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Why Prepaying Your Mortgage Loan Is A Good Alternative To Refinancing

February 15th, 2012 |

Author: yroth

prepay mortgage loan instead of refinance to save money

Why Prepaying Your Mortgage Loan Is A Good Alternative To Refinancing

One of the best ways to lower your current mortgage rate as well as reduce your current mortgage loan term is by prepaying the mortgage.

What I mean by prepaying the mortgage is that you apply extra money each month to be applied to lowering the principal balance of the mortgage loan.

Who can this help?

Let’s start with homeowners who want to refinance into a lower mortgage rate but are unable.

Either they don’t qualify for a new mortgage loan because they owe more than their home is worth and they don’t qualify for the HARP home loan program or their credit is poor or they’re self employed and don’t report enough income to qualify for a new mortgage loan.

Or, let’s say their attempting to refinance their home loan and the home appraisal comes in low.

Now they’re faced with the prospect of paying private mortgage insurance PMI or paying their mortgage loan down to get below the 80% loan to value threshold to avoid paying the PMI.

Here are the benefits of preapying on your existing mortgage loan:

1. You lower you net effective mortgage rate.

Let’s say your current mortgage rate is 5.25%. If you prepay that mortgage loan, your net effective mortgage interest rate will drop because your cutting into the mortgage term.

The degree of the drop in net effective mortgage rate will depend on how much you prepay and the existing term of the mortgage loan.

2. You pay you mortgage loan off sooner.

This is big as you’re taking years off the back end of the mortgage loan.

So let’s say your current mortgage loan principal and interest payment is $1000 per month.

If by prepaying against your mortgage loan, you eliminate 7 years off the mortgage loan term - that’s 84 payments (7 x 12 = 84).

84 payments x $1000 = $84,000. That’s nothing to sneeze at!

3. You’re saving money in mortgage interest.

By prepaying the existing mortgage loan, you’re lowering the net effective mortgage interest rate, reducing the mortgage loan term, and saving money in total mortgage interest you’ll pay on the mortgage loan.

So don’t despair if you’re unable to refinance – for whatever reason.

If you prepay your existing mortgage loan, you’ll be able to accomplish some of the same things that you set out to accomplish by attempting refinancing your existing mortgage loan in the first place!

Check out my biweekly mortgage payment calculator to see how much you’ll save!

Why A 5/1 ARM May Be A Smarter Mortgage Loan Choice Than A 10 Year Fixed Mortgage

February 12th, 2012 |

Author: yroth

I saw a friend of mine last week who asked me whether it made sense for him to refinance since mortgage home loan rates are really low.

He explained that he owed about 175,000 on his existing mortgage loan. He was about 10 years into it and had 10 years to go before it would be paid off. It originally was a 20 year fixed mortgage.

His current mortgage rate is 5.25%.

He told me that someone had told him that if he refinanced into a 5/1 ARM - also known as an adjustable rate mortgage – and paid what he’s currently paying, that the 5/1 ARM would pay off sooner than the 10 years.

So I went to my biweekly payment calculator and did the comparison.

The 5/1 ARM performed the way he suggested.

If he refinanced into a 5/1 ARM at 2.875%, which is a no lender fee mortgage rate, and paid what he’s currently paying on his existing 20 year mortgage loan at 5.25, the 5/1 would pay off about a year earlier.

For example, the current mortgage loan payment is $1850 per month. The mortgage payment on the 5/1 ARM at 2.875% is $726 per month. This is based on a mortgage loan amount of $175,000.

That’s a difference of $1124 per month.

If he applied the $1124 per month to the 5/1 ARM mortgage payment, even though the 5/1 amortizes over a 30 year period, the 5/1 ARM will pay off in 8.67 years. The total cost of the loan would be $197,721.

On the 10 year fixed mortgage loan, on the other hand, at a 3% mortgage rate, the principal and interest payment is $1689 per month.

If he prepaid $160 per month towards lowering the principal of the mortgage loan, maintaining the mortgage payment at $1850, the mortgage loan would pay off in 8.3 years. The total cost of the mortgage loan would be $197,742.

