Frequently Asked Questions
About The Mortgage Business
Is it true that you must lower your interest rate by at least two points for it to make sense to refinance?
No, that is one of the biggest myths when it comes to refinancing. There are many factors that go into determining when it makes sense to refinance like how long you will remain in the home, how much are the closing costs, and how much is the monthly savings.
Basically, you want to take the closing costs, whether you pay out of pocket or roll them into the new loan, and divide that number by the monthly savings to see how long it will take you to recoup those costs.
For example, if your closing costs are $3500 and you are saving $150 a month your breakeven is right at two years. If you are planning on being in the home say for five years it would make sense because after the first two years, you are saving $1800 a year for three years. Thus, you have an extra $5400 in your pocket versus your current lender when you go to sell the home. Another advantage is that once you have refinanced you will be paying less interest and more toward the principal. You will build equity in your home faster on top of the monthly savings
On the other hand, if you know you are going to be relocating moving in a couple of years it would be best to keep your current loan because you would not have time to recoup your costs of refinancing.
Other factors include loan size, term of the loan, how long you have been in the current loan, etc.
For example, the larger the loan size typically the less drop in the interest rate you need because your saving is larger while many of the costs of refinancing are fixed no matter the loan size. Conversely the lower the loan balance the greater the drop-in rate is usually needed for it to make sense.
Are ARMs bad?
No, they just have to be used in the correct situations. For example, I have a client that knows he is moving in 2-3 years max. Since he knows he won't be there 15 or 30 years we put him on a 5-1 ARM where his rate is fixed for the first five years and much lower than the current fixed rate.
Had he gone to a 30-year the rate would have been higher than the ARM rate and it would not have made sense as he would not have recouped his cost at that rate in 2-3 years. But with ARMS being so much lower he is recouping his closing cost in only two months and will have saved $9800 when he's ready to move in 3 years.
Again in the right situation if an ARM covers the time you'll be in a home and the spread is much lower than a fixed rate ARMs are a great option.
Should I pay an Origination Fee or Points?
Again it depends how much more savings you will get with the lower rate and how long it will take to recoup the additional cost. In many instances, it is better to take the slightly higher rate without origination and/or points. The lowest rate isn't always the best deal, every situation is unique and needs to be looked at on it's own merit. No-cost options with higher rates can many times be the best option.
Should I worry about payment savings only?
No not if you can go from a 30 Year Loan to a 20 Year or 15 Year at a lower rate. Reducing the term of your loan saves tons in interest paid over the life of the loan. In addition, you build equity much faster with the lower term. If it fits into your budget refinancing for a shorter term is a great idea.
A home equity loan is a financial product that allows a borrower to use the market value of a home as collateral for a loan. Loans secured by real estate generally are considered safer by lenders, resulting in lower interest rates than for other types of loans.
Equity is easily calculated by subtracting the amount owed on the home from the current market value. For example, if a house with a market value of $100,000 has an outstanding mortgage of $30,000, the homeowner has equity of $70,000. If there were no mortgage or other type of lien on the house, the homeowner would have $100,000 in equity.
Through home equity loans, Texans can borrow money using up to 80% of the value of their homes as collateral. Consider the example of a home valued at $100,000 with an outstanding mortgage debt of $30,000 and $70,000 worth of equity. Because homeowners are limited to borrowing no more than 80% of the home's value, the homeowner would simply calculate 80% of $100,000 ($80,000) and then subtract $30,000 to arrive at a maximum loan amount of $50,000.
Total mortgage debt, including the amount of any existing mortgages plus the projected home equity lien, cannot exceed 80% of the home's current fair market value.
Homeowners with 20% or less equity in their homes are not eligible for home equity loans
Texans voted to limit the loan amount to 80% to help prevent overextensions of credit and protect our economy during times of economic slowdown. It is part of the Texas Constitution and is prohibited.
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