Real estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.
Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.
There are many different reasons to refinance a home, but the most common reason is to change the term or rate.
Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.
Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.
So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.
In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.
This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.
Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.
These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.
Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.
Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.
Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.
Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.
In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.
Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.
There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.
Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.
There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.
It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.
For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.
It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.
In the past, when it came time to evaluate a prospective loan applicant, a very personal approach was taken, with a human manually reviewing the loan application. Today, almost all lenders now use an automated underwriting system(AUS.)
The AUS automatically reviews and evaluates the loan application and credit history of the applicant, as well as the total amount of the requested loan, using a mathematical formula to determine eligibility. The entire process only takes a few seconds and it either does not approves the loan or marks it as a Strong File or Weak File. A Strong File indicates that the application meets the loan requirements and does not require any additional documentation. A weak file, on the other hand, indicates that there were some discrepancies or problems with the application, so more documentation is required.
For example, someone with a strong file, might not need to provide any employment documentation or tax forms, while someone with a weak file would.
While the loss of a personal touch in the underwriting process definitely has negative connotations, one of the nice things about using an AUS is that initially, there is often no need to provide any documentation.
Depending on how the Automated Underwriting System evaluates the application, there are three basic levels of documentation: Full Documentation, Stated Documentation, and No Documentation.
Full Documentation loans will require that all aspects of the application are verified by a third party. Generally, this means providing tax forms, such as the past few years W2s and paycheck stubs. The lender may also require that the applicants bank verifies the loan using a Verification of Deposit(VOD) form. Typically, the full documentation loan is the most common type of refinance loan.
Stated Documentation loans are when the lender simply uses the information that is provided on the loan application, without actually verifying it with a third party.
No Documentation loans, as the name implies, are loans that require no documentation. The lender does not request any banking or employment information, as well as not running a credit report.
In some cases, the consumer does has some control over how much documentation they provide. Of course, from a literal standpoint, they are free to provide no documentation at all, but the lender is under no obligation to offer a loan in this case. Instead, it is almost always up to the lender to determine how they will document the mortgage application.
With that said, some lenders do offer a no documentation loan, but they will usually require a 20% down-payment and the mortgage will have a higher interest rate.
In the end, the lender is out to make money, so while they may be willing to forgive a minor digression on ones credit report, they will only do this if they think it is profitable. Anytime they do accept a risk, such as not checking employment, the lender will usually increase fees or rates to counterbalance this risk.
Buying a home is not just a big decision from a lifestyle perspective, but it is also a major financial decision. Usually, most people do not have the money to buy a home up front, so they use a mortgage. Sometimes, it is possible to refinance a mortgage and greatly reduce the overall cost of the loan.
In order to refinance a mortgage, you would of course have to already have a mortgage. If done properly, refinancing a home can be an excellent way of reducing monthly costs or dramatically reducing the amount of interest you will pay over the course of the loan. However, if you are not careful, it is possible to loose a great deal of money and end up worse off then you were to begin with.
There are a number of similarities to the process of getting your first mortgage and refinancing your loan. However, rather than simply going with the lowest offer, which is typically the way most people choose a mortgage, there are a number of important subtleties when it comes to refinancing a home.
If you are a homeowner, it is likely you have come across at least one advertisement proclaiming that you can cut your monthly payment in half by refinancing your home. These companies are not lying and can in-fact dramatically reduce your monthly mortgage payment. However, often this is at the expense of extending the period of your loan, which in turn means you end up paying more in interest.
Also, these companies are often predatory lenders, who are very aggressive and when you are done, you have virtually lost all the equity in your home that you worked so hard to build up.
Refinance Loans are very similar to mortgages and you must follow the same types of regulations as other
Common sense would say that if you have been paying a higher mortgage payment for many years, the lender would automatically approve a refinance loan with a lower monthly rate, but this is not the case. Instead, it is almost always necessary to follow the same sort of application process that a person would when they are applying for the initial mortgage. It is almost always necessary to prove employment history, as well as showing your assets and running your credit when refinancing a loan.
The exception to this rule, however, is FHA Loans that are offered by the Federal Housing Administration and VA Loans, that are offered by Veterans Affairs. Both of these Government Agencies offer what is called a streamline refinance. As part of the streamline refinance, as long as the monthly payments are lower, credit is almost never an issue. Usually, the only requirement is that the homeowner has not been late on a payment over the course of the last 12 months.
In the United States, Bankruptcy is used as a last resort when a borrower is unable to pay back their creditors. There are several different types of bankruptcy, but most people either declare Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. Chapter 7 Bankruptcy, which is most often used, focuses on the liquidation of the debtors assets. Chapter 13 Bankruptcy, on the other hand, deals more with the reorganization of the debt. However, with both of these types of bankruptcy, the debtor can usually retain some of their property.
While in some cases, bankruptcy is the only option, it can have a very negative affect on a persons credit rating. Typically, for the next 7 to 10 years, the individual will have a very low credit score, which makes borrowing money very difficult.
