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Should I Choose a Fixed or ARM Home Loan?

Before you begin looking at houses for sale near you, you’ll need to get pre-approved for a mortgage from a home loan lender. One of the most important things to consider is the type of home loan to fit your needs. There are two basic types of home loan: a fixed-rate mortgage and an adjustable-rate mortgage, also called an ARM. Depending on your financial situation and repayment preferences, an ARM or fixed-rate might be the best bet for you. A mortgage lender like Homestead Financial can help you determine what you qualify for.

What is a Fixed-Rate Mortgage?

Home buyers who get a fixed-rate mortgage receive a home loan in which the interest rate remains the same through the full term of the loan, most commonly for 30 years, but terms can vary. Monthly payments with a fixed-rate mortgage never change — unless taxes or insurance rates in escrow increase or decrease on your home. The principal and interest rates stay the same.

When you take out a fixed-rate mortgage on a home, you’ll get an amortization schedule from your lender. This schedule outlines exactly the number of payments you’ll need to make, and at what amount, as well as the balance remaining on your loan after each payment. You’ll be able to look to the amortization schedule to determine how much you’ll spend in interest throughout the life of your loan.

What is an ARM Loan?
Home-buyers with an adjustable-rate mortgage can expect the interest rate to fluctuate over the years. The mortgage ties the interest rate to a margin that includes a stated index, such as the Libor or Treasury bill yield, and a spread. The index can change, but the spread always remains the same. An ARM loan adjusts based on the mortgage terms, so if interest rates increase, so, too, will your monthly payment.

What if Interest Rates Change?
With a fixed-rate mortgage, if interest rates drop, you must refinance your home to get the benefit of the lower rate. To refinance, you will need to contact your mortgage lender to discuss options. You may need to pay for a new loan origination fee, among other things, to complete a refinance.

With an ARM loan, your interest rate changes every year. You do not have control over your interest rate with this type of loan. However, because you could end up with a very low interest rate for certain years, your monthly payment could be reduced throughout your loan term. Conversely, if interest rates drastically increase, your monthly payments will increase. You do not need to refinance for your interest rate to change.

What are the Types of ARM Loans?
Depending on the ARM loan you choose, your interest rate will remain fixed for a period of years before changing every year on the anniversary of the mortgage, for the remainder of your loan term. In this way, an ARM is a hybrid loan, because homebuyers do get a fixed interest rate for a certain number of years.

A 3/1 ARM, also known as a 3-year ARM, is a loan with a fixed interest rate for the first three years, but the rate changes once per year for the remaining term of the mortgage.

Similarly, a homeowner with a 5/1 ARM loan will enjoy five years of a fixed-rate mortgage, with the interest rate changing once per year. A 7/1 ARM loan and a 10/1 ARM loan work similarly, in that the first number in their name is the length of time in years with a fixed interest rate.

Case Study
To better understand how a fixed-rate mortgage and an ARM loan differ, let’s take a look at two loans: a 30-year fixed-rate mortgage, and a 5/1 ARM.

For simplicity’s sake, let’s say you’re purchasing a home for $100,000. You have a $20,000 down payment, and a 30-year fixed-rate mortgage with a 5 percent interest rate. Your homeowner’s insurance is $1,000 per year, and your annual property tax is 1 percent.

With this fixed-rate loan, you’ll have an $80,000 loan balance and will make monthly mortgage payments of $649 per month for 30 years. In the first five years, you’ll have paid $19,230 in interest and $6,537 toward the principal of the loan. In year 30, you’ll have paid your entire principal – $80,000 – and a total of $74,468 in interest.

Comparatively, with a 5/1 ARM loan with the same loan balance, property tax, starting interest rate, and homeowners insurance, you’ll start out with a $596 monthly payment, a monthly savings of $53 per month. In the first five years, you’ll have paid the same amount in principal and interest as you would with a 30-year fixed. However, by year 30, you are projected to have paid $142,198 in interest. Of course, this can vary depending on what the interest rates are each year of your loan term.

When Should I Choose an ARM Over a Fixed-Rate Mortgage?

Based on the case studies, it seems like an ARM loan doesn’t save you money in the long-term because of interest rates. However, there are compelling reasons to choose an ARM.

