FHA 203k Experts

If you are thinking about refinancing your mortgage, you should start by doing the following quick Home Finance Analysis:

• Review your existing loan terms and interest rate.
• Determine if your monthly payments are about to increase.
• Explore more attainable options with your current Lender
• Based on what you learn on lesson I decide if the time is right to refinance.

One key concern most people do not realize when Refinancing is the fact that traditionally they will refinance due to cash flow reasons and will not take in consideration their overall equity position and their factual total expenses throughout the life of the loan.

Keep on mind that most of the times when refinancing a loan most likely you are back to square 1 on your 30 year period. Realistically, when refinancing, you might want to look into a mortgage with a shorter term. For example, if you currently have a 30-year fixed rate loan, you might consider refinancing to a 10-, 15-, or 20-year loan which will lower the total amount of interest you will pay over the life of the loan and will let you to pay off your loan faster.

You might also want to switch an adjustable rate mortgage with high or no limits on interest rate increases to a fixed rate mortgage which provides the predictability of knowing exactly what your mortgage payment will be for the life of the loan. However, you have to ponder the fact that your monthly payment might go down but your loan payoff period might increase along with your total interest payments.

Unfortunately, most of the borrowers miss this point due to economic pressures or other reasons, but in the other hand the average period a household stays in their house is approximately 7 years and bottom-line free and clear equity ownership becomes a non issue.

To figure out whether it pays to refinance, you must calculate the total refinancing costs and answer the question that may help you decide: How many months will it take to break-even? You should consider refinancing if you plan to stay in your home for more than the time it takes to break-even.

To calculate your break-even point proceed as follows:

1) Look at your latest mortgage statement how much is your loan amount balance.

2) Add to the balance one month payment (PITI) plus $500.00 and this will become your estimated payoff balance.

3) Look at your loan note for any pre-payment penalty. The greatest deterrent to refinancing could be a prepayment penalty on your present mortgage. The practice of charging money for an early pay-off of the existing mortgage loan varies by type of lender, and type of loan. Laws in many states prohibit or limit mortgage prepayment penalties. The mortgage documents for your existing loan will state if there is a penalty for prepayment.

4) Check your Loan to Value (See lesson I for understanding how to calculate it) and make sure it is not higher than 90%. Otherwise, please be aware that in today’s market your refinancing chances are limited

5) Check the market refinancing interest rates and pick your desired rate (not necessarily assume that you are going to get it, but it would be part of the exercise to determine your refinancing options). A general rule states that if rates drop by two percentage points that was the time to refinance. However, it could pay off to refinance with only a one percent lower rate if you find a good deal on refinancing costs.

6) Calculate using any financial calculator (or my web site) how much would be your savings of the expected new payment using your payoff balance and your desired interest rate compared to your present one. This will become your Refinancing Monthly Savings.

7) Then proceed to calculate your Refinancing Closing Costs by multiplying your payoff balance by 0.895% and adding $2,000.00. Likewise, also remember to add your prepayment penalty (if any) to your refinancing closing costs. This will give you a Market Average Closing Costs for your new loan.

As a final step, divide your Market Average Closing Costs by your Refinancing Monthly Savings to obtain your Number of Months to Break Even.

For instance, if the total refinancing costs are $6,000, and your monthly savings on the new loan are $300, it will take you 6000/300=20 months to break-even. If you don’t plan on staying in the house that long, it won’t pay to refinance.

Refinancing costs: $4,500
Prepayment penalty: $1,500
Total of all fees on your new mortgage: $4,500+1,500=6,000
Monthly savings: $300
It will take you 6,000/300=20 month to break-even.

THREE SPECIAL CONSIDERATIONS:

1) There is NO FREE LUNCH. A no closing costs refinancing stands for a higher rate that will yield a higher profit used to subsidize your closing costs (lenders generally will charge a higher interest rate for this type of loan). When quoting a refinancing with your lender always ask for 2 quotations, one with closing costs and another without closing costs. Then calculate your actual break even point.

2) You can always add your closing costs to your new loan amount and pay nothing at closing. Please do not consider this case as a No Closing Costs refinancing. You are actually paying them by increasing your loan amount.

3) This exercise does not include the impact of pre-paid interest and escrows on your closing costs since traditionally escrows wash out with your existing ones and you still will have to pay interest on your loan depending on when it closes.

Once you have decided to refinance you should shop for a rate similarly you do when getting your first mortgage. Your existing lender may not have the best rates and programs. But bear in mind that the existing lender may waive the appraisal, title-search, and possibly credit report fees and there’s a good chance that you’ll get a better interest rate.

However, remember that a Second Opinion on your mortgage takes just a few minutes! It can pay to compare. Contact us at Wells Fargo for a free, no-obligation second opinion on your Good Faith Estimate. We may be able to provide reductions in interest rate and/or closing costs that even your present lender won’t do.