Reasons To Consider Mortgage Refinancing
Refinancing in mortgage lending is when a homeowner, who has existing financing on their home returns to the market and replaces the existing mortgage, hopefully on better rates and terms than the original.
There are many good reasons to consider refinancing your home but it might require a careful examination of your specific circumstances to determine whether it is justified. Any time that you apply for financing you have to go through the entire application process; refinancing is no exception.
The Traditional Mortgage Refinance
For homeowners that want to reduce their outstanding balance, term or payments, bringing cash-in at closing can create a real advantage. Homeowners, for whom it is an option to bring cash to closing, can use mortgage refinancing as a great way to take advantage of the situation.
For example, on a conforming loan, by contributing cash at closing a homeowner could reduce the balance to below 80% LTV, enhancing the savings by eliminating the need for private mortgage insurance.
In some circumstances it might be desirable to receive cash-out at closing. This type of cash-in-hand at closing increases the balance of the loan although the interest rate might be lower or the term may be shorter. The rule is that a cash-out refinance is one that gives you more than $2,000 at closing.
Finally, the rate-and-term refinance is just an adjustment of rate or term or both. There need not be any additional cash either way at closing, although there will be fees that will likely be added to the balance of the loan.
Applying For Mortgage Refinance
There are three things that lenders will consider when you apply for mortgage refinancing. In the same process as when you are seeking finance to purchase a home, your application will be evaluated for your credit score and payment history, cash and assets that you own, and your employment history and income.
In addition to the paperwork the home will require an appraisal to accurately determine the current market value. As long as the property and the borrower are acceptable under current mortgage guidelines, the new loan will replace and pay off the existing loan.
Special Streamline Refinancing Programs
In addition to the traditional mortgage refinance available on the home loan market there are several simplified or streamlined refinancing programs. Homeowners with existing government-backed loans have options to refinance where the guidelines are less stringent. Programs such as the Home Affordable Refinance Program (HARP) provide streamlined refinancing for existing loans held by Fannie Mae or Freddie Mac loans. The Veterans Administration Interest Rate Reduction Refinancing Loan (IRRRL) provides improved terms for borrowers with VA loans.
The process of mortgage refinance is repeatable as often as the homeowner chooses. However, the costs associated with it mean that it is best done sparingly and at strategic times, such as when home values have increased significantly or when the homeowner has had a significant windfall that improves the payments or term of the loan.
When your agent does a market analysis or a certified appraiser provides an appraisal for your home, the most important indicator of the local market and the market value of your home, comes from what other similar and comparable homes in the market have previously fetched on the market.
Comparable Sales Roles In Appraisal
Looking at the real estate listings for a neighborhood can be deceptive because the asking price is not the same as the sale price. Usually there is some negotiation that goes on to set the actual sales price. You need to have some more information. There are important factors in correctly pricing real estate. Prices change with time and they can vary significantly by location. They are also determined by the size and other characteristics of the property.
The pricing mechanism of residential real estate in most regions of the United States is simply an open market value that is determined by supply and demand in the marketplace. There are limits because real estate has some restricting factors.
First it is not very liquid; a perfect free market has no delays or resistance in the exchange process. The items for sale should be commoditized or all uniform. Also in a perfect market the cost of sales and exchange should not be prohibitively high.
As anyone who has had anything to do with buying a home knows, this is definitely not the case with real estate sales. There are delays and obstacles in the process that make it expensive and slow. No two buildings or locations are exactly alike. Finance fees, broker fees, stamp duties and state sales taxes can add much expense.
Putting The Open In Open Market
In spite of all of this the real estate market has some things going for it. The most important is freedom of information; because real estate transactions are a matter of public record information is widely available about sales.
The number of sales in a region helps to provide comparable sales figures. This is augmented by the use by agents of multiple listing services to share information that would otherwise be hard to find. Information is an important equalizer in the open market.
The only appraisal you get is from a certified appraiser, when your realtor calculates a price it is termed a market analysis. Only the appraisal will be allowed as the formal valuation when you are applying for a home loan as a buyer. In either case the value of the property is calculated by a careful comparison with similar properties by size and location.
The appraiser or realtor will take into other factors such as how rapidly market values are changing but it all comes down to having information about similar homes in similar areas, those prices at which those similar properties sold is what is meant by comparable.
There are many ways that you could structure a home loan payment but there are some that are more popular and well known than others. Overall, they fall into one of two main categories defined by the terms of the interest payment: Fixed interest rates throughout the term of the loan and adjustable rate mortgages (ARMs).
