Refinancing Tips for a Smooth Closing

Refinancing your mortgage is a complex procedure with many moving parts, and it's important to stay informed and get the details correct. You, the consumer, have the law on your side; but you have to know your rights, whether you're closing a second mortgage, home equity loan, or refinance mortgage.

Meet RESPA

The Real Estate Settlement Procedures Act of 1974 (RESPA) gave homebuyers a number of powerful new rights to make sure that you have all the information you need, complete and correct, before making such a huge financial decision. You may be familiar with the HUD form, a document that shows all the fees and charges involved in your home purchase. RESPA gave you the right to ask for your HUD statement the day before closing the loan.

That's a very good thing. Get your details a day early and go over the small print with a fine-tooth comb. If you have an accountant, attorney, or real estate agent available, ask for support on the hairy issues. Compare the HUD document with the Good Faith Estimate you received when you originally applied for the mortgage refinance. And make sure to ask your closing agent about any significant differences between the two statements.

The Main Event

It's a good idea to schedule your closing early in the day, to provide some cushion in case there are any problems. Remember to bring any documents that your lender has requested, such as paid property tax receipts, copies of your existing mortgage, or a money order for the closing costs. Keep your papers organized. You'll want to minimize the time spent looking for the right document at the closing table, and you won't forget anything if your materials have been verified against a checklist of required papers.

By crossing your 'T's and dotting your 'I's in advance, you'll be sure that your new loan is all that you expected, and there won't be any last-minute headaches. The most complicated of refinancing programs can, with the right preparation, be as simple as ABC.

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Is it Time to Refinance?

What happens when you set a $20 bill on your front lawn on a windy day? It blows away. What happens when you don't actively manage your home financing? It can be akin to putting money on your front lawn…if you don't consider a mortgage refinance, advantageous mortgage rates might blow away.

Consider the Trends

Mortgage interest rates are continually trending up or down. Excluding all other factors, a fixed-rate mortgage is preferable when rates are on the upswing, and an adjustable-rate mortgage (ARM) is the vehicle of choice when rates are expected to drop. Since fixed rates are relatively low right now, you might achieve significant cost savings over time by refinancing your ARM to a fixed loan.

Consider Your Future

It's also important to consider how long you're planning to live in your home. If you'd like to sell within the next few years, refinancing an ARM to a fixed-rate mortgage may not be the right move, even if the interest rate is lower. The savings you'll achieve with the lower rate may not be enough to outweigh the closing costs you'll incur. On the flip side, if you have a fixed-rate mortgage and you expect to sell the home in a few years, refinancing to an ARM might be a good idea. You can take advantage of an ARM's low initial payments now, and pay off the loan when you sell, before your higher rate kicks in.

Consider Your Needs

The state of your finances can always be an overriding factor. If you need to raise cash, consolidate debt, or lower your monthly payment, a refinance mortgage may be the most efficient course of action. Remember, too, that you might be able to use a second mortgage or home equity loan to achieve the same objective at a lower cost.

Is it time to do a mortgage refinance? Regardless of the answer, you've done the right thing by considering the question, and you won't get caught chasing your hard-earned cash into rapidly blowing winds.

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Dropping Mortgage Rates Spur Refinance Fever

Mortgage interest rates have been rising steadily for more than two years, and are expected to continue climbing higher in 2007. Because of that prediction, many homeowners are eager to refinance out of high-interest adjustable-rate mortgages, interest-only loans, and other mortgages with increasingly expensive monthly payments.

Now may be the best time to do a mortgage refinance out of home equity loans and mortgages that have high rates of interest, because those rates recently hit their lowest mark in more than a year. Mortgage rates have fallen for 10 of the past 13 weeks. Concerned consumers weren't waiting for them to resume their upward spike. Instead, they're flocking to lenders to refinance. Financial newspapers report that the volume of mortgage applications across the nation has risen sharply in the past few weeks. That's because homeowners are taking advantage of temporarily low rates to refinance out of less predictable and more expensive loans.

Seize the day!

