Why Refinance? There are lots of reasons you might want to refinance, but most people fit into one (or more) of the basic four catagories. Most people want to reduce their monthly payments; some want to consolidate outstanding debt, such as combining a first and second mortgage into a new first mortgage; some want to tap built-up equity in their homes, and some just want to get out of a mortgage product that they don't like, or that's costing too much -- going from an ARM to a fixed rate mortgage, for example. Whatever group or groups you fit with, there are certain rules that you must follow to reach the goal desired. Straying from some of these basics can end up not only costing time, but could end up costing more money in the future. 2% Rule of Thumb? The traditional refinance rule of thumb -- that you must get an interest rate at least 2% below the interest rate you currently have -- is often wrong. Why? Waiting for a two percent difference from your rate to show up in the marketplace can actually cost you money. For some people, as little as one-half of one percent can be enough, if all other factors fall into place. In addition, since ARMs are priced at below-market rates, it's almost always possible to get that 2% spread -- though you may or may not want to. The only way to determine whether refinancing is for you is to go about it the right way: by analyzing the time and the cost factors. What Is Your Time Frame? What is your time frame? Simply put, it's how long you plan on holding this mortgage, although it can be more complicated than that. You might have a product that demands refinancing -- like a balloon mortgage -- your time frame is only until the balloon period runs out. But, if you don't have to refinance, your time frame can be as long as you plan to stay in the home you're in. When determining your time factor, it's crucial to be honest with yourself, since the time factor will determine if and when you begin to save money. It's a fact that refinancing can cost a considerable amount of money, so you'll want to be as certain as possible of your time frame. For example, is it likely that your employer will relocate you to another city, or that you'll change jobs soon? Do you have a physical condition that could require you to move? Evaluating all possibilities is vital, but only you know what your time frame will be. More or Less Mortgage? One other factor involved in refinancing your mortgage: how much money you'll need or want to borrow. Most lenders will let you borrow around 80% of your home's current appraised value. Some will allow more, if you're simply refinancing your existing loan. But, if you're looking to tap equity, known in the mortgage industry as a 'cash-out refi', you'll probably find that it's less than 80%. In many cases, cashing-out will mean that you'll have a larger mortgage balance than before, with possibly a higher monthly payment -- and you'll have to qualify for that new mortgage. Another consideration with a cash-out refi: you might not be able to get that nice low rate you've seen, if your mortgage amount will be above the 'conforming' loan amount. Conforming loans are sold to large secondary market investors -- mostly to Fannie Mae and Freddie Mac -- and since they buy so many, the rates are often lower. However, loans above the conforming limit, known as 'jumbo' loans, often have interest rates as much as 1/2% higher than conforming, since they are bought and sold on a much smaller scale. This is also known as the 'jumbo premium'. In short, if you have to or want to take out a jumbo mortgage, be prepared to pay more for it. Cash-out Refi or Home Equity Loan? If freeing up cash in your home is what you'd like to do, there's a way to do so, even without refinancing: taking a home-equity loan. Home equity loans can be a viable alternative to a cash-out refi, although they are not without their own set of risks. Most Home Equity loans are of the adjustable-rate, revolving 'line of credit' type, and work much like a credit card does, and lenders will generally offer you as much as 75% of the equity in your home (the appraised value less the balance of your first mortgage). Most lines are pegged to the Prime rate plus a margin, but be careful -- most don't have per-adjustment interest rate caps, and some have lifetime caps of as much as 25%. There are fixed rate home equity loans available too, and they function much like any first or second mortgage does, but will cost you more than a line of credit. Closing Costs Now that we know why you want to refinance, how long you're planning to hold the mortgage, and how much money you want or need to borrow, we can look into possibly the most difficult part: closing costs. Closing costs are what it will cost you, out of pocket, to obtain that new mortgage. Keep in mind, of course, that the more it costs you to get that new loan, the longer it will take to recoup those costs, so there may be some finite limits on what you want to pay. While some closing costs are standard -- that is, you'll find them all over the country -- there are some that may be specific to your local market, or to your state. Estimating your costs will take a little research, but it's important because they'll cost you anywhere between $1000 to $5000 dollars. Along with the time factor, they will determine your savings (or costs) when you refinance. The major closing cost in obtaining any mortgage are 'points', also known as 'discount' and 'origination' points. Origination points are treated differently for tax purposes, but each point is equal to 1% of the mortgage amount you borrow -- $1000 each if you're borrowing $100,000. How many points you want to pay, or whether you want to pay any at all, depends upon how much cash you have available. Typically, paying more 'discount' points will lower the available interest rate, since they are a prepayment of interest; however, you may not know that points can often be traded off for a different interest rate -- such as 9% and 3 points, 9.125% and 2 points, 9.25% and 1 point, and 9.375% and no points. (This is just an example). So, if you decide that paying points is not for you, expect to pay an incrementally higher interest rate. Origination points are a different matter, since they technically are a fee, and they have no effect whatsoever on the interest rate you can obtain. (Some states limit the number of discount points a lender can charge in the making of a mortgage loan). Of course, points (discount or otherwise) are only one of the costs involved with refinancing. As you well remember from getting your original mortgage, there are plenty of others waiting to tap