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When does it make sense to refinance?
Usually people refinance to save money, either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation:
Calculate the total cost of the refinance
Calculate the monthly savings
Divide the total cost of the refinance (#1) by the monthly savings (#2). This is the "break even" time. If you own the house longer than this, you will save money by refinancing.
Since refinancing is a complex topic, consult a mortgage professional. Back To Top >>
What Are Closing Costs?
There are several categories of closing costs. First, the mortgage company
can charge various fees such as processing fees or administration fees.
Next the actual lender or investor who gives you the money can charge fees
such as underwriting, commitment, tax service, etc. Then, there are title
fees. These can include the title search, commitment, endorsements, recording
and courier fees. Usually, the mortgage company can negotiate their fees
but rarely will a title company or investor lower their fees. Usually the
total closing costs will range in the area of $1,000-$1,400. Back
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What are Pre-Paids?
Pre-Paids are monies which you pay for in advance associated with your loan
transaction. These will include interest from the date of closing to the
end of the month. Also, any property tax or homeowners insurance which will
be put into escrow and disbursed by your lender are considered pre-paids.
Mortgage insurance is another pre-paid item. Back To
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Can I Roll In my closing costs and pre-paids? Pay Closing Costs With my loan proceeds?
If you are refinancing, provided there is sufficient equity in the property
you will be able to Roll In your costs. If you are purchasing a property,
closing costs are usually paid out of pocket. There are certain transactions
where your seller or mortgage company can pay the closing costs for you. Back To Top >>
What are Points or Origination Fees?
Points or origination fees are sometimes paid to buy down your interest
rate. Typically, 1% of your loan amount will buy the interest rate down
1/4%. Therefore, a 7% rate with no points can be bought down to 6.75 % by
paying 1 point. Generally, the determining factor in whether to pay points
is dependent on how long the mortgage will be held. The lower rate will
eventually save you money if you keep the mortgage a sufficient length of
time. Back To Top >>
What is a Credit Score?
Credit scoring is the method of rating, or scoring your credit history. These scores are now being used by credit grantors as a tool in determining risk factors in lending. The risk with mortgage loans is, of course, foreclosure. Although the lender has significant collateral with the lien placed on your property, they are not interested in owning that property. The credit scores give the lender a method of predicting the risk associated with your loan.
There are three major credit bureaus which have credit scoring models. FICO
was created by Experian or TRW. Beacon scores are from CBI/Equifax and Empirica
comes from Trans Union. These models differ somewhat but all can be used
by a mortgage lender in determining risk. Derogatory credit information
weighs most heavily on credit scores. Late payments, collection accounts,
charge offs, judgements, bankruptcy and foreclosure will severely lower
your credit scores. Other factors include numbers of open credit accounts,
high balances compared to credit limits, recently opened accounts and recent
inquiries into your credit history. Surprisingly, a borrower who has perfect
credit history can have low scores because of too much credit. Back
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What is PMI?
Private Mortgage Insurance. This type of insurance is required by lenders
for loans with a low equity position. For example, if you purchase a property
with less than 20% down payment, the lender will require you to have mortgage
insurance. The insurance will cover a percentage of your mortgage should
there be a default. Mortgage insurance must be paid each month and is included
in your mortgage payment. You must maintain the insurance until you can
prove that the equity in the property has reached 20%. In other words, the
lender's exposure has been reduced to 80%. Mortgage insurance is expensive
and if possible should be avoided. Back To Top >>
What is AMORTIZATION?
This is how your payments break down during the life of the loan. It involves
dividing the principal and total interest charges into equal payments and
will completely pay off the debt at the end of the term. Back
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What is an ARM mortgage?
An Adjustable Rate Mortgage. This is exactly as it sounds -- a mortgage
that can adjust over periods of time. Typically, an ARM will have rate caps.
This means that after a specified number of payments, the rate can only
increase by a certain percentage, usually no more than 2%. There are also
lifetime caps, usually 6%, which will indicate the highest possible rate
for that particular mortgage. ARM mortgages are usually taken out by borrowers
who plan to stay in the property a limited period of time, or by borrowers
who need a lower rate to qualify for more mortgage money. Back
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What is Locking-In?
Locking will guarantee your interest rate for a specified period of time
regardless of market fluctuations. Back To Top >>
What is Floating?
Floating means that there is no guarantee of what the interest rate will
be on your loan. You are gambling that the market will improve so you can
take advantage of a lower rate during the time your loan is being processed. Back To Top >>
How does a BI-Weekly or Equity Acceleration Mortgage work?
The Bi-Weekly mortgage plan has been endorsed by financial analysts everywhere
from the Wall Street Journal to Consumer Reports. This is a plan that breaks
your monthly mortgage payment in half and is paid every two weeks. Since
interest on a mortgage is calculated based on outstanding principal, you
will drastically reduce the amount of interest you will pay over the life
of the loan. The Bi-Weekly mortgage plan will build equity at over 2.5 times
faster than a monthly mortgage. Back To Top >>
What is an FHA mortgage?
The Federal Housing Authority is a government agency that insures lenders
against default by borrowers. FHA loans require less money for down payment
and somewhat more liberal credit guidelines. One must carry mortgage insurance
for the life of the loan with FHA. This can add to the cost of credit but
it will allow many more people the advantages of home ownership. Back
To Top >>
What is a VA mortgage?
These types of loans are available for US Military Veterans only. The advantages
for Veterans are the more liberal credit guidelines and no down payment
requirements. The Veteran must obtain a Certificate of Eligibility from
the Veterans Administration in order to qualify. Back
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