Now here’s the rub.

If the mortgage rate on the 5/1 ARM stayed at 2.875 or lower for the full 8.7 year term, then the 5/1 ARM would make sense.

However, that mortgage rate and mortgage payment might change after 5 years.

Theoretically, the mortgage rate on the 5/1 ARM could increase 5% over the 2.875% in the 6th year.

This is where the difference is.

All things being equal, the 5/1 ARM – going against conventional wisdom – would save my friend money compared to him doing nothing and staying with his 20 year fixed mortgage loan at 5.25%.

Compared to the 10 year fixed mortgage loan at 3%, the 5/1 ARM with the additional prepayments applied to mortgage principal performs well.

However, the fact that the mortgage rate can change after the 5th year and can potentially eat into his savings, makes the 10 year fixed mortgage loan the safer and less expensive option.

Is A “No Cost” Mortgage Loan A Scam?

February 7th, 2012 |

Author: yroth

Homeowners and first time home buyers will ask me whether I offer no cost mortgage loans and whether they are a scam.

The answer to the scam part of the question is “No, they’re not a scam.”

One thing that you need to keep in mind when you’re either buying a new home or refinancing your existing mortgage loan is that there are going to be closing costs associated with the transaction.

For example, the mortgage lender is going to want to be paid for their service and product.

A home appraisal is needed to determine the home’s value. The home appraiser charges for their work.

The title will have to be searched and a new title policy issued. That costs money.

Finally, the county and state that the home is located in will charge a recording fee to record the mortgage and in some states, taxes are paid on the new mortgage loan amount.

So, with all these fees, how is it that you see advertised “no cost” mortgage loans?

It’s because the lender is offering a higher mortgage rate. It’s out of the revenue generated through the higher mortgage rate that the mortgage lender, acting as an interested third party, will pay your title and government recording fees and/or taxes.

This is definitely not a scam.

Now some people will say, “i’m paying for it one way or the other.”

And in a way, that’s true.

However, that doesn’t mean that there isn’t benefit to you to take a higher mortgage rate and have the mortgage lender pay your mortgage closing costs.

For example, if your goal is to lower your mortgage rate and lower your monthly mortgage payment, you still can accomplish that by taking a higher mortgage rate and have the mortgage lender pay your closing costs.

If you’re buying a new home and you’re s first time home buyer who has limited cash to pay mortgage closing costs, then having the mortgage lender pay the mortgage costs can make sense.

If you’re refinancing your existing mortgage loan and you can drop your monthly payment by, say $150 per month, and it doesn’t cost you anything or it costs you very little, then the “no cost” mortgage loan can make sense.

In conclusion, the ‘no cost” mortgage loan is not a scam and can make a lot of sense to a lot of homeowners or first time home buyers.

5 Mortgage Loan Types That May Help You Get What You Want

January 31st, 2012 |

Author: yroth

There used to be a whole myriad of mortgage loan types available to the consumer and first time home buyer – as long as they qualified. For many, qualifying for the mortgage loan wasn’t difficult.

Times have changed.

Here are the 5 mortgage loan types that are now available to homeowners and first time home buyers.

1. Conventional Mortgage Loan.

This is a mortgage loan that is less than $417,000 and is sold to Fannie Mae or Freddie Mac.

To qualify for this mortgage loan, the homeowner needs credit above 620, at least 5% equity in the home and total monthly installment debt not to exceed 50%.

Pros: Low rates, all mortgage loan types (i.e. fixed rate as well as adjustable rate mortgages.)

Cons: Homeowners have to meet Fannie Mae, Freddie Mac and the mortgage lenders’ underwriting guidelines.

2. FHA Mortgage Loan.

FHA, which stands for the Federal Housing Administration, isn’t just for first time home buyers.

With a FHA mortgage loan all you need is 3.5% equity in the home for a new home purchase or rate and term refinance, also called a no cash out refinance. Homeowners can also take cash out of their home up to 85% of the value of the home.

