Home Mortgage Refinancing: Know Where You Stand and Hold your Ground

Mortgage rates generally trend down at the moment, but this decline does not provide much benefit to those who signed up for low-introductory-rate adjustable-rate mortgages (ARM) in the past few years. An ARM is a type of mortgage that charges a discounted rate for an initial period of time, after which it resets to market levels. For instance, ARMs that offer really enticing introductory rates of 2 percent or less are likely to jump to rates of more than 6 percent—and even as high as 9 percent—by the time they adjust to market levels. Hence, for millions of homeowners out there who have adjustable rate mortgages, that is very sobering news. This article examines some important things you need to know about the current state of home mortgage refinancing.

According to the Federal Reserve, about 10 percent of all home mortgages will need to be re-priced in 2006—that means Americans are going to be paying a whole lot more. For example, if you had a $200,000 loan with a 4.5 percent interest rate that was re-priced at 6.5 percent, you'll be paying about $300 more a month.

To measure the impact this will have on your mortgage, check out the promissory note from your mortgage lender. The type of loan you have (whether it is a 5/1 ARM or a 7/1 ARM) should be indicated. You should also find information about when your rate lock expires and how much your interest rate is allowed to go up. In most cases, your interest rate cannot increase more than 2 percentage points a year. But sometimes, that rate hike can be as high as 5 percent. You also should get information on what your lifetime interest cap is on your loan. For most loans, your rate cannot increase more than 6 percent over its lifetime, according to Holden Lewis of Bankrate.com.

Remember, finding out your loan specifics should be easy. The government requires that this information not be in the fine print and that it is on one of the first few pages of your mortgage agreement.

Next is weighing in the costs. Home mortgage refinancing takes a lot of cash. You should do the math to figure out if it is even worth the upfront costs. If you have to pay $3,000 in closing costs, but you are only saving about $150 a month by refinancing, it would take you almost 2 years to make up the cost of refinancing. Furthermore, it is not just closing costs you should be calculating. You also may have to pay appraisal fees, loan and origination fees. And on top of all that, don't forget you may have to pay title insurance, which can be up to tens of thousands of dollars.

Third is finding the lender that offers the best refinancing deal. Fewer people are borrowing today so mortgage lenders are even more eager for your business. That means you will have more leverage to cut some costs when it comes to negotiating with a lender.

If you have already used a lender for your current mortgage, you may want to consider using them again since you have an established history with them. You may even be able to negotiate more of a discount.

 Fourth, forget about interest-only mortgage options. The people who have interest-only loans are going to feel the biggest pinch in the recession. That is because many of those homeowners have not been paying down any of the principal. Once the rates are adjusted, people with interest-only loans will have to pay back the principal that has been accruing plus a higher rate of interest.

If you are seeking for a seemingly attractive way to refinance, stay away from payment-option ARMs. These are loans with a very low starting rate of 1.5 percent. The problem is that they adjust within one to 6 months. Many people are teased by these loans because you basically choose what you want your payment to be each month. You could even decide to pay less than the interest on the loan.

Don't be a sucker. You would owe more on the loan at the end of the month than you did at the beginning of the month, mainly because you're not including the interest you built up that month. This is what financing experts call negative amortization.

Finally, if you have taken out a home equity line of credit, you would be very familiar with just how much your payments increase after a rate hike. In fact, if you took out a home equity line of credit in June of 2004, today you would be paying about double the amount of interest on that same loan.

 

Earl Juanico

Florida Mortgage Broker 

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