Refinance Mortgage Loan- Should You?

You are the one to make the final decision about Refinancing Your Home loan but as a prior Mortgage Professional, I am going to give you some facts to consider before making that decision. A Refinance will or can changed the present term of your loan, back to the original term, unless you reduce the term. The rate may change and you may have to add in the closing cost that will increase the balance of your loan. Refinancing Your Home should be considered with great care and I will list some of the concerns to ponder.

I have seen the news that President Obama has urged homeowners to refinance their current mortgage loan. These are the issues to consider:

• can you reduce your current rate of interest by at least 2%
• can you pay the closing cost out of pocket
• can you lower the term of your current loan to say 20 or 15 years if it is 30 year term
• do you now have mortgage insurance/MI
• do you have a 2nd mortgage
• will this help your overall credit situation
• is your property value the same as when purchased or more

Rate of interest: if you cannot lower your interest rate at least 2 %, you are probably not going to benefit your current situation or your future situation unless you are refinancing your loan to lower the term only.

Closing Cost: if you cannot pay your closing cost for the refinance transaction out of pocket (and most cannot) you can add it into your loan balance. The downside of this is that you will have loan amount higher that the balance you owe now by at least 3%(+-). If you use a Broker who will shop for your mortgage for you; you will pay more than 3% normally. It could be as high as 5%. When you are adding back all of this cost, it will take you longer to pay off this mortgage and recup the closing cost you have added into your loan, depending upon how loan you have had your current mortgage and how much CC. It will take you a number of years to pay the closing cost you are adding into the loan amount over and above your current balance.

Lower the term: You are always doing yourself a favor if you can lower the term on your loan if you have a 30 year mortgage to a 25, 20 or 15. Yes the payment will be higher because the term is shorter but you will also get your principal paid quicker and your equity rises more quickly. This will depend upon if you can afford a higher payment in your debt to income ratio also. A lot of time borrowers cannot afford the higher payment.

Mortgage Insurance: If you have a loan to value > 80% of the appraised value at refinance, you must carry MI. This makes your mortgage payment higher but protects the Mortgage Lender in case of default. If you are fortunate enough additiional money in savings to pay down your mortgage to 80%, if you are considering refinance; you will eliminate MI.

2nd Mortgage: if you have a second mortgage lien, (home equity loan or other 2nd lien), this loan will have to be considered in the loan to value ratio. If your value is the same or has increased, you may be able to add this loan into your new mortgage loan and have only one payment. You do not have to add this 2nd lien in but it must be subordinated to the first.

Will a Refinance help you: If you are not benefiting from this transaction by decreasing either your interest, term or adding in your 2nd mortgage in (if applicable), it is not that sensible to refinance. Especially if you cannot pay the closing cost out of pocket instead of adding it into your present balance.

Current Appraised Value: If the value of the dwelling has declined you may not be able to refinance. It will depend upon the housing market in the area where you live. If your value has stayed the same or increased then your equity position is greater. If there has been a lot of foreclosure in your immediate area (subdivision), you may have some problems with your value. This will make the value of your loan less. It is not something we want to talk about but it is evident in the market today.

A lot of people want the lowest rate they can get and that is a good thing to do in the right situation. If you have a 7% interest rate and can lower it to 5%, you are going to benefit if you are not increasing your loan balance substantially. A 20 to 15 year term will give you a slightly better rate of interest but will increase your payment amount so that it pays off earlier.

For those borrowers who received a much higer rate with a Subprime loan, hopefully your value has not declined and you can refinance to a much lower rate. There are many things which have to be considered and some of those things are; why you got the Subprime loan to begin with. Is your credit better now, if that was one of the issues. My advise is not to let anyone talk you into a refinance if it is not going to be to "your" advantage.

Find a Loan Officer you trust and talk to them and ask the right questions. If you talk to a Mortgage Professional and they cannot answer your questions, you need to find someone else who can. A professional should be able to tell you the pros and cons of refinance at the drop of a hat. Of course this depends upon your loan balance,but if someone tells you that your closing cost is 6% or more, something is wrong. Ask questions and get answers before refinancing your loan. Most Banks can give you closing cost within the 3% (-) range. I said most. Sometimes it can be less if they will eliminate the origination and discount of the loan which normally is quoted: 0/0. This means no origination, no discount.You will have the normal other fees and I will talk about the Good Faith Estimate in another post with the most applicable fees.