Pros: Low rates, full range of mortgage loan products, only need 3.5% equity in the home for a home purchase or a no cash out refi.

Cons: High monthly mortgage insurance premium that has to stay on the mortgage loan for 5 years and 22% equity in the home. The MIP goes on no matter the loan to value ratio.

3 VA Mortgage Loan

This mortgage loan is for Veterans of the Armed Services and stands for the Veterans Administration – not the state of Virgina!

Pros: low rates, 100% financing, no VA funding fee if the vet is disabled, full mortgage loan product range

Cons: underwriting is cumbersome, VA funding fee for non-disabled Vets

4. Construction Loans

A construction loan is for a homeowner who wants to build a custom home. So they hire a builder and architect, have plans drawn up, and use the construction loan to buy the land and pay the builder as he builds the custom home.

FHA provides a 203(k) mortgage loan, which is their version of the construction/renovation loan.

Pros: if you’re building a custom home, it’s the only mortgage loan type available. You’re only billed on what you use. The mortgage loan is refinanced after the home is completed into a permanent mortgage loan.

Cons: mortgage loan rates are higher.

5. Second Mortgages

A second mortgage comes in 2 forms: a fixed rate second mortgage and a Home Equity Line Of Credit HELOC. If you want access to your home’s equity, a second mortgage is a good way to get it. It may be a good alternative to refinancing your existing first mortgage and taking additional cash out.

Pros: Allows you to access your home equity. Your only billed on what is used on the HELOC.

Cons: HELOC rates are variable and can move higher. Fixed rate second mortgages have higher mortgage rates than first lein mortgage loans.

So there you have it: the 5 Mortgage loan types that may help you!

The Main Reason Why Homeowners Can’t Get The Lowest Mortgage Rate

January 25th, 2012 |

Author: yroth

Can You Get The Lowest Mortgage Rate?

Everyone wants the lowest mortgage rate.

If you’re buying a new home or refinancing your existing mortgage loan, you want the lowest possible mortgage rate. And why not? So do I.

So homeowners will do their due diligence and shop around to different mortgage companies and get mortgage rate quotes in search of the lowest mortgage rate.

Here’s the problem.

The lowest mortgage rate doesn’t exist.

Let’s say you’re buying a new home and you’re scheduled to close on or before a certain date.

You have a time constraint so you can’t shop and wait around indefinitely for “the mortgage rate bottom.”

However, if you’re refinancing your existing mortgage, there is no such time constraint. So some homeowners will wait to find the lowest mortgage rate.

Here’s the problem: finding the lowest mortgage rate is like waiting for a stock price to reach a certain price point.

It might get there and it might not. Or it might take 3 years to get there.

If you were to look at where mortgage rates and their associated costs have been over the past 3 years – for example – there was 1 day out of the past 3 years that the “mortgage rate” was the lowest.

To try and game mortgage rates in search of the “bottom” is foolish.

Here’s what to do. Look at current mortgage rates and their associated costs. Ask yourself, “Is there benefit to refinance into that market mortgage rate?”

Are you lowering your mortgage rate? Are you lowering your mortgage payment? Are you reducing your mortgage loan term? Are you able to recover your closing costs in a reasonable amount of time?

If there is benefit, take it and lock it in.

To “game” mortgage rates in search of the mortgage rate bottom doesn’t work because the lowest rate doesn’t exist.

While mortgage rates change and you’re waiting for that elusive mortgage rate bottom to appear, you could be saving and benefiting now.

2 Things That Can Screw Up Your Mortgage Refinance Closing

January 24th, 2012 |

Author: yroth

I do a ton of mortgage loan refinance transactions.

It seems the main item homeowners are concerned with, in addition to the mortgage rate and fees, is whether they’ll have to bring money to the mortgage refinance closing.

Most homeowners don’t want to.

If there are costs and escrows that have to be collected at the mortgage refinance closing, then most people want that money included in the mortgage loan amount.

Sometimes, however, homeowners will get a copy of the HUD-1 Settlement Statement before the mortgage refinance closing and they see they have to write a check for $500 or $950 or what ever the figure may be.

