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Refinancing your home loan to a lower interest rate or shorter term may result in significant savings. And as economic conditions change, you want to be sure you still have the best home financing arrangement for your current and long-term financial goals.

Is refinancing right for you, right now?

If you are thinking about refinancing your mortgage, this information may help you decide. We’ll walk you through the steps to refinance your mortgage.

Lesson #1: Stop the Bleeding and Call 911

If the fixed period of your ARM’s interest rate is expiring within the next 18 months and present interest rates are much more favorable than your present rate (*), then you owe to yourself to do the following math calculation.

a ) Find out your present Loan to Value (LTV). That is, divide the present outstanding balance of your loan by the realistic selling price that you could sell your home today and multiply it by 100. This will give your percentage Loan to Value.

b ) If your LTV is higher than 85% then you should seriously consider to refinance your home right now and not wait until your fixed period expires.

Even though the government is sponsoring some loan rescue programs for sub prime and other troubled mortgages, reality is that the housing prices still are on a decline and lenders guidelines will keep tightening your ability to pre-qualify for your present loan amount.

That basically translates on the fact that most of the lenders will be willing to refinance only up to 90% LTV or even lower depending on your occupancy and credit history. Hence, if the prices of comparable homes keep falling due to market conditions, then you might find yourself on a situation where you won’t be able to refinance your property even being a qualified buyer with some equity left in your home.

c ) If you are on a Option ARM ( negative amortization ) instrument . You should stop making the minimum only payments and start making at least the Interest Only payments even if you consider them to be unaffordable. Reality is that after refinancing your Option ARM at the best rate in today’s market, your new payment is going to be higher than your current minimum payment, but at least you will start to amortize your loan.

However, there is some interesting news for those homeowners that currently are on a MTA Option ARM program funded within the last 3 years at a 75% LTV and that have a margin not higher than 2.8%. (Please do not hesitate to contact me by posting a comment if you need assistant understanding these criteria)
If you don’t plan to stay in your house for at least another 3 to 5 more years, it might be reasonable not to refinance your Option ARM but just pay the 30 year fully amortized payment if you look at this forecast of the MTA for the next 5 years.

(*) Remember that 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.

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.

Lesson II will be how to calculate your break-even point when refinancing. Up until then, please do not hesitate to leave any comments if you need further information about your refinancing options.

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 HomeServices Lending 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.

Lesson III – What are my Refinancing Options?

This is a hot topic… you’ll want to stay on top of this and we want to keep you informed! The Economic Stimulus Plan has been signed by President Bush and is now law.

The GSE’s (Government Sponsored Entities ~ Fannie Mae and Freddie Mac) and HUD (Dept. of Housing and Urban Development) now need to determine how they will implement these changes and communicate the product and process guidelines to mortgage investors and lenders.

Here’s what we can tell you thus far for Conventional Conforming loans… again nothing is final until Fannie Mae/Freddie Mac and HUD make their formal announcements.

Fannie Mae and Freddie Mac need to consider many factors as they determine how to implement the new products. Once they have, they will send a formal announcement with the details. The general target for release by the GSE’s is the beginning of April.

Because it is a temporary measure, this will not be as quick and easy as past increases to the maximum loan limits that were tied to home price appreciation.

Below are some high level details that Fannie and/or Freddie have provided to date:

• The new legislation sets maximum loan amounts based on calculations tied to the HUD Median House Price amounts:

• The maximum loan limit will be increased to 125% of the HUD Median House Price based on Metropolitan Statistical Area (MSA) up to 175% of the current conforming limit, never to exceed $729,750 for a single-family property
• The new loan limits will not be uniform across the country
• HUD is required to publish revised median house prices to implement the legislation within the next 30 days
  
• Product parameters will be more restrictive than conforming products:
  • Full Documentation and Full Appraisals will be required
  • 660 minimum credit score
  • 90% LTV maximum for primary residence purchases and rate/term refi’s (lower LTV limits for investment properties, second homes, and cashout refi’s)
  • 0x30 on all mortgage debt in past 12 months
  • 12 months minimum seasoning for cashout refinances since prior refinance
  • Full project review required on condos
  • The declining markets policy will be in effect (5% reduction of maximum LTV / CLTV for properties located within a declining market)
  • Product types will likely be limited to 5-yr ARMs (P&I and IO), 15- and 30-yr fixed P&I products
  • Full documentation means that variances such as VIP will not be eligible for loans within this product
    
• There will be special Pricing and Delivery requirements
  
  
  • Pricing will not be the same as current conforming product (we expect pricing to be somewhere between current jumbo and conforming pricing)
  • Because of the special requirements, PHH will release new products to identify these separately

Please note: the abovementioned product parameters are based on preliminary guidance only and are subject to change by Fannie Mae and/or Freddie Mac.

