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Refinance mistakes can cost you thousands, even tens of thousands of dollars. Here are some quick tips to help you out
1. Wrong time frame
Don’t do a refinance under time pressure. Always be sure you can walk away from a refinance if you are surprised by last minute (usually more expensive) changes to the loan you were expecting. These kinds of shenanigans happen. Sometimes people sign up for a bad deal because they need the money quickly, but could have avoided this with a little planning.
It is harder to walk away from a loan when it is a purchase loan. Make sure the broker or lender verifies in writing the final interest rate that was locked in, so there are no surprises.
2. Pay too much closing costs
Closing costs can vary greatly between borrowers and between mortgage brokers. A point is 1% of the loan size. If someone charges you 2 points on a $600,000 loan, that is $12,000.
Make sure you get a good faith estimate within 3 days of the loan application. Compare these carefully from multiple sources. Make sure the estimates are thorough so that you are comparing the same items across different offers. If a mortgage broker leaves off certain costs, such as property taxes or prepaid items, then their offer may seem much cheaper when it actually won’t be. Also make sure the quotes are for the same type of loan (30 year fixed, 5 year interest only, etc.) so you are comparing the same loan types. Otherwise you are comparing apples and oranges.
3. Not locking your interest rate properly
Your mortgage broker “locks in” your final interest rate with the lender. You can request a copy of this rate-lock prior to having to sign the loan documents. That way you know which interest rate to expect, and you won’t be hit by any last minute surprises.
4. Wrong loan type
There are many different loan options out there. Make sure these are explained to you thoroughly. This is your chance to get free advice from multiple sources. For some people a 30 year fixed loan is appropriate, and for some people an interest-only loan with lower payments may be better.
5. High prepay
Some loans come with a prepayment penalty. Find out how long this payment penalty period exists for, and how much it will cost. If you plan on leaving your house in a year, and your prepayment penalty is for 2 years, you will end up paying that prepayment penalty in the future. Sometimes accepting a prepayment penalty for the short term can lead to a lower rate. If you accept a prepayment penalty of one year for an interest rate, but reasonably expect to be in the property for another five years, then this is something to consider.
6. Paying a prepay
Your current loan may have a prepayment penalty. Some lenders waive their prepayment penalty if you refinance with them again. Sometimes this prepayment penalty waiver is prorated from your old loan. For example, if you have one year of a prepayment penalty left on a three year prepayment penalty, then your new loan with the same lender will carry over that one year prepayment penalty.
7. Fixed for long time frame
If you plan on keeping the house for 10 years and get a loan that is fixed only for 5 years, you are exposing yourself to the risk of a higher interest rate in 5 years. Interest rates may be lower or higher at that time, but if you have a 30 year fixed loan you don’t have to worry about that for 30 years.
8. Hard/soft prepay
A hard prepayment penalty is triggered if the loan is refinanced or the house is sold. A soft prepayment penalty is only triggered by a refinance, so if you sell the house then there is no prepayment penalty. A soft prepayment penalty gives you more options.
9. Borrow too much
There are lots of aggressive loan options and lenders out there. It can be relatively easy and tempting to cash out a lot of equity. Make sure you can afford the new payment, and that the cash you are taking out is for reasonable purposes.
Thursday, July 17, 2008
Tuesday, July 15, 2008
12 Refinancing Rules
1. When in doubt, do not refinance or consolidate debts. Caution is always a good idea. Refinancing usually involves significant costs.
2. Do not refinance because of pressures from debt collectors. Debt collectors may try to scare you into refinancing because they have no other way to get their money. There are better ways to address debt collection problems than to borrow against your home.
3. Never (or almost never) use your house as collateral to refinance unsecured debts such as credit card debts, medical debts, or utility bills. If you have financial problems, unsecured creditors can rarely take your property for nonpayment. But if you refinance and use your home as collateral, the lender can take your home.
4. If you have an existing debt with a finance company or high-rate second mortgage lender, do not refinance that debt with the same company. You can ask the company to agree to lower payments on the existing loan, but you should not allow the creditor to write out a new loan, which is likely to involve hidden penalties and expensive new closing costs (or a higher interest rate).
5. You should not turn a car loan into a second mortgage unless you would rather lose your home than your car. Repossession is bad, but foreclosure is worse.