They say, “Wait a minute, why am I writing a check at closing when I wanted the money included in the mortgage loan amount?”

Here’s the answer.

There are 2 things that can change whether the homeowner has to bring money to the refinance mortgage closing and can potentially disrupt or screw up the mortgage refinance closing.

The 2 things are: the existing mortgage payoff figure and the escrow amount that the lender is collecting.

Let me explain.

Think of the money break down in terms of credits and debits.

Let’s start with the debits.

The first debit amount would be the mortgage refinance closing costs. The homeowner should have a very good idea what the mortgage closing fees are going to be prior to closing.

They received a Good Faith Estimate GFE showing the lender fees, title fees, appraisal fee and government recording fees.

Those numbers provided on the Good Faith Estimate GFE should not be off by more than 10% and the lender fees have to be 100% spot on.

Remember, the mortgage broker or loan officer that provided the Good Faith Estimate is estimating “third party” fees, such as title work, appraisal, and government recording fees.

So if the GFE says the third party fees are $2000, then they cannot be off by more than $200, which is 10%.

So the mortgage refinance costs are pretty well nailed down beforehand.

The second debit is the escrows that the lender is collecting. (This only applies if the homeowner is setting up an escrow or impound account.)

The esrows are the annual property taxes and dwelling insurance premium. In addition, there will be prepaid interest, but this figure will depend on what day the mortgage refinance funds on.

What the mortgage closer does first is determine the annual property taxes and dwelling insurance premium amounts, then they’ll look at when the taxes and insurance are due.

Based on that information, they will collect a certain amount to fund an escrow account at the mortgage closing.

If the mortgage broker of loan officer knows what they’re doing, they can provide a reasonable approximation to the homeowner to account for this debit when the new requested mortgage loan amount is figured out.

The third debit is the old mortgage payoff amount.

This is where people get screwed up. They believe that the mortgage balance that they see on their mortgage statement is the mortgage amount that is actually owed.

In reality, mortgage interest accrues in arrears, so the mortgage payoff is usually higher than what is shown on the mortgage statement.

To recap, the 3 debits are the mortgage closing fees, escrows collected, and existing mortgage payoff amount.

The 2 things that can screw up the mortgage refiance closing are a poor estimation or calculation of the escrow amount to be collected and the old mortgage payoff amount.

The mortgage costs are fixed, so we know what they are.

It’s the mortgage escrows and payoff that may be different than what was originally calculated.

So the 3 debits are added up and then the credit is applied.

The credit would be the new mortgage loan amount.

If the debits are larger than the credit, then the homewoner will have to bring money to the mortgage closing table.

If the credit is larger, then the homeowner will get cash back.

In conclusion, the 2 things that can screw up a mortgage refinance closing would be if the existing mortgage payoff figure and the property tax and dwelling insurance escrow figures aren’t calculated correctly when the mortgage loan application is originally taken and as a result the new requested mortgage loan amount isn’t high enough, forcing the homeowner to bring money to the mortgage closing table.

The new mortgage loan amount can be increased at to cover the difference. However, it’s best to get the new requested mortgage loan amount correct at the outset so there are no delays or hiccups at the mortgage refinance closing.

Is Your Mortgage Company Stealing Your Money At Your Refinance Closing?

January 13th, 2012 |

Author: yroth

This mortgage question I get from time to time.

I got a call from a homeowner who was about to close on her mortgage refinance transaction.

She was looking at her HUD-1 Settlement statement and noticed that the mortgage company was collecting prepaid interest for 11 days.

At $37.52 per day, this amounted to $412.72.

She also noticed from the old mortgage payoff date that her old mortgage company was collecting a balance from a date about 12 days from when her new mortgage funded.

I think her new mortgage funds on January 19 but her mortgage company was collecting money through Feb 4.

She asked me,”Why am I paying prepaid mortgage interest from January 19th through January 30th and also paying my old mortgage company per diem mortgage interest through February 4th when they get paid off on January 19?”

Great mortgage question.

She believed the mortgage company was stealing her money.