For FHA Business

We have not received any information as to whether or not HUD will impose any additional LTV, credit, or documentation requirements beyond standard guidelines for FHA products. As we become aware of these details, we will let you know.

Regarding HUD Sales Price Limits, the following describes how HUD derives their limits and how this new Law impacts these calculations.

For most areas, FHA limits are set at 95% of the median home price for the area. However, there are Floor and Ceiling limits that are applied to low and high cost areas.

• Floor: The 1-unit “Floor” will now be $271,050 (currently $200,160)
  • The “Floor” is derived from calculating 65% of the conforming limit for 1-unit properties (previously calculated using 48%)
  • The “Floor” is used for areas in which 95% of the median home price is less than $271,050
    
• Ceiling: The 1-unit “Ceiling” will now be $729,750 (currently $200,160)
  • The “Ceiling” is derived from calculating 175% of the conforming limit for 1-unit properties (previously calculated using 87%)
  • The “Ceiling” is used for areas in which 95% of the median home price exceeds $729,750

As is the case for GSE eligible loans, exact limits per MSA cannot be determined until HUD releases the latest Median Sales Prices per MSA and confirms each MSA’s maximum loan limit.

As we find out more, we will send you updates…

Just a few hours before Valentine’s day, president George W. Bush signed H.R. 5140, better known as the economic stimulus package, into law. This package is basically a set of “lovely” regulations intended to address the fear of recession, the declining housing market and the sub-prime (please real all kind of mortgages) situation.

In the very beginning the original version of H.R. 5140 was mostly about rebates for tax payers and tax incentives for small businesses, but it ended up including some key provisions with respect to mortgages.

What does all that stimulus love mean to me?

Basically, it means that if you pre-qualify, it will be easier and relatively more affordable to obtain mortgages to purchase or refinance your home in more expensive markets for some specific areas. It means that you will be able to obtain a loan higher than $417,000.00 at a more affordable interest rate than it used to be for such loans.

For example, during this past week a qualified buyer on a $417,000 loan could have gotten an interest rate of 5.50% compared to a rate of 6.875% for a loan of $550,000. Today, that same buyer, if qualifies, could get a loan for $550,000 at 5.50% which will represent savings about $470.00 per month, or more than $5,676.00 a year.

However, do not expect this rosy valentine’s present to be reflected in your closing statement by this month. Most of the lenders will still have to digest, identify impacts and implement the changes as quickly as possible before these measures impact you in any way.

Furthermore, please be aware that not every household will benefit from this law. The legislation is geographically specific and will provide assistance only in those areas where housing prices are well above the national average. The legislation reads that the loan limitation "on the maximum original principal obligation of a mortgage that may be purchased...shall be the higher of-

a.- the limitation for 2008 (i.e. $417,000); or

b.- 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008.

In other words, Fannie and Freddie cannot purchase any loan for which the original principal balance exceeds $729,750 or 175% of the 2008 limitation. However, in most parts of the country where median prices are under $250,000 the limit will remain at $417,000.

Another important issue to be taken in consideration is that this provision is very temporary. It was made retroactive for loans that were originated during the period beginning July 1, 2007 and it ends on December 31, 2008. The retroactive nature of the legislation will allow lenders to package and sell many of the so-called jumbo loans that were originated earlier, thus freeing up money to make more loans. However, the new limits will apply to loans originated during this period for the life of the loan, so the loans can be repackaged and resold at any time.

The whereabouts of your loan after December 2008 will be unknown until next Valentine’s day.