6. Do not refinance low interest-rate loans with higher rate loans. Make sure that the "APR" (Annual Percentage Rate) of the new loan is lower than the interest rate stated in the note on the old loan. (The APR adjusts for certain up-front fees in the old loan which you have already paid.) Also factor in the cost of insurance, closing costs, and other up-front fees. Treat these as costs of the new loan that could be avoided if you did not refinance. Note: These cautions apply even if your monthly payment is lower.
7. Keep long-term first mortgages unless you are getting a lower rate. Lenders may try to consolidate (pay off) a first mortgage. That is, they may try to give you a new mortgage equal to the old mortgage plus the new loan. Do not let the lender do this unless the interest rate on the new loan is significantly lower than the old first mortgage to offset prepayment penalties and fees and charges.
8. Be careful about variable rates. Variable rate refinancing loans can be very tricky. In any variable rate transaction, the monthly payment can increase drastically when you can least afford it. And some loans have artificially low rates (and payments) during the first months.
9. Do not refinance loans when you have a valid legal reason for not paying that debt. If you have a legal defense to repayment of a debt, such as lender fraud, you can raise that defense in court. If you refinance with a new lender, the defense will not be available against the new creditor. If you need legal help to determine whether you have a defense, you should get that help before entering the refinancing deal.
10. Be wary of claims that you will get a tax advantage from a debt consolidation loan. Many lenders offering bad refinancing deals talk about the benefit of the tax deductibility of mortgage interest. Make sure you understand how your personal tax situation will be affected. (For example, if you don�t itemize deductions, the tax deductibility of mortgage interest is worthless.)
11. Some refinancing deals are scams. When in doubt, seek help to review the loan papers before signing anything. You can walk away from a bad deal even at the last minute. Refinancing involves great potential for hidden costs, fees, security interests and other unfair loan terms. Even some reputable lenders make unfair refinancing deals. Whenever possible, ask a qualified professional to review the refinancing paperwork before you sign.
12. If your home is collateral in a refinancing deal, remember that you have three days to cancel. When you use your home as collateral for a refinancing transaction, federal law usually gives you the right to cancel for three days. You can cancel for any reason. If you do change your mind, make sure to cancel in writing before the deadline. The lender is required to give you a form for this purpose. Even if the lender does not give you the appropriate form, you may cancel by sending a signed, dated letter to the lender indicating your desire to cancel the refinancing.
2. Do not refinance because of pressures from debt collectors. Debt collectors may try to scare you into refinancing because they have no other way to get their money. There are better ways to address debt collection problems than to borrow against your home.
3. Never (or almost never) use your house as collateral to refinance unsecured debts such as credit card debts, medical debts, or utility bills. If you have financial problems, unsecured creditors can rarely take your property for nonpayment. But if you refinance and use your home as collateral, the lender can take your home.
4. If you have an existing debt with a finance company or high-rate second mortgage lender, do not refinance that debt with the same company. You can ask the company to agree to lower payments on the existing loan, but you should not allow the creditor to write out a new loan, which is likely to involve hidden penalties and expensive new closing costs (or a higher interest rate).
5. You should not turn a car loan into a second mortgage unless you would rather lose your home than your car. Repossession is bad, but foreclosure is worse.
6. Do not refinance low interest-rate loans with higher rate loans. Make sure that the "APR" (Annual Percentage Rate) of the new loan is lower than the interest rate stated in the note on the old loan. (The APR adjusts for certain up-front fees in the old loan which you have already paid.) Also factor in the cost of insurance, closing costs, and other up-front fees. Treat these as costs of the new loan that could be avoided if you did not refinance. Note: These cautions apply even if your monthly payment is lower.
7. Keep long-term first mortgages unless you are getting a lower rate. Lenders may try to consolidate (pay off) a first mortgage. That is, they may try to give you a new mortgage equal to the old mortgage plus the new loan. Do not let the lender do this unless the interest rate on the new loan is significantly lower than the old first mortgage to offset prepayment penalties and fees and charges.
8. Be careful about variable rates. Variable rate refinancing loans can be very tricky. In any variable rate transaction, the monthly payment can increase drastically when you can least afford it. And some loans have artificially low rates (and payments) during the first months.
9. Do not refinance loans when you have a valid legal reason for not paying that debt. If you have a legal defense to repayment of a debt, such as lender fraud, you can raise that defense in court. If you refinance with a new lender, the defense will not be available against the new creditor. If you need legal help to determine whether you have a defense, you should get that help before entering the refinancing deal.