Rates are currently hovering around 6.11 percent, the lowest since January 2006, according to Freddie Mac. This contrasts to this year's average rate of 6.44 percent. Just six months ago, the average rate on a 30-year fixed loan was 6.67 percent. And while it's true that nobody has an economic crystal ball, some experts have warned that we may see the return of double-digit rates before too long. If that happens, today's sub-7 percent mortgage rates will look like bargain basement discounts.

Whether you want to refinance a second mortgage, take out a new mortgage to purchase a home, or to borrow some quick cash for holiday expenses, refinance mortgage fever has people going to meet with their lenders. If you act in a timely manner, you might be able to give yourself a valuable holiday gift in the form of a refinance or home equity loan with substantial interest rate savings that will continue to deliver over the coming months and years.

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Refinancing: A Potentially Healthy Addiction

For people looking to come up with needed money, a cash-out refinance is always tempting. So tempting, in fact, that many people do it repeatedly. One couple, recently featured in a major investment magazine, borrowed their way to huge home equity in tiny increments, with no start-up funds. They borrowed a small amount using a home equity loan, used it to upgrade the bathroom, and watched their home value increase accordingly. They refinanced again, based on their higher equity, and recycled that money to remodel the kitchen. After two years of sweat equity projects-and six refinanced mortgages-their property had doubled in value. They got rich through refinancing home equity wisely.

Whitney whittles away at her fortune

People who borrow more than they can afford, or take money out of their homes without paying it back, can run into trouble. Pop singer Whitney Houston is one very sad example. According to news reports, she bought her primary residence for $2.2 million, with a $1.4 million mortgage. She then used her home equity to buy other homes, eventually borrowing an additional $10 million. But as personal problems took their toll, she used loans to cash-out all her equity and pay extraordinary living expenses and legal fees. This process left her owing millions of dollars in mortgages for real estate that held no measurable equity. Borrowing against home equity, but spending the money to acquire more debt, is a classic and common mistake.

One way to use a second mortgage or home equity loan to get rid of debt is to borrow at an attractive fixed rate and then use the cash to pay off, or consolidate, other high interest loans. For example, if you're paying 18 percent interest on a credit card, and can refinance to an 8 percent home equity loan, you automatically save 10 percent. That rate of return is better than most experts generate in the stock market in a given year, and you can earn it with one phone call to your lender. Plus, the interest and points are tax deductible, saving you even more, and making refinancing a financially healthy habit.

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Tips to Reduce Monthly Mortgage Payment

Griping about the government's inability to balance the budget is a national pastime. The apple doesn't fall far from the tree: there are plenty of people with the same problems, albeit on a much smaller budget. If you find that you've spent your way into heavy debt, consider using the following tried and true methods for reducing your monthly mortgage payments.

Rate reduction

The easiest way to lower your payment is to refinance your current mortgage to a lower rate. While rates are not near the rock-bottom levels of the last several years, they're still low when compared to the historical rate climate. If you didn't cash in on these low rates, you still may be pleasantly surprised at what a mortgage refinance could do for you.

The thrill of a single bill

How many credit cards do you have? Too many? If you have multiple pieces of plastic generating multiple monthly bills, consider a debt consolidation mortgage loan. Whether you consolidate your debts into a new first or second mortgage loan, you'll most likely lower your overall monthly payments. Debt consolidation works because the rates for credit cards are generally much higher than those for mortgage loans. Home loans are also tax-deductible, another reason to purge the plastic.

Coming to terms with a long-term loan

Another way to lower your monthly payment is to increase the repayment term of your loan. Many people switch from 15-year to 30-year mortgages under this approach, although there are 40- and 50-year mortgages, as well. While this definitely frees up short-term money, you'll eventually wind paying more money in interest payments over the long-term.

If the monthly bills have you singing the budgetary blues, take a good look at your mortgage payment options. Start checking out rates and crunching numbers on our mortgage loan calculator. The results might show you just how easy it can be to move out of the red and into the black-and into the green of cold cash.

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Fix and Flip" Refinancing

"Fix and flip" has nothing to do with pancakes hot off the griddle, but everything to do with real estate investors making big bucks. It's the nickname for the practice of buying a home, renovating it, and then immediately selling it at a profit.

