) or any outstanding real estate tax liens be paid (depending on the time of year).

Will my loan amount change?

Some of our clients have asked us if when talking about a NCC refinance we are simply referring to “rolling” the cost of the loan into the new loan amount. We are not. This is truly a NO CLOSING COST refinance. If you’re comfortable paying your equivalent of one mortgage payment at closing and possibly any collected taxes and insurance then we can keep your loan amount exactly the same.

Does my 30-year term on my mortgage start over again?

It is true that with the new mortgage your term will start over again (there are some exceptions). However, if paying off your mortgage is most important to you then it would still be in your best interest to complete a NCC refinance. This is because if you used the monthly payment savings that you’ll get from the refinance to pay additional principal each month you’ll pay off your principal quicker than your current mortgage with a higher interest rate.

Are NCC refinances available to everyone?

NCC refinances are tougher to offer for borrowers who have loan amounts < $250,000.