Each side has benefits and disadvantages and so it is a matter of establishing the one that is best suited to your needs as a homeowner.
Fixed Rate Mortgage Financing
Fixed rate mortgages are very popular because of the certainty that interest rates will not suddenly go up, putting the homeowners under water with extortionate payments. The United States has not had exceptionally high interest rates in a generation and yet the pain that they can cause seems so real to many borrowers.
There tend to be two popular terms of conforming (suitable for government backing) fixed rate loans, either thirty-year or fifteen-year terms. The interest rate of a fixed rate loan is fixed at the start of the loan. Even if your fixed rate loan seems like a real bargain you can be sure that there is a part of your interest that is added in to account for the risk to your lender that they are losing out on extra income from some possible future interest rate hike.
ARM Caps and Indexes
Adjustable rate mortgages tend to be slightly cheaper than fixed rates because, if interest rates go up in the future they will be able to raise your interest payments. There is usually a limit called a cap on how much the lender can increase the rates when it is time to adjust them.
For example, if you have a 3/2/6 ARM it means that you rate will stay at the initial rate for three years, then it can adjust by as much as 2% once a year but only up to a maximum of 6% above the initial interest rate.
So, the term adjustable is pretty mild and the adjustments are only on rigid terms. The amounts by which they adjust are determined by a predetermined financial index that will be named in the terms of your loan.
The sort of index will be something like the London Interbank Exchange Rate (LIBOR) or similar. Indexes like the LIBOR are used because they have a connection to the inner financial condition of the economy and tend correlate to the prime-lending rate, along with other basic factors.
Fixed Rate Vs Adjustable Rate Mortgages In Summary
Fixed rate mortgages give you the certainty of knowing your rate cannot change. However you are paying for that privilege with a little extra interest on your loan. ARMs start out at more competitive rate and adjust after a fixed period.
This should be clearly stated and controlled rigidly within the terms of the loan, with only limited periodic reviews based on fundamental market indexes. There will also be caps on the amount by which your ARM can adjust at a given time and in total. So, although the risk is real, it is limited to a narrow range of changes.
Along with other terms of your home loan fixed and adjustable rate give you choice in the market for a home loan that meets your own personal needs. Neither category is going to be onerous, as long as you have read the terms and considered the risks and consequences you should be able to find the mortgage that is best for you.
The Right Numbers To Make The Homeownership Team
The process of purchasing your own home can seem like a major sporting event at times. If you have ever tracked baseball or football statistics then you have a little experience of what it is like to go through the application process and get pre-qualified and finally close on a home.
You are definitely going to feel like you are trying out for a team when you are facing the approval process with lenders. The key statistics that lenders will be looking at are the Debt To Income Ratios. There are two of them that really matter and you are going to be glad if you have been exercising some financial discipline in the period leading up to your home buying decision.
Lenders are willing to lend money secured by real estate as long as they are certain that they will be getting the monthly income that they expect. Since they have large numbers of borrowers they can make statistical predictions based on financial indicators as to who will make their payments and who might struggle. One of the most popular numbers that the will look to your debt to income ratio.
This percentage indicates what your obligations are each month in relation to your income. This tells the lender how much income is available for home loan payments and there are well-established limits that will determine if you will be considered as a safe income proposition. There are two ways the number is calculated and both figure into the lending decision.
Front End Ratios Measure Housing Expenses
The first metric compares the ratio of your pre-tax income to the mortgage payment. This is the front-end or housing expense ratio. It is calculated with the formula:
Annual Pre-Tax Income x 0.28 / 12 = Maximum Housing Expense Ratio
Back End Ratios Your Debt Repayments
The other metric for measuring debt to income is the back end ratio or total debt-to-income ratio. This will include all of the financial obligations that you have, including credit cards, loan payment, child support, and any Homeowner association fees. The maximum for this value is by the formula:
Annual Pre-Tax Income x 0.36 / 12 = Maximum Allowable Debt-To-Income Ratio
As long as your front-end and back end ratios are below the maximum amounts these numbers will not disqualify you from a home loan. There will be other important considerations in the lender’s decision such as your credit history and the cash you can put down at closing. However, your income will be scrutinized closely and two ways that will happen are through your front-end and back-end debt to income ratios.
There are many aspects to consider when you are exploring the possibility of purchasing a home. One of the most important is the financial discipline that you practice in your life as a matter of habit. Lenders must rely on facts and figured in their lending decisions and the way that they evaluate your credit worthiness is by looking at published verifiable financial records and comparing them to how all of the other borrowers have behaved done in the past. You are on your way to home ownership when you can get your debt to income ratios within these well-established limits.