Recently, however, the slump in the real estate market has left some investors unable to "flip" their properties. There are ways, however, to ensure that "fix and flip" can work-even in a slow market.

It's all in the estimating

The basic "fix and flip" scenario involves buying a house, fixing it up, and then immediately selling it at a price higher than your initial cost, plus the expense of renovation. Your profit depends on how well you can project both your costs and the time it will take to sell the house. To be successful, be conservative in your renovation estimates-these projects generally go over budget and schedule. Next, make sure that you properly assess market conditions. "Fix and flip" can work in a down market if you don't put yourself on an overly restrictive selling time line.

Look to the leasing option

In this scenario, you'll follow the typical "fix and flip" procedures. But this time, you'll sell the property on a lease basis with an option to buy. Naturally, you must make sure that the rent payment covers your monthly mortgage. When it's time to sell, you profit by pocketing any fees you'd normally have to pay to a real estate broker.

There are plenty of lenders who'll provide you with "fix and flip" financing. These programs can include loans for the purchase price and renovations. But for the technique to work, the onus is on you. If you make sure that your time and cost estimates are on the money, your "fix and flip" deals can be as sweet as syrup on pancakes.

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Refinancing: Debts and Taxes

In the 19th century, Sherlock Holmes relied on impressive observational skills and shrewd reasoning to solve the most complex of mysteries. Holmes' brilliance was never applied to mortgage-related tax deductions, but surely he could have unraveled that case, as well. The famous detective always moved deliberately, approaching each new mystery with a closer look at the facts.

Whether you have an original mortgage or refinanced mortgage, there are three main tax deductions associated with home ownership: mortgage interest, real estate taxes, and points paid. The tax facts relevant to refinanced mortgages are discussed below.

Mortgage Interest

Generally speaking, the interest on a refinanced mortgage is tax deductible. Exceptions arise for homeowners who refinance to cash out equity, and then use the equity-related funds for something other than improving their home. In this situation, only the interest on a maximum of $100,000 of the equity debt is tax-deductible. Here's an example:

You refinance your original $125,000 mortgage for $300,000. The extra $175,000 goes towards vacations, new cars, and other discretionary spending. You can deduct the interest related to the $125,000 refinanced from the first mortgage, and $100,000 of the new equity debt. The interest on the remaining $75,000 would not be tax deductible.

Real Estate Taxes

Real estate taxes are deductible in the year they are paid to the property tax collector. You cannot immediately deduct monies put into escrow for future property taxes; that expense would be deducted later on, in the same year those funds are applied to your property tax liability.

Points

Points paid on a refinance mortgage are, in most cases, deducted proportionately over the life of the loan. That said, points might be fully deductible in the first year if the refinance is used to fund home improvements. You must meet specific requirements to qualify for this deduction, so please check with your tax advisor.

The case isn't closed just yet. Just as Sherlock Holmes outlines his conclusions with trusty Dr. Watson, you should discuss the details of your deductions with a qualified tax advisor. Once you do, you'll see that they, too, are elementary.

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Cash in on the Refinancing Boom

At the beginning of January 2007, the number of mortgage refinance applications spiked, thanks to a sudden drop in mortgage interest rates. But interestingly, when interest rates rise, many homeowners also refinance while there's still time to lock in low rates. Whichever direction mortgage rates move, consumer activity seems to accelerate. The reason: people want to capture available discounts while they last.

These questions will help you determine if a refinance is right for you:

How long will you keep the loan?

If you plan to hold on to the loan for several years, shop for a refinance rate that saves you money both now and into the future. Fixed rate loans are especially popular now, because their rates are still near historic lows and will stay predictable, even during times of mortgage market uncertainty.

Do you need to raise cash?

A cash-out refinance can put money in your pocket at rates that are lower than typical consumer loans. While the interest paid on consumer loans is not tax deductible, interest -as well as points paid at closing, in most cases-is deductible, and can provide further financial justification for refinancing.

Do you have untapped equity?