Here’s the answer.

She paid prepaid interest from the time her new mortgage funded, which is January 19th through January 30th.

She won’t have a mortgage payment in February.

Her first mortgage payment is due March 1 as all mortgage payments are applied in arrears.

I explained that when the title company ordered the mortgage payoff for her existing mortgage, they don’t know exactly when the new mortgage will fund.

So the title company will request a mortgage payoff for a few weeks beyond what the target mortgage fund date is estimated to be.

They do this in the event there is a clich in the mortgage underwriting process and the mortgage closing is delayed and closes after the payoff date. If this were to happen, the title company would have to order a new mortgage payoff, which would delay the mortgage closing even more.

What’s happening is that the old mortgage company is collecting 15 days of extra mortgage pre diem interest from her.

I think this amounted to around $550.

I explained that that money is hers and that the old mortgage company will refund any overage to her.

As the old mortgage company was fully paid on January 19, they’re not entitled to any mortgage payments or mortgage interest beyond that date.

Since they collected beyond that date, the difference between the fund date and the mortgage payoff date would be refunded to the borrower.

In conclusion, your mortgage company isn’t stealing from you if they collect more than what is owed to them.

If they do collect more than what is owed (which is common for mortgage refinance transactions), they will refund you the difference.

Does It Make Sense To PrePay Your Mortgage?

January 11th, 2012 |

Author: yroth

Does It Make Sense To Prepay Your Mortgage?

I get this mortgage question a lot: “does it make sense to prepay my mortgage?’

The answer is “yes.” However, see my caveat at the end of this post.

If you can afford to prepay your mortgage – and by prepay – I mean pay more than the minimum monthly mortgage payment, do it.

Just make sure that extra mortgage payment is applied to lowering the mortgage principal and not routed into your escrow account.

Some of the benefits of prepaying your mortgage are that it lowers your net effective mortgage interest rate, lowers the amount of interest you’ll pay over the life of the loan, and save you in the back end by having your mortgage pay off early and as a result, you won’t be making mortgage payments.

Those mortgage payments that you won’t be making on the back end you could be saving.

If you really want to super charge and accelerate the payoff of your mortgage, then refinance into a shorter term mortgage, like a 20, 15 year fixed or 10 year fixed mortgage.

Your mortgage payment will go up; however, if you can swing that payment and add extra towards principal reduction, you’ll pay the mortgage off even sooner, enjoying the benefit of lowering the net effective mortgage interest rate, saving money in mortgage interest payments you’ll be making and pay your mortgage off sooner, saving even more money.

Now here’s my caveat.

You don’t want to prepay your mortgage if you could otherwise be saving that money you’ll be applying to principal reduction if your existing cash savings is limited.

You want to have a least 6 months of monthly income saved in the event of an emergency.

So if your savings is limited and you can afford to apply $300 per month – for example – to principal reduction, I would argue it would make more sense to take that $300 and save it.

Build up a cash nest egg. Cash is king!

Your home equity isn’t liquid and you have to be qualified by a bank to turn it into cash!

In conclusion, does it make sense to prepay your mortgage?

Yes, if you have cash savings, take extra money and apply it to principal reduction.

Or refinance into a shorter term mortgage – like a 15 year fixed or 10 year fixed - and continue to prepay the mortgage.

If you don’t have any savings, it would make more sense to take that extra cash and save it.

Build the nest egg first, then apply the extra cash to prepay the mortgage.

2 Reasons Why You Don’t Have To Drop Your Mortgage Rate by 2% To Justify A Mortgage Refinance

January 9th, 2012 |

Author: yroth

I get the mortgage question a lot about how much does the mortgage rate have to drop before it makes sense to refinance the existing mortgage.

This morning a homeowner I was talking to was under the impression he needed to drop his mortgage rate by 2% in order to justify refinancing his mortgage.

Here’s are the 2 reasons why the 2% rule doesn’t make sense.

Reason #1. In addition to the mortgage rate drop, you want to look at the mortgage payment.