your resources -- costs for appraising your property, researching your title to the property, title insurance, credit checks, attorney review fees, inspections for insects, and others. These can easily add up to a few thousand dollars, but there may be ways you can reduce these costs. For example, if the lender who originated your mortgage still holds it, you might be able to simply update your title insurance policy, instead of taking out a new one. Or, if your original mortgage required Private Mortgage Insurance (PMI) because you put less than 20% down on the property, and your new mortgage will be 80% or less than the appraised value, you can probably drop your PMI coverage, saving you as much as the equivalent of 1/4 of one percent on your new interest rate. Shopping around and comparing can also help you save on these fees. One other possible cost, depending upon where you live: taxes. Some states have surcharges known as 'mortgage taxes', 'realty transfer taxes', 'mortgage recording fees' and others. It is very important to find out if your area is one that does charge these fees, since they can add as much as 2% of the mortgage amount to your closing costs, and significantly lengthen the cost recovery time. Consolidation & Refinance: Unleashing the Financial Power of Your Home Your home is one of your most powerful financial assets, and used properly, it's equity has the strength to help you reach your financial goals. Various financing strategies such as a new first mortgage, or a second mortgage or home equity loan can be used to pay off higher interest debt such as credit cards, and actually lower your total monthly obligations while putting cash into your pocket. Using your home's equity to make a large purchase, such as an automobile, can give you the bargaining advantage that comes with paying with cash while actually costing you less than the market rates you'd pay for a car loan. Your loan officer can assist you in determining the financial strategy that will best serve your needs. Unleash the financial power of your home and keep more money each month! Your Home can save you Money. This is an example of the benefits of consolidating high-interest debt into one easy, lower monthly payment by using the equity in your home. In this example, the borrower would save $616.00 a month (every month) over what had been previously paid. If desired, an extra $300.00 could be paid toward the principal every month, paying the loan off much sooner, substantially reducing the interest paid, and still leaving over $300.00 a month for discretionary spending. Not bad for about an hour spent filling out some forms with your loan officer. *$377.00 monthly payment is based on $28,500.00 amortized over 10 years at 10% APR (amounts rounded up to nearest dollar). Any statement of current loan terms and conditions provided by us is not an offer to enter into a loan at a specific interest rate, or points, or both. Any such offer may only be made pursuant to Minnesota Statutes Section 47.206. Rates, terms, and expenses may vary according to program. Consolidation = Financial Power Monthly Bills Account Balance Monthly Payments Mastercard $1,640.00 $35.00 VISA $1,985.00 $45.00 Discovery $1,975.00 $40.00 J.C.Penny $880.00 $90.00 1st Bank $5,390.00 $180.00 Target $685.00 $137.00 Car Loan $13,600.00 $346.00 Home Depot $1,200.00 $120.00 Total $27,175.00 $993.00 New Loan Total Bill & Expenses Paid $28,500.00 New Monthly Payment* $377.00 Total Monthly Savings $616.00 Some useful guidelines to remember when planning to tap into your equity. Normally, you want to improve your new interest rate by at least 2% over your old rate to make refinancing with a new first mortgage cost effective (a fancy way of saying worth your while). You'll want to see a Break-even Analysis (see glossary) of the loan you are considering. Assuming the closing costs are going to be rolled into the loan, it's important to know how long it will take for the loan to pay for itself (break even). This can be especially critical if the possibility exists that your job could require you to move. When you take out a loan, you are "renting" money. Pay the smallest amount of interest for the largest amount of dollars. Paying off high-interest credit cards with a lower-interest equity loan is a good example. Remember, though, it's the total overall amount of money you have going out that matters, not necessarily any one, individual payment. Consolidating debt could increase your mortgage payment while actually saving you quite a bit on your bottom line. If you can afford it, take the amount of monthly savings from your lowered total payments and apply it as extra principle payments toward your loan. If you can't pay the whole amount, pay whatever you can. You'll save even more in interest, and pay the loan off much sooner. Take your loan out for the shortest term that you can comfortably afford to pay. The reason is interest (the kind you pay, and that of your own self). For example, with an average first mortgage, after five years you'll have paid back approximately the following amount of the principle balance of the loan: 30-year loan: 4% of the principle 20-year loan: 11% of the principle 15-year loan: 22% of the principle As you can see, with a 30-year loan, there isn't even enough equity built up after five years to pay the typical real estate agent's commission. Since people, on average, move every five years (in some markets, the time is even less), this could be important. The 15-year loan will pay the agent's commission and leave enough for a nice down payment. Do you see the possibilities in using 15-year financing? What if after five years you pulled out your equity (refinanced) and used the money to purchase that car you've wanted, with cash? What if you used the money to buy appreciable assets, instead? What if every five years you "harvested" your equity to purchase appreciable assets? So often, real estate agents (usually at their clients' urging) attempt to get people into the "most" house they can afford, which means using 30-year (and/or adjustable rate) financing. The result is, of course, that they are mortgaged up to their eyeballs. Instead, if they were to purchase only the house they could afford using 15-year financing, they would pay the mortgage balance down much sooner, save a bundle of interest, and build equity, thereby increasing their net worth. Whether you make $10,000.00 or $100,000.00 a year in income, there are going to be only so many dollars that will ever pass through your hands. It's up to you to make the most of them. Learn to make your money work as hard for you, as you work for your money.