Refinancing Mortgages

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Over the past several years, lenders, mortgage brokers and home improvement contractors wihtout scruples have targeted homeownersa means of making some quick money wihtout concern about the future consequences to the homeowners and the economy.

The following are examples of scamsthat should put a homeowner on alert to a possible problem:

  • A lender seeks to refinance a mortgage again and again.
  • The lenders usually charge high points and fees, which are included in the amount financed so the homeowner is paying interest on the loan and on the fees.
  • The lender may also promise that you can refinance latter if you are unhappy with the loan or that your monthly payments will go down if you make monthly payments. These statements are almost always false and are another way to get more money from the homeowner.
  • A lender may try to sell you a loan that you cannot afford explaining that you will be paying off other debts such as credit cards or medical bills. If you combine all of your debts into a mortgage, you may end up with a monthly payment on your home that you cannot afford. If you cannot afford to pay unsecured debts such as credit card debts or medical bill, it is unlikely that those creditors can take your home. However, if you cannot make your mortgage payments, you may lose your home.
  • Another method that the lenders use to get a homeowner into an unaffordable loan is by increasing the amount of your income on the loan application.

It is very important that youreview all the information on the application before you sign it. If the lender has inflated your income by typing in an inflated amount, you may be the one blamed laterfor putting false information on the loan application.

Also be sure that you understand all the "extras" that are included in your monthly payments:

  • Do you really need life insurance through the mortgage company given the fact that it is usually much higher than other insurance?
  • Are the fees charges by the mortgage broker or the lender reasonable?
  • Does the amount of fees and the interest rate you are to pay match what you were told you would get in the pre settlement statements?

Avoiding these scams may be a simple as making sure you understand what happens when you refinance a mortgage.

What happens when I refinance a mortgage?
When you refinance your mortgage you are taking out a new loan on yourhome. The old mortgage is then paid off and you will owe payments on thenew mortgage.

Why would I want to refinance my mortgage?
There are severalreasons you might want torefinance. The biggest reason you may want to refinance is to get a lowerinterest rate and lower your monthly mortgage payments.Before you refinance your mortgage, you must think about why you are doingit.

  • Are you currently paying a higher rate of interest on your mortgage than is available now?
  • Do you want to refinance to lower your payments because you are having trouble making the payments?
    These may be good reasons to refinance.
  • Are you trying to consolidate all your debts into one loan?
  • Do you need money for repairs?
    These may not be good reasons to refinance.
Because a mortgage uses your house as collateral, you risk losing yourhome if you are unable to make the payments. You might be better offgetting another type of loan instead of refinancing your house.

I am thinking about putting all my debts together into my mortgage.Should I?
This may not be a good idea.

First, if you get a 30-year mortgage, youwill be paying off all of these debts over a 30 year period of time. Thismeans you will be paying interest on these debts for 30 years. Do youreally want to be paying that medical bill for 30 years?

Second, your homewill be collateral for the loan. If you can’t make your monthly mortgagepayment, you could lose your home. The more debt you roll into yourmortgage, the higher the mortgage payment.

Also, the more debt you have inyour mortgage, the more likely you will have to pay for mortgage insurance(an insurance policy for the lender). This will increase the amount ofyour monthly payment even more.

Finally, consolidating your debts into ahome mortgage can severely limit your ability to obtain debt reliefthrough bankruptcy, should the need arise in the future.

How much can I realistically borrow?
You can estimate how much you can realistically borrow for your home,by using this common formula.

First, take your gross monthly income(before taxes are taken out) and multiply it by 28% (.28). This is yourallowable monthly payment for housing that lenders often use in figuringout how much they can lend you.

Next, figure out your monthly real estatetaxes by dividing the year’s total real estate taxes by 12.

Do the samefor your homeowner’s insurance to determine the monthly amount ofhomeowner’s insurance.

Finally, subtract the monthly taxes and insuranceamounts from the amount you can pay per month. That leaves what a lenderthinks you can pay per month on a mortgage payment.

Example:

Gross mo. Income $1500 Times .28 (28%) = $420
Taxes ($1200 annually) ÷ 12 = $100 - $100
Insur. ($900 annually) ÷ 12 = $75 - $ 75
-------
Mo. Payment: $245

This formula may not work for everyone. Youshould look at your own budget and all of your expenses before you decidehow much you think you could pay per month for a mortgage. You may havehigher than normal expenses, such as medical, utility, transportation,school, etc.

Also, remember that some lenders may be willing to lend youmore money than you can realistically afford to repay.

How do I find a mortgage loan?
If you have a good relationship with your current lender, ask about theirloan programs. Because you are already a customer, they may be willing towork with you to keep your business. If you don’t have a good relationshipwith your lender, it might be harder to get a new loan from that lender. Apoor payment history will cost you money in higher interest rates andhigher insurance costs to protect the lender from nonpayment. Make sureyou understand all of the costs that come with refinancing before youchoose a new lender. You may be getting a lower interest rate but havevery high closing costs.

What is a mortgage broker?
A mortgage broker does not actually lend you the money, but finds someonewho will lend the money to you. The mortgage broker charges a fee for thisservice. These fees can be substantial.

If you go to a mortgage broker, find out what fees are charged for thebroker’s services. It is important to understand that the mortgage brokeris not working for you, but for the mortgage broker business itself. Themortgage broker may be more interested in sending you to a lender who paysthe broker’s fees, than in finding a lender who will offer you the bestdeal. Before agreeing to financing ask the mortgage broker to identify all the fees and costs that will be paid to him for theloan as opposed to other loans for which you may qualify.

What kind of loan should I get?
There are two basic kinds of mortgage loans available.

  • The fixed-rate mortgage has a predictable cost for the life of the loan. Your interest rate stays the same, and you will always know what you will be paying from month to month. You can get a fixed-rate loan in 30- and 15-year mortgages. The monthly payments on a 15- year mortgage will be higher, but over time you will end up paying a lot less interest than on a 30-year loan.
  • Variable rate mortgages are also called “adjustable rate mortgages” (ARMs). They are used during times of high interest rates because they offer a lower initial rate, but the rate can go up over the term of the loan. The interest rate on the loan will be adjusted upward, giving you higher payments. ARMs can be a bad idea if you are on a fixed income because the payments may soon become too high for you to afford.

Is there any help for me in refinancing my mortgage?
Find out if you are eligible for any government programs through theFederal Housing Administration (FHA) or the Department of VeteransAffairs. You might be able to get lower interest mortgages with lower feesthrough these programs.



Reviewed August 2009