Let’s say you’re only dropping your mortgage rate by .75% but your mortgage payment is dropping by $100 per month.

If one of your goals is to improve your monthly cash flow by lowering your mortgage payment, you just accomplished that and you only dropped the mortgage rate by .75%.

Reason #2 why you don’t have to drop your mortgage rate by 2% to refinance your existing mortgage to justify refinancing your mortgage.

Let’s say that you dropped your mortgage rate by .75% and you’re saving $100 per month.

Let’s also say that the closing costs to do that are only $1200. That means that it’ll take you 1 year to recoup your closing costs.

That’s a short recoup period and makes sense as long as you plan on keeping the mortgage for at least 1 year and aren’t losing equity by resetting the mortgage term back to the orginal mortgage term.

In conclusion, the 2 reasons why you don’t have to drop your mortgage rate by at least 2% to justfy refinancing your mortgage are as follows: if you can lower your mortgage rate (even .5%), save money each month by lowering the mortgage payment, you can recoup your closing costs within 1 year and you’re not losing a lot equity by resetting the mortgage term more than 2 or 3 years, a mortgage rate reduction less than 2% makes sense.

3 Ways To Lower Your Mortgage Rate

January 6th, 2012 |

Author: yroth

3 Ways To Lower Your Mortgage Rate

There are 3 ways to lower your mortgage rate.

The first way is to refinance your existing mortgage. By doing this, you will lower your mortgage rate.

Your mortgage payment may go up or down depending on whether you refinance into a longer term or shorter term mortgage – like a 30 year fixed or 15 year fixed mortgage.

By refinancing your mortgage, you may have to pay closing costs, which include bank fees title charges, an appraisal fee and government recording fees.

You might be able to get the lender to give you a lender credit, which would pay for your title and government recording fees, allowing you to lower your mortgage rate and refinance at no closing costs.

The second way to lower your mortgage rate is to prepay against your existing mortgage.

By prepaying against your existing mortgage, you’re effectively reducing the mortgage term, and as a result, your net effective mortgage rate will drop.

You can prepay against your existing mortgage by sending in an additional payment to be applied to the mortgage principal or you can set up a biweekly mortgage payment system.

The third way you can lower your mortgage rate is by contacting your loan servicer, which is the company you write your mortgage payment to, and request they modify your mortgage.

Your mortgage company, in all likelihood, will try to refinance your existing mortgage to lower the mortgage rate first.

If you don’t qualify for a mortgage refinance, then a loan modification to lower the mortgage rate may be available to you.

Your mortgage company will direct you to their loan modification department.

With a loan or mortgage modification, you may be able to lower your mortgage rate at no or little cost.

You don’t necessarily have to be late on your existing mortgage to qualify for a mortgage modification.

In conclusion, there are 3 ways to lower your mortgage rate.

The first way is to refinance your existing mortgage into a new mortgage with a lower mortgage rate.

The second way is to prepay your existing mortgage either evry month or using a biweekly mortgage payment sysytem.

The third way is to apply for a mortgage modification, which would also effectively lower your mortgage rate and mortgage payment.

Yale Roth M.A., M.Ed

Archive for the ‘Live Debt Free!’ Category

Why Prepaying Your Mortgage Loan Is A Good Alternative To Refinancing

Related Posts:

Why A 5/1 ARM May Be A Smarter Mortgage Loan Choice Than A 10 Year Fixed Mortgage

Related Posts:

Is A “No Cost” Mortgage Loan A Scam?

Related Posts:

5 Mortgage Loan Types That May Help You Get What You Want

Related Posts:

The Main Reason Why Homeowners Can’t Get The Lowest Mortgage Rate

Related Posts:

2 Things That Can Screw Up Your Mortgage Refinance Closing

Related Posts:

Is Your Mortgage Company Stealing Your Money At Your Refinance Closing?

Related Posts:

Does It Make Sense To PrePay Your Mortgage?

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2 Reasons Why You Don’t Have To Drop Your Mortgage Rate by 2% To Justify A Mortgage Refinance

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3 Ways To Lower Your Mortgage Rate

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