A lower interest rate may result in lower monthly payments – even a small rate change can save a substantial amount of money each month. But lower payments are just the tip of the iceberg when considering the benefits of refinancing.
Take cash at closing. By refinancing more than the amount still owed on your home loan, you may be able to receive additional cash at closing. Example: If your home is worth $150,000 and you still owe $80,000 on your mortgage, you could refinance $100,000 and take out $20,000 in cash. You’ll have one monthly mortgage payment plus the flexibility to use that $20,000 to cover other expenses, such as home improvements or tuition.
Build up equity and pay off your debt faster. Refinancing with a mortgage over a shorter term than your current mortgage can significantly lower your total costs – and your monthly mortgage payment may not increase at all, depending on your initial rate. By reducing the term of your loan, you may be able to build up equity faster.
Switch from an adjustable-rate to a fixed-rate mortgage. In these economic times, many homeowners with adjustable-rate mortgages (ARM) are understandably concerned about the market’s direction. By switching to a fixed-rate mortgage, your principal and interest will never increase and can deliver some peace of mind. And if the fixed interest rate is low, you could wind up saving even more money. If you plan to stay in your home for the long term and rates are favorable – like they are now – refinancing with a fixed-rate mortgage can save a significant amount of money over the life of your mortgage.
Select an ARM with a cap, for added security. If your current ARM doesn’t include a cap feature, consider switching to one that does. This option allows you to set a limit on potential increases to your interest rate and monthly payments – giving you the confidence of knowing there won’t be any unpleasant surprises later.
Consolidate debt. Paying all those credit card bills every month can be expensive and confusing. By including those debts in your refinancing plan, you can have just one monthly payment and save significantly on interest charges and late fees. Even if your credit is less than perfect, this option can deliver more of that well-deserved peace of mind. (Please consult your tax advisor.)
Private mortgage insurance. If you put down less than 20 percent when you purchased your home, you’re most likely paying a monthly fee for private mortgage insurance (PMI). But once you’ve accumulated more than 20 percent in equity, you may be able to eliminate the PMI payments. If you haven’t reached the 20 percent quite yet, it may make sense to round up your monthly mortgage payment (from $1,090 to $1,100, for instance), enabling you to get there quicker and eliminate the PMI sooner. (Please consult with your private mortgage lender.)
Just like there’s no magic loan amount that’s perfect for all borrowers, different types of loans are appropriate for different borrowers, depending on their individual needs and plans. Understanding the differences between fixed-rate and adjustable-rate mortgages can help determine the best option for you.
Fix-rate mortgages. The main benefit of a fixed-rate mortgage is your principal and interest never changes for the life of the loan. This keeps things simple, and the predictability makes planning easier. However, fixed-rate loans make it harder to take advantage of dropping interest rates – requiring the work and cost of refinancing – and if the initial rate is high, the long-term cost can be hefty. Fixed-rate mortgages are also rather standard procedures from lender to lender, leaving little room for customization.
Adjustable-rate mortgages. If you expect your income to rise or plan on selling your home within five years, this may be the option for you. And if interest rates drop, you don’t have to refinance to enjoy lower payments. However, with an ARM, your payments can increase dramatically if interest rates rise — even on ARMs with increase caps — and initial rates are almost always lower than market rates, so the first adjustment can be a big one. (Remember: Caps don’t always apply to the first adjustment!)
The two most common means of estimating your home’s value are an appraisal by a certified appraiser and a comparative market analysis.
Appraisal vs. Analysis. A certified appraisal considers such factors as square footage, construction quality, home design, floor plan, neighborhood, availability of public transportation, local schools and shopping, lot size, view and landscaping. An appraisal can cost between $450 and $595 (Depending on value/size/program). A comparative market analysis is more informal, made by a real estate agent based on sales of comparable homes in the neighborhood, and may be done at no cost.
“Value” vs. “worth.” While a home’s “estimated value” can be gleaned from an appraisal or comparative market analysis, a home’s “worth” is ultimately established by the market: what prospective buyers are willing to pay.
Trust the professionals. Sites such as Zillow can create home-value estimates, but these sites only calculate recent home sales and refinance transactions in your area. A certified appraisal or competitive market analysis are your best chances for an accurate assessment.
In the long term, financially speaking, it’s usually better to buy a home than to rent – but not always. It’s an important decision based on fairly complicated guidelines, but these rules of thumb can help make sense of it all.
Better to rent. A home-seeker should consider renting instead of buying if he or she matches certain criteria. For instance, if the person has a job that requires frequent relocating – say, every two or three years – renting is probably a better plan. If your rent is low – say, two-thirds or less of what your total monthly payments, including taxes and insurance, would be if you purchased a home – you probably want to keep renting for now.
Better to buy. Purchasing a home has many advantages over renting, and right at the top is that an owner stops making monthly mortgage payments when the mortgage loan is paid off. Monthly expenses won’t drop to zero – the homeowner must still pay property taxes, as well as maintenance and insurance costs – but removing the mortgage from the equation always means significant monthly savings. Similarly, where renters basically “throw away” their rent money every month, homeowners are putting that same money toward something – they’re building equity in their home. Money spent paying back the mortgage loan principal, as well as money spent on the purchase down-payment, is money they’ll get back.
Created in 1934 to provide affordable housing financing for qualified borrowers, the Federal Housing Administration (also known as the Federal Housing Authority, or FHA) insures mortgages on loans made by FHA-approved lenders throughout the U.S. and its territories, thereby limiting the lender’s risk. The largest mortgage insurer in the world, the FHA is the only government agency operating entirely from self-generated income, at no cost to taxpayers. It has insured over 34 million properties since its inception, including single- and multifamily homes, manufactured homes and hospitals.
FHA vs. Conventional Financing. There are many similarities between FHA mortgage financing and conventional mortgage loans, but some important differences. While interest rates are similar, credit guidelines vary – for instance, the FHA can deliver favorable interest rates to borrowers with less-than-perfect credit. To secure an FHA-backed mortgage loan, borrowers must pay an upfront insurance premium (about 1.75 percent of the loan amount, a payment that can be included in the financing package) and a monthly premium of .55 percent of the loan amount divided by 12 months. The FHA also requires a down payment of 3.5 percent.
The embodiment of economic stimulation. The FHA provides an enormous economic boost to the country by spurring home and community development. These efforts trickle down to local communities in the form of jobs, customers for building suppliers, improved tax bases and school construction, expansion and improvement, among other revenue streams. The periodic MIP is an annual MIP that is payable monthly. The amount of the annual MIP is based on the LTV ratio, Base Loan Amount and the term of the Mortgage.
Using your credit wisely can help you eliminate debt quicker and transform bad debt into good debt – and it will have certified lenders fighting for your business.
Your credit score. Credit scores are calculated from various data in your personal credit report. This data is often grouped into five categories of descending importance: payment history, amounts owed, length of credit history, new credit and types of credit used. Although each credit-reporting agency formats and reports this information differently, all credit reports contain basically the same information categories. Your Social Security number, date of birth and employment history are used to identify you, but are not used in credit scoring, which considers trade lines, credit inquiries, public records and collection issues.
Improving your score. Raising your credit score is a bit like losing weight: It takes time and there’s no quick fix. And just like a crash diet, quick-fix efforts can backfire terribly. The best advice is to manage credit responsibly over the long haul. Pay your bills on time. Keep balances low on credit cards and other forms of revolving credit. Get current, and stay current, on your payments. Remember that paying off a collection does not remove it from your record, and closing an account doesn’t make it disappear. And always remember: If you’re having trouble making ends meet, contact your creditors directly, or seek the assistance of a legitimate credit counselor.