If you have equity in your home that could be used for a higher return elsewhere, use a mortgage refinance to take it out and put it where it really counts. For example, some financial advisors suggest using home equity loans to tap money that can then be invested in high-yield stocks. This can be a clever tactic for baby boomers needing aggressive wealth-building strategies prior to a retirement that looms just around the corner.

Is your current loan too expensive?

A refinance to a conventional loan is the ticket if you have an interest-only loan and want to avoid negative amortization. If you have an ARM that has adjusted-or is about to-and you want to avoid its higher monthly payments, you can refinance into a more comfortable fixed-rate product.

Instead of riding the stressful minute-to-minute mortgage rate roller coaster, crunch the numbers calmly and see if-and how-mortgage refinancing might be able to save you money in the New Year and beyond.

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Mortgage Refinancing for the Self-Employed

America is a country that applauds its entrepreneurs, although you won't hear much cheering coming from mortgage bankers. That's because the self-employed-who often have complicated tax forms and show less income than their corporate counterparts-may have trouble qualifying for a conventional loan or mortgage refinance. But even a crabby banker would have to agree that there are significant reasons why the self-employed should consider becoming homeowners or tap into their home equity.

Fixed rates, shorter terms

Many people who are self-employed choose a fixed-rate mortgage instead of an adjustable-rate loan. It allows for easier planning, and there's no scrambling if your mortgage rate adjusts higher. You can also choose a shorter term, which allows you to pay off the mortgage earlier. This can result in more cash to invest in your business.

The documentation trap

It's often difficult for the self-employed to qualify for a mortgage loan due to complicated document needs and tax returns. In the past, a non-salaried worker could opt for a "lo-doc" or "no-doc" loan. But recently, the IRS has tightened guidelines for these types of mortgages, so they're harder to get. Contact your lender and find out what documents they'll need before applying for a home loan. These usually include two years of tax returns, a current profit and loss statement, and bank and investment account statements. If you're refinancing, they'll also need your pay-off balance, and information about your current mortgagor.

Deductible delight

One of the main gripes of the self-employed is that they must pay twice as much Social Security and Medicare taxes as an employee of a company. That's why the tax deductions that mortgages provide should be highly valued. The interest portion of your mortgage payment is tax-deductible, as are your property taxes. These two write-offs can help ease any heavy tax burden.

Embarking on a mortgage refinance is never an easy task, and it's particularly onerous for the self-employed. But as is usually the case for the ambitious entrepreneur, many of these obstacles are worth hurdling.

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Refinancing Your Mortgage? Know the lingo

If the saying "familiarity breeds success" holds true, it would be in your best interest, if you're looking for a mortgage refinance, to understand the terminology. There's no need to pour over dry-as-dust mortgage textbooks. Learn a few basic terms, and you'll be headed in the right direction.

Adjustable-rate mortgage:

A loan with a periodically changing interest rate. The mortgage rate is pegged to a specific economic indicator such as treasury bills or the prime interest rate, for example. Terms can vary greatly, and often offer very low introductory rates during the early years.

APR:

The Annual Percentage Rate (APR) is intended to include all of a lender's closing costs, giving a true yearly interest rate. However, many lenders calculate their APRs in different ways.

Fixed-rate mortgage:

A loan in which the rate is set at the time of closing and is constant throughout the mortgage term.

Good Faith Estimate:

Lenders are required by law to produce a Good Faith Estimate, which details all the costs you'll be charged to close your loan.

Loan-to-value (LTV) ratio:

The ratio of your loan amount to the appraised value of your home. (Loan amount/appraised value = Loan-to-value ratio.) Generally expressed as a percentage, a higher LTV can trigger the need for private mortgage insurance or a higher rate.

Points:

A point on a mortgage is 1 percent of the total loan value. For example, a point on a $100,000 mortgage is $1,000 (.01 X $100,000).

Term:

The length of time that you have to repay your mortgage loan. Generally expressed in years, the typical term for most mortgages is 15 to 30 years.

Third party fees:

Charged by vendors, such as appraisers and title companies, these are fees that your lender uses to assess the quality of your loan.

There are plenty of other commonly used mortgage terms, but these are the basics. Study up if you have time. Like any educational initiative, it's bound to pay off in the end.

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