  • You may qualify for a lower interest rate on an ARM loan than a fixed-rate loan, depending on the current financial climate. Some lenders charge more interest on a fixed-rate loan than an ARM loan.
  • The savings in the mortgage payments in the first few years of the loan gives homebuyers extra money to invest elsewhere.
  • ARM loans can be a cheaper way for borrowers to finance a home, especially if they don’t plan to live there for very long.

Choose Homestead Financial for Your Mortgage

Homestead Financial serves homebuyers in the Kansas City, MO and St. Louis, MO metropolitan areas, including Godfrey, IL and Glen Carbon, IL, and Overland Park, KS. We’re the “gold standard” in mortgages for every property type, and are ready to take care of every step of the home loan process for you.

To learn more, please reach out!

I Didn’t get the Cash Out I Wanted on My Mortgage RefinanceSo those borrowers who would like to refinance and pull “Cash Out” of your home but were turned down or told the home didn’t appraise for enough, there are some options which you can do fairly quickly to change your outcome.

1. Increase your credit score.

Often, lenders have a limitation on how much cash they can lend, many times, it may be due to credit score. For example, you may be able to borrower up 70% of your home’s value at a 640 score on a conventional loan, but if you have above a 700+ score, you may be able to go up to 85%

2. Apply for a renovation loan.

Many borrowers just want the cash for home improvement, unaware that a renovation loan is what they need. In some cases a renovation loan appraisal can yield a much higher value because it can value the home, “subject to” the improvements being done which is rare. Due to the their technical nature, a renovation loan isn’t common. However, they can be well worth it, with the right circumstances.

3. Apply for a HELOC

A HELOC is a Home Equity Line Of Credit. This is technically a 2nd mortgage but has a lot more flexibility to pull cash out and repay. They also can go to a higher Loan-To-Value than most other products.

So, what do you do if this is you? Like anything when you are dealing with professional services…get a second opinion and ask them about any of the above options.

Interest rates are still at historic lows and refinancing could save homeowners a bundle. Trouble is many homeowners aren’t refinancing because the process can be a bit tricky. Here are some refinancing mistakes to avoid.

Before starting the refinancing process it’s a good idea to know your credit score. Job loss and a tough economy have taken a beating on many homeowner’s credit scores. Seeking a way out of debt, many homeowners attempt to refinance only to receive refinancing offers that were actually worse than their existing mortgage and in extreme cases were rejected by lenders all together. To improve your credit score in the months before you refinance, don’t make big purchases like a car or a boat, pay down your credit cards and check your credit report for errors, like debts you’ve already paid off. Continue reading “Typical Refinancing Mistakes You Should Avoid”

The question of whether the time is right to refinance a mortgage or not is one that homeowners often wrestle with. When interest rates are low, it’s difficult to know whether they’ll hold at that level and for how long. While many consider refinancing to be the best way to save money on a monthly mortgage payment, refinancing at the wrong time may actually end up costing you money. Knowing the right time to make a move is challenging.

Refinancing Defined

Refinancing a mortgage simply means that you take out a new home loan to pay off the old one. There are several reasons why you might want to do this. Lowering the interest rate is one of the most common. Refinancing to a lower interest rate reduces the monthly payment and eases the burden on your household budget. Shortening the term of the loan is another reason many homeowners refinance. The sooner you can pay your house off, the better because you’ll pay less in interest over the life of the loan. A third reason for refinancing is to switch the type of mortgage you have from an adjustable-rate mortgage to one with a fixed rate or vice versa. And finally, many homeowners decide to refinance because they need extra cash for some other use, such as debt consolidation or home repairs.

Assessing Your Decision

There are several things to consider when trying to assess whether it’s a good time to refinance or not. There are costs associated with refinancing. These costs – for items like an appraisal, title search, and application fees – can vary from 3% to 6% of the loan’s principal. Your decision on whether it’s a good time to refinance or not needs to take these costs into account. Also, you need to have a good feel for how long you plan to live in the house. If you’ll only be there another year or two, it may not be worth it, because you may not have time to recoup your refinancing costs.