Short Sales, Foreclosures And Debt Forgiveness

In December, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which provides tax help for homeowners facing foreclosure or who sell their homes in a short sale.In the past, if the value of your home declined and your bank or lender forgave a portion of your mortgage debt, the tax code treated the amount forgiven as Phantom income that could be taxed.For example, if a lender forgave a $100,000 in mortgage debt because your house was worth $100,000 less than your mortgage balance, the IRS treated this debt forgiveness the same as income that you earned from your job, thus requiring you to add $100,000 in phantom income to the amount of your annual income and pay tax on it at your marginal tax rate.

With the new rule in place, taxpayers can exclude up to $2 million of mortgage debt forgiven in 2007, 2008 or 2009 on their principal residence only. There is a limit of a $1 million for a married person filing a separate return. Mortgage debt forgiven through a short sale or a foreclosure would both qualify for the tax exclusion.

Please note the Mortgage Forgiveness Debt Relief Act of 2007 only applies to principal residences, not second homes or investment property, When a lender forgives mortgage debt, the lender sends the taxpayer Form 1099C or 1099A. The form should state the fair market value of the home. In the case of a short sale or foreclosure, that would be the sales price.

Sometimes in a foreclosure, the lender may just put the value of the loan in the field where the fair market value of the home should be listed.

Another important point to note is while the Mortgage Forgiveness Debt Relief Act of 2007 will allow loan forgiveness of up to $2 million on a primary residence, it’s applicable only to acquisition indebtedness. The amount of money it takes to buy your existing home, build a new home, or the equity you cash out to make a substantial improvement to your home counts as acquisition indebtedness. But if someone takes out cash in home equity to buy a car or send their kids to college, this does not count.

Remember always get professional advice from your CPA, Attorney and a reputable Real Estate Agent.

This mornings Miami Herald’s front page blared “Lenders raising the bar on buying a home”. As usual this news is lagging way behind what we already know!. You can read the article here.

Miami-Dade County is officially a “soft market” and as such there have been certain restrictions put into place. For example, the 80/20 loans that were on every buyer’s lips last year are non existent. Most loans will require some kind of down payment, especially the non-conforming loans or Jumbo loans. The problem here is not that down payments are required, it’s that the 100% financing option became the norm instead of the exception. Even buyers that had the money to give a down payment chose not to because the way the loans were being priced very competitively and were actually competing with the more traditional loans. Now when lenders are going back to “traditional” lending parameters, the media is making it out to be the “sign of troubled times”. The truth is that lenders are just returning to sanity and going back to the way things were no more than a few years back.

Recent bulletins from FannieMae and FreddieMac to lenders have definitely changed the landscape for prospective purchasers in the market for a home. In addition to the down payment requirements, they also laid out certain “loan delivery fees” tiered to the borrower’s credit scores. Translation: borrower’s with a credit score of less than 660 will pay approximately .25% higher interest rate. Credit scores lower than 640 have an additional price adjustment. There are also significant changes in how borrowers who choose an interest only payment or an adjustable rate mortgatge will be qualified.

So, where does this leave us…. The GOOD NEWS is that there are still many good safe loans available for first time home-buyers who think that they can’t get a loan because they don’t have enough money for a down payment of 10% or more. Home-buyers shopping for their first mortgage can still get 95%-100% financing with our Home-Opportunities Loan. These programs offer flexible guidelines to help buyers qualify for their first home purchase and also provide special “expanded guidelines” for buyers who are public service employees such as Medical Professionals, Firemen, Police Officers, Military Personnel etc. This program also allows a seller to pay up to 6% for closing costs which can include rate buy-downs to further enhance the borrower’s ability to qualify, and also allows the buyer to receive the down payment as a gift from an acceptable donor.

In addition, Wells Fargo has an exclusive program for first time buyers that they call the Builder’s Grant wherein, the developer can pay up to 3% for the buyers down payment and another 3% for closing costs! This is not a typical down payment assistance program where the funds come from a 3rd party, the 3% down payment comes directly from the developer at closing, no extra hoops to jump through! How great is that?!

So, you see, it’s not all bad news. The best part of these two programs, is that condo’s are eligible and are currently not subject to the “soft market” additional down payment requirements! On the down side, there are income limits on these loans, but depending on location of the property, these can be waived. The income limits are automatically waived for public service employees!

So, the Good News is that there are still programs available for that First Time Homebuyer who is feeling squeezed right now and not out there looking because of down payment issues!