When you are shopping for a mortgage you will hear the term points and learn that they are an expense that you have to pay up-front, at closing to kick off your home loan. So the question is: Why pay on a mortgage? This is an up-front fee that is common practice but it can be negotiated out of your loan if you are willing to accept more expensive terms. Once you understand mortgage points you will realize that they give you some flexibility in how you structure your mortgage.
What Are Mortgage Points Anyway?
When you take on a home loan, your lender earns income from you in the interest payments. In theory, this could be done in many ways, such as a balloon payment of all the interest at the end. Well, that would be expensive because you would then have to find some way to fund that very large future payment. You could pay all of the interest in advance, but again not an appealing option.
The easiest way to repay a home loan is with an amortizing loan where you pay interest on the remaining principal of the loan each month and part of the principle. This works out for everyone, the bank makes some interest and consumers get reasonably affordable home loan payments.
Pay Points And Save Interest
But banks like to get paid sooner rather than later and so they are willing to trade a discount on your interest in return for an small-ish up-front payment. This has often worked out even better for all parties involved then just repaying the interest in the payments. This has become a standard practice in the home finance industry. This payment is referred to as points because it will be a small percentage of the principle, usually around two to four percent.
You do not have to pay points but the lender will demand higher interest payments for a no-points loan. The higher the points you pay the lower the interest rate for your monthly payment. In fact, you might be able to negotiate negative points where the lender pays you!
Negative points might be helpful when you need cash at closing to to cover costs that would otherwise be unaffordable. But watch out for the higher interest rates that they will want to charge you each month.
Paying points on your home loan is not mandatory but it is a common practice in mortgage lending. It might be worth it if you can afford it because it will save you some on interest payments. If you are cash poor you can save on closing costs by taking a no-points loan at higher interest. If you have the cash it might save you more interest than if you added it to your deposit. Make sure that you know all of your options and discuss it in detail with your lender before you make a final choice.
The choice to lease or buy your car may seem like an obvious one. Unfortunately the answer that is obvious to you might be the opposite of someone else’s choice. There is a serious possibility that if you sit down and work it out, You might get an interesting surprise. Leasing or owning your automobile gives options that might be good for you in ways that you had not considered.
The Decision To Lease Or Buy Your Car
When you buy your own car whether it is a cash payment or through an auto loan, the only obligation you have remaining is to pay of the loan. The car belongs to you at the end of the day.
When you lease a car you are going to pay less as a down payment and as a monthly payment. However, at the end of the term, ownership of the car goes back to the dealership or the leasing company.
Their number one concern at the end of the lease is that they can sell the car on once you return it. To do so they have strict limits on the miles driven and the condition of the bodywork and interior, as returned. Any damage or excess mileage will be charged to you at the time of return.
The Value Is In What You Value
In the long run, owning your own car is less expensive if you hold onto your car for the long term. On the other hand, if you trade in for a new model every three years or so, you will get better value from a lease. There are exceptions to this rule as leases have limits on the mileage you can drive each year without penalty.
Having a new car every three years can be smart. The manufacturers warranty will cover most mechanical breakdowns. To get the most out of your purchased pride you will have to run it long after the warranty has expired. That may not matter to you but, as cars age, wear and tear will cause breakdowns to become increasingly likely.
Ultimately, the pride of owning your own car must be balanced against the pride of driving a new car.
Can You Anticipate Your Next Three Years?
Miles and miles into a lease you may find that the great job you never expected came up, half way across the state. You immediately begin driving four times the number of miles you expected each year, just to satisfy your career ambition. The mileage limit on leases means that your overage will be charged to you at the end of your lease, by the mile.
This might be all well and good if you earn significantly more in the new job than that on which you based your budget when you decided to lease. However, if it is a job that does not pay better but will look great on your resume down the road, it might turn out to be much cheaper in your own car.
The question of whether you lease or buy your car comes down to your personal situation. Either case can sometimes be significantly better depending on the things you value and the miles you drive.
Get Familiar With The Territory
As daunting as it may seem before you start, there are only a finite number of things that you need to know to be a confident first time buyer. Your quest for home ownership is exciting to you but it is not a new thing; people have been buying real estate since the times of the Roman Empire, more than 2,000 years ago.