A Closer Look at Refinancing

To determine whether now is a good time to refinance your home loan, we need to take a closer look at the reasons people refinance. There may be something here that will help guide you in your decision-making process.

Refinancing to Lower the Interest Rate

If interest rates are on the downswing, you might want to look into refinancing. Obtaining a home loan with a lower interest rate can help you save money by lowering your monthly payment. But how do you know if interest rates have dropped enough to make this worth your time? The rule of thumb generally states that if you can lower your interest rate by 2% or more, refinancing is beneficial. However, some financial experts say that a drop of only 1% is worth considering. This is why it’s important to know your current interest rate. Have a mortgage professional run the numbers for you to determine the impact of refinancing. 

There could be another benefit to lowering your interest rate. Many homeowners with conventional mortgages pay private mortgage insurance (PMI) on their loan if they didn’t make a substantial down payment. When you lower your interest rate, you build equity in your home faster because more of your monthly payment goes to the principal rather than interest. The faster you build equity, the quicker you’ll get to 20% equity, the magic number that allows you to drop the PMI, thus saving even more.

Refinancing to Shorten the Term

Shortening the term on a home loan, even by a few years, can save a considerable sum over the life of the loan. However, if you don’t lower your interest rate at the same time, your monthly payment could actually go up. If you can afford that, it may still be a wise thing to do because you’ll save money over time. The ideal scenario is to lower both the interest rate and the term when you refinance. You may be able to shave years off the loan while keeping your monthly payment very nearly what it is currently.

Refinancing from an Adjustable Rate to a Fixed Rate – or Vice Versa

Often, adjustable-rate mortgages start with lower interest rates than fixed-rate mortgages. But over time, the interest rate adjustments may climb to the point that they overtake the rate offered on a fixed-rate mortgage. When this happens, it’s a good time to consider refinancing. Refinancing to a fixed-rate mortgage eliminates the uncertainty that comes with fluctuating interest rates. Conversely, if interest rates fall below the rate on your fixed-rate mortgage, you may want to consider refinancing to an adjustable-rate mortgage and ride the rates downward. This is an especially good strategy if you plan on living in your home for only a few years.

Refinancing for Extra Cash

Refinancing can be a viable option if you need extra cash for major expenses like remodeling or home repair projects, paying off or consolidating consumer debt such as credit cards and car loans, or paying college expenses. Refinancing your home loan is an excellent way to tap into the equity you’ve built up in your home and put it to good use. But make sure you’re smart about the decisions you make. A mortgage loan officer can help you weigh the pros and cons of refinancing to determine whether it’s the best option for your situation.

Homestead Financial Mortgage is Here to Answer Questions

Knowing the right time to refinance is challenging. Homestead Financial Mortgage is here to help you weigh the options. Our goal is to help homeowners understand the refinancing process and figure out whether the time is right to refinance. We work with customers in St. Louis, MO, Kansas City, MO, Overland Park, KS, Godfrey, IL, and Glen Carbon, IL, as well as the surrounding metro areas. Give us a call or stop by one of our branches to talk with our mortgage experts. We’ll help you decide whether now is the right time for you to refinance.

You hear it all over the radio and see it all over the internet. “Refinance with No Cost”, which sounds a little…errr, maybe a lot too good to be true. Today we will talk about what is a no cost mortgage refinance, how does it work, and if it is right for you. Continue reading “What Does a No Cost Mortgage Refinance Mean?”

From radio ads to TV commercials, newscasters and co-workers, lots of people are talking about refinancing. Trouble is not everyone meets the basic requirements for a refinance, nor do they know how to prepare for one. But the good news is preparing for refinance isn’t difficult. More people could meet those basic requirements with a little research and preparation. It’s no different than earning a better score on the SAT or ACT exams for entrance into a better college. The only way to succeed on the test is to know some of the questions that will be asked. The same can be said when it comes to working with mortgage lenders. Knowing what to expect from lenders and familiarizing yourself with their requirements will better prepare you for a refinance and could result in a faster closing. Here are some things to keep in mind. Continue reading “Preparing for Your Refinance”

In trying to makes sense of advertising of mortgage company ads, one will hear many things. Today we will discuss what it actually means when someone says they can refinance your home without an appraisal.