This article discusses how to refinance a home after bankruptcy, although the information provided can also be applied to anyone who wishes to refinance their home. Even though many types of loans, like a new car loan, can be very hard for someone who has declared bankruptcy to get, refinancing a home is often not viewed as a large risk by mortgage lenders. So, even if you have declared bankruptcy, it is usually possible to refinance your mortgage.
Most people decide to refinance their mortgage in an effort to get a lower interest rate and a lower monthly payment. In the case of someone who has filed bankruptcy, it is not uncommon to have a subprime mortgage, which can have excessive rate increases, higher interest rates, and unfavorable terms. As a result, refinancing your home can often be the best way to save money and stay in your home.
It is important to note, however, that when you refinance your home, you are basically starting from scratch with your new lender. Over the course of the first few years of a mortgage, you are primarily paying the interest of the loan. Over time, the amount of interest you are paying will decrease, while the amount that you are paying towards the principal will increase.
As an example, lets consider a home that costs $200,000. In the first three years of your mortgage, you might pay $50,000 to your lender, but only $3,000 goes towards the cost of the home. So, after 3 years, you would still owe $197,000 towards the home. Over the next three years, you may pay $9,000 towards the principal and as time goes on, the amount that goes towards principal increases. If you were to refinance your home after only 3 years, you would be refinancing it for basically the full amount, even though you have paid your lender $50,000.
This is important to remember, because a big part of refinancing your home involves determining whether it is in your best interests to do it in the first place.
The first step when preparing to refinance your home should be to begin setting aside some money every month. When you refinance a mortgage, you will usually have to pay a number of different fees, including an application fee and a loan origination fee.
These fees are often called junk fees, because they do not actually go towards the mortgage itself or the value of the home. In many cases, junk fees can cost several thousand dollars, so it is a good idea begin saving money as early as possible.
It is also important to determine if your current mortgage has a penalty for paying the mortgage off early. Some mortgages, especially subprime mortgages, have a pre-payment penalty, which goes into affect if you pay your home off early. If this is the case, you will need to take this into account.
Before you begin shopping around for a new mortgage, it is also very important to analyze your monthly expenses and compare these with your monthly income. This is important because you need to get an idea of what type of monthly mortgage payment you can afford.
It is important to take into account all of your monthly expenses, including utilities, phone bills, car payments, food, and any other living expenses you may have. Also, make sure that you include any outstanding debt, such as credit card bills, as well as emergency bills that may occur.
Getting an idea of the current mortgage rates is essential, even if you have poor credit or have filed bankruptcy. You can use these figures to help decide whether a particular lender is offering you a fair interest rate or if they are offering a subprime mortgage.
Begin by calling around to several of your local banks to find out what the current mortgage rates are. At this time, don’t mention the details of your situation, but simply inquire as to what the current mortgage rate is. It is also a good idea to consult some online lenders as well, who usually have their basic interest rates posted on their website.
Once you have an idea of the current mortgage rates, you can start to get estimates for refinancing your home, as a number of lenders to provide a pre-qualification letter with their rates. The lender will ask you for your financial information, but they should not actually run your credit or charge you any fees for the written estimate.
At this point, it is imperative that you are upfront and honest with the lender. Lying about your bankruptcy or your credit score, might get a higher estimate, but when they actually run your credit, they will find out you were lying and will not offer you the same rate. In the end, you are only wasting your own time, as well as that of your lender, which can often disqualify you from receiving the loan anyway. Instead, honestly answer their questions about your income and bring up the fact that you have filed for bankruptcy.
Make sure that you also ask about the cost of refinancing your mortgage, such as attorney fees, application fees, and any other charges that the lender might have.
It is a good idea to check the rates of a multiple lenders, so you can explore all of your options.
Once you have a number of estimates, you can begin comparing the different loans to find the one that best fits your needs. Start by comparing the interest rates offered to the standard interest rates that you found in step 3. This will give you an idea of whether the interest rate is normal or if it is subprime.
Next, compare the cost of refinancing your home against the cost of keeping your existing mortgage. It is essential not just consider the difference between the monthly payments, but also the cost of the junk fees and any pre-payment penalties associated with your current mortgage. For instance, if your monthly payment is $100 less on the new mortgage, but you have to pay $3,000 in junk fees, then it would take you almost 3 years before you break even on the mortgage. Remember, that the junk fees are due at the time of signing.
It is also important to look at the big picture. An amortization table can be very handy, which will break down every payment over the course of the loan to show you how much of it is going towards interest and how much towards principal. It is important to compare where you are with your current loan and where you would be if you refinanced your mortgage.
After you have carefully considered all of your options and decided upon a lender, it is a good idea to try to get your lender to reduce the junk fees. These fees can often be reduced with a little negotiation and are often padded just for this reason.
While refinancing your home can be a great way to reduce monthly payments or get out of a subprime loan, it is not a decision that should be taken lightly, especially for those who have filed bankruptcy. Instead, it is important to make sure that refinancing your home is really in your best interest and not just think about the difference in monthly payments.