There are books on the subject by the thousands and great resources online, such as this website. You owe it to yourself to educate yourself as much as possible about the process before you begin. The information is out there and, as they say, knowledge is power. So, be a first time buyer in a position of strength by building your knowledge of the business before you dive in.
Find Professionals To Work With
You are going to need to have the right representation and a source for financing when you buy your first home. You will need to pre-qualify for a home loan and find a realtor that you are comfortable working with. You may end up spending a lot of time with the realtor and they are going to be advising you on a very important decision. So, it is important to find one whose reputation is strong and with whom you get along.
Sellers and their realtors will take you much more seriously when they believe that you have the capacity to strike a deal. For most buyers, that means that they have received agreement in principle from a lender to fund a specific maximum amount for a home loan. The process of getting pre-approved for a home loan will cover all of the aspects of the loan that involve you being personally approved and judged as credit worthy.
Do Not Bite Off More Than You Can Chew Each Month
Do not set your sights on the biggest, most expensive home possible. Go for the one that suits your needs and which gives you a little breathing room if finances get tight for a while. You will be able to put more down and pay it off more easily. Later, when you are ready you will find your first time buyer home is the leverage you need to get the palace of which you dream.
Be Prepared To Let Go
Go into your first home purchase with your eyes open and your heart tucked away safely. It is when your emotions take control that you are vulnerable to paying too much or buying more than you need. Buying a home can be a long and frustrating process, until you find the right home. Not the one that makes you feel needy and greedy but the one where the numbers look right and the general features are adequate for your needs.
In real estate you earn the money when you buy. This is because you either lock in the equity or the potential that will grow until you are ready to sell. If it is a bad deal at the beginning of the process it is not going to get any better later. So, be prepared to let go of the deal in hand if it is not the right one for you.
Buying your first home can be a challenging experience. It is also one of the most rewarding things you will do as long as you follow these five simple common sense rules that will make you a happy first time buyer.
Buying real estate for rental income is one place to put your money that has historically been considered a good, income producing, and long-term investment. Once you start to investigate opportunities and options you will find that it is an entirely different market from that of homeownership.
Buying Real Estate For Rental Makes Bank Managers Nervous
You will have to approach your bank as a business and so you will likely get a better response from the sort of banks that work with small business. Stay away from the big retail banks; you will be able to build a more product relationship with a local banker.
Lenders do not like to give mortgages based on rental income without at least two years of history. So you are not going to be able to buy a property based on the tenant’s promise to pay, lenders just do not take that type of risk.
Most mortgage insurance does not cover rental properties so it is going to be difficult to get financing unless you can make a 20% down payment. Your lender will want to see an excellent credit history and FICO Score above 740. They will need to see that you can make the down payment and still have cash reserves to pay for any contingencies or get you through periods of rental vacancies of up to six months.
The balanced approach that you will find that institutional buyers use is to leverage the cash on hand will reasonable amounts of loans. Investors with cash on hand can find that lenders will give them a 50% to 75% loan to value ratio. Real estate loans on these terms will also receive a preferential interest rate.
This effectively leverages your cash by a factor of four. The cost of borrowing will be fairly constant, subject only to any pre defined rate adjustments. Any increase in the value of the property will go to you as the investor, as will any increased rents when the market heats up.
Alternative Sources For Financing Your Rental Property
Some owners who want to dispose of their property might not need all cash. It can be a great way to make the deal happen if you can arrange seller financing. In recent year there have been developments in financing through peer-to-peer lending sites, such as lendingclub.com where investors will be more willing to consider loans to first-time landlords. This is the most recent trend in what has been traditionally called creative financing.
As the landlord you have to ensure that the rental property is in a safe condition. Managing tenancies is a topic in its own right. Risks include damage, bad tenants and vacancies while you still have to cover your costs.
You do take on some serious liability if you are a landlord; any thing that causes an injury to the tenant that they somehow could blame you for could be very, very expensive. This can be covered with insurance but you will pay increased premiums for any claim.
Buying real estate for rental is a different endeavor than buying a home to live in. There will be strict limits to the way you can use the income to qualify for a mortgage. If you have enough cash on hand or in your 401K that you can cover six months of lost income then having rental properties as investments could be a great way to round out your financial portfolio.
In a declining real estate market, where the competition for buyers is fierce and the supply outruns the demand, you will probably consider selling a home by lowering the price of the property. Rather than lowering the price of the property, first make a serious attempt to increase the attractiveness of it and sell it more quickly at the right market price.
In spite of the growing competition in the market, you can sell the property at good prices if it stands apart from the rest and captures buyers’ attention and hopefully their hearts. If you are selling your property in a chilled real estate market, here are a few tips, which will help you sell your home more rapidly and at the right price.