10. Be wary of claims that you will get a tax advantage from a debt consolidation loan. Many lenders offering bad refinancing deals talk about the benefit of the tax deductibility of mortgage interest. Make sure you understand how your personal tax situation will be affected. (For example, if you don�t itemize deductions, the tax deductibility of mortgage interest is worthless.)
11. Some refinancing deals are scams. When in doubt, seek help to review the loan papers before signing anything. You can walk away from a bad deal even at the last minute. Refinancing involves great potential for hidden costs, fees, security interests and other unfair loan terms. Even some reputable lenders make unfair refinancing deals. Whenever possible, ask a qualified professional to review the refinancing paperwork before you sign.
12. If your home is collateral in a refinancing deal, remember that you have three days to cancel. When you use your home as collateral for a refinancing transaction, federal law usually gives you the right to cancel for three days. You can cancel for any reason. If you do change your mind, make sure to cancel in writing before the deadline. The lender is required to give you a form for this purpose. Even if the lender does not give you the appropriate form, you may cancel by sending a signed, dated letter to the lender indicating your desire to cancel the refinancing.
What is Refinancing?
Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms. It is basically paying off one loan by obtaining another.
Refinancing is generally done to lower your interest rate, receive cash against the property for whatever reasons, or to combine a 1st and second mortgage. There are a lot of reasons a person may refinance their current mortgage but that's the meaning in a nutshell. If you have perfect credit, refinancing is sometimes a good way to obtain a lower interest rate or to convert a variable rate loan to a fixed rate. However, if you are in the midst of financial difficulties, if you have too much debt, or if you have bad credit, refinancing is loaded with pitfalls. We recommend that you be very careful when refinancing debts. Many refinancing loans hurt consumer.
Advantages
Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to raise cash for investment, consumption, or the payment of a dividend.
In essence, refinancing can alter the monthly payments owed on the loan either by changing the loan's interest rate, or by altering the term to maturity of the loan. More favourable lending conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve overall cash flow. Therefore making your bills/payments lower than before.
Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.
In the context of personal (as opposed to corporate) finance, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of borrowing with the general creditworthiness and collateral security available from the borrower. For home mortgages, in the United States, there may be certain tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax.
Risks
Most fixed-term debt contains penalty clauses (known as "call provisions") that are triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, there are also closing and transaction fees typically associated with refinancing debt. In some cases, these fees may outweigh any savings generated through refinancing the loan itself. Typically, one only rationally considers refinancing if the potential for a substantial cost savings exists, or if there is a need to extend the loan due to weak cash flow or other non-recurring commitments. In addition some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.
Refinancing is generally done to lower your interest rate, receive cash against the property for whatever reasons, or to combine a 1st and second mortgage. There are a lot of reasons a person may refinance their current mortgage but that's the meaning in a nutshell. If you have perfect credit, refinancing is sometimes a good way to obtain a lower interest rate or to convert a variable rate loan to a fixed rate. However, if you are in the midst of financial difficulties, if you have too much debt, or if you have bad credit, refinancing is loaded with pitfalls. We recommend that you be very careful when refinancing debts. Many refinancing loans hurt consumer.
Advantages
Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce or alter risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to raise cash for investment, consumption, or the payment of a dividend.
In essence, refinancing can alter the monthly payments owed on the loan either by changing the loan's interest rate, or by altering the term to maturity of the loan. More favourable lending conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve overall cash flow. Therefore making your bills/payments lower than before.
Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various indices used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time. This flexibility comes at a price as lenders typically charge a risk premium for fixed rate loans.
In the context of personal (as opposed to corporate) finance, refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. This can allow a lender to reduce borrowing costs by more closely aligning the cost of borrowing with the general creditworthiness and collateral security available from the borrower. For home mortgages, in the United States, there may be certain tax advantages available with refinancing, particularly if one does not pay Alternative Minimum Tax.
Risks
Most fixed-term debt contains penalty clauses (known as "call provisions") that are triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, there are also closing and transaction fees typically associated with refinancing debt. In some cases, these fees may outweigh any savings generated through refinancing the loan itself. Typically, one only rationally considers refinancing if the potential for a substantial cost savings exists, or if there is a need to extend the loan due to weak cash flow or other non-recurring commitments. In addition some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.
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