Refinancing Recap Since the interest rate cuts, Clark has been inundated with calls about how to refinance, when to refinance and what all of the terms really mean. So, we've put together answers to some of the most Frequently Asked Questions regarding refinancing:
Should I refinance? As a general rule, if you can shave at least a half point off your current interest rate, it is a good idea to refinance. If you currently have a home mortgage above 7%, the time is now to make a change. However, your decision should also depend on how long you plan to stay in your home. If you are only going to stay 2 to 5 years, you should figure out the cost of the refinance. Will you pay more in closing costs than you will save on your monthly payment? For those who plan to move after a few years, a "no-cost" loan, which drops your mortgage payment a significant amount, would probably make sense.
What is a "no cost" or "zero cost" loan? A "zero cost" loan means that you pay no closing costs for the loan. A "zero cost" loan is different than a "zero point" loan. You will probably have to take a higher rate to get a zero cost loan, but that is okay. Closing costs include appraisal, credit report, processing fee, underwriter fee, attorney fee, notary fee, title insurance and any other fees the lender may make up. Closing costs typically cost between $2,000 and $2,500.
How do I find good rates? Clark likes using
bankrate.com for quotes. It gives you the option of selecting the number of points you want to pay. Remember to call and verify the loan rate, and make sure the loan officer you speak to adheres to that published rate. Choose the lender that offers the lowest total cost for the first 30 months of the loan.
What are points? A point represents 1% of the total amount of money borrowed. There are two types of points. Borrowed points are a profit paid to a lender. Discount points are a fee paid in advance to lower the interest rate over the life of a loan.
Do I have to stay with my existing mortgage company when I refinance? No. You are under no obligation to remain with your current lender. But it is a good idea to let them know what you're planning to do so they'll offer you their best rate.
Should I change from a 30-year to a 15-year loan when I refinance? If you can afford to pay a bit more each month to pay off your loan, this is a smart move. Clark's previous producer Teresa was in this situation. The balance on her home was $118,000. She had been offered a 15-year "zero cost" loan at 6.5 percent. Her monthly payment would go up to about $1,300. That's $200 more than the $1,107 she would pay on a 30-year loan. But, over the life of the loan, the 15-year loan would save her $8,795. For help calculating your costs, go to
hsh.com.
I'm being told I should roll other debts into my loan, or get a "cash out." Is this something I should consider? No. Your loan should be for the exact amount you owe and no more. You do not want to add to the interest you owe by increasing the amount of your loan.
What is a "good faith estimate?" Do I need one? Yes. Every lender you talk to should mail or fax you a good faith estimate of all charges when you discuss a refinance with them. The estimate will include such things as a list of fees, including closing costs, calculated taxes and your estimated monthly payment. The estimate gives you documentation to refer to at the closing of the loan, as well.
Want to get a new TV, new furniture, maybe even a new car to go with your new house? Starting soon, opening too much new credit before you close could kill your mortgage financing and leave you without a home.
Historically, all three credit bureaus would be consulted once when a borrower or refinancer went through the underwriting process. But that was then, and this is now. Now your credit will be pulled early in the process
and then again the day before closing.
If the lender sees a pattern of recent credit applications when they review your file the day before closing, well, the deal could be pulled altogether.
This is a new rule designed to address the fact that first-time homebuyers are so susceptible to buying every possible appliance, piece of furniture and even a new car for their new home on credit...and then defaulting on the mortgage!
The lesson here is don't be credit happy in the months leading up to closing or even on the eve of your closing. You want to reduce debt, not take on new debt.
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It's easy to see in hindsight how bad of an idea it was to allow homeowners to treat their houses as ATMs. All throughout the last decade, it was common to see homeowners purchase a home with 100% financing, and then, as values artifically climbed, they'd do a "cash-out refi." Sometimes they'd even do it multiple times!
In Canada, this kind of refi was never allowed. They maintained a conservative system that required a real downpayment for property purchase. As a result, they haven't had the real estate problems we've seen here in the U.S.
However, there is an exception: the State of Texas. While it may be completely different from Canada culturally and politically, it's the one place in this country that most embodies the Canadian ideals regarding real estate, and has seen a significantly lower rate of foreclosures. It's written into the State Constitution that a homeowner can only borrow up to 80% of a home's value. So Texans always have a safety valve of 20% ownership in thier home.
Texas and Canada both have something to teach us: The purpose of money borrowed against a house should be for improvements to the house. If we as a country had stuck to that as a rule, we would not have experienced the housing boom and bust. Recovery will be slow, but when things eventually even out again, resist the urge to go back to that habit, because it
will burn you.
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CLARKONOMICS: What does the financial turmoil in Greece have to do with your life here in the U.S.? Quite a bit, it turns out.
When an overseas country is in trouble, faith is undermined and people run to the U.S. for safety. As a result of the declining Euro and the troubled overseas bond market, bond money is flowing here. When there's more demand for U.S. bonds, the prices for them go up, and interest rates come down.
Mortgage rates were supposed to be going up, but instead, with the troubles in Europe, they're actually going down. Mortgage rates have been artificially supported by the Fed since 2008 in order to try to ease the severity of the recent housing crisis. With the Fed now beginning to loosen its involvement in this area, all predictions pointed to rising mortgage rates.
But with consumer confidence on the rise and confidence in European economy declining, mortgage rates have come down. So if you're in the market for a home, or need to refinance, the conditions just became better. It seems odd that what's going on a quarter of the world away could have so much impact on your monthly payments!
By the way, when the Fed announced yesterday that it's leaving interest rates unchanged, you should know that this is not connected to mortgage rates. The Fed was referring to savings rates (which will stay puny), and Home equity and variable-rate credit cards (which will both remain favorable for now.)
One other favorable sign involves loans. Private parties are stepping back into the free market, and lower down payments are reemerging. You can now find loans requiring only about 5% down once again for those with just average credit -- though you should be aware that you'll need PMI (Private Mortgage Insurance) for any loan with less than a 20% down payment.
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