Keep Curb Appeal In Mind
First impressions matter! A house with old and peeling paint, a yard overgrown and unmaintained, with overgrown hedges and patchy grass won’t do any good to the seller as well as the buyer. Fixing small things, which improve the overall look of the property and adding props to it, can produce a great return on investment. If you maintain the outlook of the house, buyers will view it as one less thing they have to consider spending money on.
Give It That Ready To Move In Look
A property for sale should be well maintained; the doors, windows and the paint job of the house can be renewed for an overall good impression on the buyer. The idea is to leave an impression on the buyer that they can move in the place anytime and enjoy their new home, not spending their time repairing the home even after spending their money. This creates an impression that is an extension of the curb appeal and little things can make a big difference.
Clearing out all the clutter from your house is one of the most important things that you need to do. Remove all the unnecessary items to make the space look bigger. Hiring a stager is also a good option, as professional stagers are known to be effective at making homes more salable. Every buyer would want a place the they can immediately associate positive experiences and a stager can create an appealing vibe and a look that is more attractive and generating a positive emotional response.
Tag It With The Right Price To Sell Your Home Faster
Even after setting up your place yourself or getting it done by a professional stager, you have to work to set the accurate price of the place. Setting price of the place is equally essential because you need to keep yourself updated with the current rates in the real estate market. Working with a professional realtor who has years of experience can help to put it on the market at the right price. In residential real estate the differences in price of a few percent above the right market price will make a difference of days or even weeks of time on the market. Get professional advice from your realtor, their market analysis should be able to get it right the first time.
Selling your home at a cooling real estate market might require a bit of hard work. But developing curb appeal, keeping the interior well maintained and setting the right price can increase the rate at which your property will be sold.
This article is intended to help the reader understand the cryptic sounding term mortgage backed securities or MBSs and how they affect mortgage rates. To begin with let us look into what mortgage backed securities are all about.
Mortgage Backed Securities
Mortgage backed securities are simply bundles of mortgages with similar terms, such as interest rates. In other words, when a bank makes a loan it bundles all of the mortgage loans with similar interest rates and sells them to quasi governmental agencies such as Fannie Mea and Freddie Mac or to investment banks or the large insurance companies. These bundles of mortgages or groups of similar mortgages are held and traded by large institutions, in way that is somewhat similar to bonds, stocks or mutual funds.
When the FHA set up its home loan guarantee program the problem of holding on to all of those low down payment mortgages was solved by collecting them into large bundles and holding them as investments under the supervision of what was to become Fannie Mae. Homeowners will pay their principal and interest to the company responsible for servicing the debt. The servicer passes on the income from the loan to the institution after subtracting their management fee.
Big Boys Of The Bond Market
Like all other fixed income securities, the price of one of these MBS bonds is set based on the value of the income stream. Because they have traditionally been seen as safe investments, these bonds are often sold at a price higher than the face value of the bond. For instance, if an investor is buying a bond of $100 he or she will have to pay $101 or more to buy it, which often depends on the yield of the bond. Yield is the rate of return an investor gets on that particular bond. It could be 3%, 4% or 5%. The higher the yield of a bond, the more the buyer is willing to pay for it.
If the demand for a particular bond decreases the seller lowers the price of the bond. On the other hand, if the demand for a particular bond increases the seller increases the price of the bond. In this way we can say that price of a bond is directly proportional to demand. Because the income is constant the variation is in the price to buy and sell the bond. Of course, investors want to understand it in term of what their dollars buy and so, looking at it from that perspective, when yields go down and bond values go up. In the reverse situation, as yields go up, the bonds become cheaper.
Higher Yield Means Cheaper Bonds
The MBS bonds reflect the demand for mortgages in the economy. If demand is for mortgages is increasing then the Fed will respond by increasing interest rates. This increases the income from new lending, which lowers the sale value of existing bonds (to give them a higher yield) as investors pull out of mortgage backed securities to finance other higher income investments.
Inflation also plays an important role in affecting the demand for bonds, which also impacts the mortgage rates. In the event of high inflation, investors often demand bonds at lower rates to cover their margins. In other words, since bonds produce a fixed rate of income it is quite natural for the investors to buy bonds at cheaper rates so that they can buy more bonds with the same investment. Moreover, booming economy forces investors to divert their funds in businesses where they could earn more profit. Thus, sellers often lower the price to attract investors resulting in rising in mortgage rates.