Thanks to today's ultra-low interest rates, the home mortgage business is booming at a record pace.
Although new home construction and home resales are at near-record volume, surprisingly most of the home mortgage originations are not coming from these sources.
Only about 24 percent of new mortgages are from home sales. Approximately 76 percent of new home loans represent house and condo owners who are refinancing their existing mortgages.
WHY REFINANCE YOUR HOME LOAN?There are many reasons homeowners refinance. Perhaps you want to spend some of your home equity on a frivolous luxury trip around the world. Or maybe you want to use your home equity to pay for a child's college tuition.
Here are the 10 most frequent home refinance reasons:
1. To reduce the current mortgage interest rate and lower the monthly mortgage payments
2. To take out tax-free cash from home equity for personal use
3. To combine a first and second mortgage into one mortgage with a lower total payment
4. To pay off other loans that have non-deductible interest, such as credit card and auto loans
5. To eliminate expensive PMI (private mortgage insurance) or FHA mortgage insurance premiums
6. lender, such as one who fails to credit your monthly payments promptly or who messes up your escrow impound account
7. To switch from an adjustable to a fixed-rate mortgage
8. To finance home improvements, such as remodeling or a family-room addition
9. To cut interest costs and speed up loan payoff by switching to a 15-year or 20-year mortgage
10. To borrow on your home equity to start or buy a business, or to expand your current business.
WHO SHOULD NOT REFINANCE THEIR HOME MORTGAGE? The "old rule" used to be that homeowners should not refinance unless they can reduce their interest rate by at least 2 percent. But that was before today's low-cost and no-cost refinancings.
I know homeowners who have refinanced two and even three times within the last two years. The reason they repeatedly refinanced was they could reduce their monthly mortgage payments without incurring any refinance costs.
In other words, the refinance costs were included in their mortgage interest rate.
However, by today's home loan standards, most homeowners won't benefit unless they can reduce their interest rate by at least one-half percent.
Homeowners who plan to remain in their homes for more than five years should definitely refinance with a fixed-rate mortgage. However, if they are absolutely certain of selling within five years, they should consider an adjustable rate mortgage (ARM), which is locked in for five years. Today's ARM interest rates are typically around 5 percent, sometimes even a bit lower.
HOW TO BEGIN THE HOME MORTGAGE REFINANCE QUEST. Most home mortgage lenders are now swamped with loan applications from refinancing homeowners. The delay in refinancing is often four to eight weeks. Plan to be patient.
Due to the nationwide shortage of appraisers, the big bottleneck is getting an appraiser to evaluate your house or condo's current market value. But most homeowners are in no rush, especially since mortgage interest rates are currently very stable.
1 - CHECK YOUR "FICO" CREDIT SCORE. Before contacting mortgage lenders about refinancing, get a copy of your credit report and your FICO (Fair, Isaac and Co.) credit score, which most lenders use to evaluate your loan application.
Your FICO score estimates the probability you will make your mortgage payments on time, based on your history of paying your credit cards, mortgage and other debts.
If you have a FICO score of 620 or above, you'll probably get a low interest rate. Below 620, however, refinancing will be expensive and might not be worth the effort. Above 700, lenders don't worry about your probability of repaying your mortgage.
Surprisingly, your income is not considered in your FICO score. The easiest place to get your current FICO score is on the Internet at www.myfico.com. The cost is $12.95, charged to your credit card.
At that Web site, you will instantly receive your credit report, your FICO score and suggestions on how to improve your FICO score. If your credit report reveals errors, before applying to refinance be sure to contact the three major credit bureaus to "verify" the mistake, correct it and receive a corrected credit report within 30 days.
2 - CONTACT AT LEAST THREE MORTGAGE LENDERS. After you are certain your credit report and FICO score are accurate, it's time to begin loan shopping. Each mortgage lender is different. That's why it pays to mortgage shop among mortgage brokers, local banks and S&L direct lenders, and mortgage bankers. For best results, contact at least one lender of each type.
A - MORTGAGE BROKERS. These lenders are "middlepersons" between the borrower and the lender. They originate about 60 percent of all home loans. But they don't loan their own money.
After you fill out a mortgage broker's loan application, it will be "shopped" among many lenders to find the best loan terms for your situation. Most mortgage brokers represent dozens of lenders. If your situation is unique, such as a rural, one-of-a-kind hilltop retreat, an experienced mortgage broker will know which lender likes that type of mortgage.
However, pitfalls I have encountered with mortgage brokers include (1) bait-and-switch loan quotes that proved to be unavailable, (2) unexpected last-minute "junk loan fees" that were not previously disclosed, and (3) poor service, such as failure to return phone calls. However, mortgage brokers often perform "mortgage miracles," especially with unusual property or unique borrower circumstances.
B - BANK AND S&L DIRECT LENDERS. Local banks and S&Ls, also known as direct lenders, loan their own mortgage funds. But they often immediately resell their mortgages into the secondary mortgage market to major nationwide lenders, such as Fannie Mae and Freddie Mac, to raise cash to make more loans.
Examples of nationwide direct lenders include Washington Mutual (the nation's largest direct lender), Bank of America, Chase Manhattan and Wells Fargo Mortgage. These lenders often retain their adjustable-rate mortgages but sell their fixed-rate mortgages, usually retaining the very profitable loan servicing.
A major drawback of some direct lenders is that if your situation doesn't fit their formulas, you won't get a mortgage. Loan and borrower qualification flexibility of some direct lenders is very limited.
C - MORTGAGE BANKERS. The third major category of mortgage lenders is a hybrid of mortgage brokers and direct lenders. Mortgage bankers lend their own money to homeowners. But they usually quickly sell those home loans in the secondary mortgage market, much like direct lenders.
Because mortgage bankers specialize in developing many ways to dispose of loans they originate, they often have a wide variety of creative home loans to fit different situations. The largest mortgage banker, Countrywide, has both local offices and a huge Internet Web site at www.countrywide.com.
AVOID PAYING LOAN FEE POINTS WHEN REFINANCING A HOME LOAN. Unlike home buyers who can immediately deduct any loan fee points paid to obtain an "acquisition mortgage," refinancing homeowners can only deduct loan fee points over the 15- to 30-year life of the mortgage. Each "point" equals 1 percent of the amount borrowed.
For example, if you pay a one-point loan fee to obtain a $100,000 30-year refinanced mortgage, that $1,000 can be deducted at the rate of only $33.33 for the next 30 years.
A better alternative is to obtain a "no-cost" or "low-cost" refinanced mortgage without any loan fees. Study the lender's "good faith estimate" of loan charges, which must be given to you within three days of your submitting a loan application. Although you might pay a one-eighth percent higher interest rate for a loan without a loan fee and extra "junk" or "garbage" fees, the savings are usually worthwhile.
SUMMARY. Today's ultra-low mortgage interest rates mean this is a great time to refinance home mortgages. However, it pays to shop among at least three different lenders to compare their interest rates and loan terms. Watch out for any loan charges that were not disclosed in the lender's "good faith estimate." If necessary, be prepared to walk away if the lender attempts to bait and switch loan terms.
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