Is a No Appraisal Refinance Possible?

Yes, it absolutely is. Currently, approximately 10% of our mortgage refinance transactions are done without an appraisal. In addition to saving the $350-$500 cost of the appraisal, the transaction can move faster due to many appraisers being backlogged, Currently, the refinance transactions that are done without an appraisal comes down to either conventional HARP loan or an FHA streamlines. Continue reading “What Does it Mean When a Mortgage Company Advertises “No Appraisal Required””

Over the past 5 years, mortgage interest rates have gone in one direction, down, down, and down. Each time we appear to have hit a floor, the bottom drops out of it to another floor.

Over this time frame, some borrowers have taken an “I’ll get around to it” attitude. However, I thought it wise to break down what the actual savings on refinancing in today’s market will actually mean.

Example 1 – Paying off your Mortgage Faster

Borrower John in Chesterfield, MO has a $175,000 mortgage at 5.5%with 25 years left at a payment of $993.63 and has been putting off refinancing due to the trouble of rounding up all of the income documentation.
What is available is $175,000 mortgage at 15 years at 2.75% which carries a payment of $1,187.59.
Total payback on John’s loan (993.63x25x12) is $298,089 but by applying for a lower rate on a 15 year leaves him with a total payback of $213,766, saving John a whopping $84,322.

Ex. 2 Improving Cash Flow for Investments

Borrower Lisa from Overland Park, Kansas has a $200,000 Mortgage at 5.5% with 25 years left which carries payment of $1,135.58

What Lisa wants to do with her situation is refinance to a 30 at 3.500% and invest the excess cash flow. The payment on her $200,000 mortgage is $898.08, saving her $237.49. If Lisa invests the $237 savings every month over 30 years, assuming a 5% return in a tax deferred account, she will have $197,000 left over when she pays off her mortgage in 30 years.

So to conclude, if it’s to pay off your mortgage quicker, or to take advantage of investment opportunities, there are great financial opportunities in today’s refinance market.

The main reason homeowners today refinance is to get a lower interest rate. But what many homeowners don’t realize is that refinancing helps them to rebuild the equity in their homes more quickly. For those of us who bought homes prior to 2006, most of us have less home equity than we used to because our homes are worth considerably less than they were a few years ago. Therefore, we have less home equity. Fortunately, refinancing can help homeowners to rebuild the equity in their home.
Continue reading “Rebuilding Your Home’s Equity with Refinancing”

If you’re one of the millions of homeowners with an underwater mortgage who would still like to refinance but can’t qualify for HARP (the federal Home Affordable Refinance Program), there are still some options. Though limited to borrowers in specific situations, you can still refinance a negative-equity mortgage even if you don’t qualify for HARP as long as your mortgage loan is backed by the FHA or VA.

Provided you’ve kept up with your mortgage payments, both FHA and VA mortgage loans offer what is known as “streamlined” refinancing that enables you to be approved for a refinance almost automatically. In fact, credit scores, appraisals, proof of employment aren’t necessary no matter how much the value of your home has fallen below what you owe on the loan. But it’s important to remember there are criteria that must be met.
Continue reading “Refinancing Without HARP”

Yep, that’s right. Ben Bernanke, the Federal Reserve Chairman, refinanced his home. Your eyes do not deceive you. So, what about you? Don’t you think it’s time for you to refinance your home too? According to Bernanke’s financial disclosure form, he took out a 30-year mortgage with a fixed rate of 4.25% to replace one he took out in 2011 at 5.375%. Granted Bernanke has better credit than most Americans and has access to information the average consumer doesn’t, but besides that why are so many Americans waiting to refinance their homes when rates are at historic lows?

Because no two situations are alike. Refinancing isn’t an option for some homeowners because they have no equity in their homes, their homes aren’t worth as much as the balance on their mortgages or they have bad credit while homeowners who have a FICO score of 740 or above, at least 10% equity in their home and few debts are better equipped to refinance.
Continue reading “Ben Bernanke Refinanced his Home, Maybe You Should Too”

Unless you’re living under a rock, you know it’s a presidential election year, with Election Day less than two months away. And while many are already sick and tired of the mud-slinging and negative ad campaigns, there’s one thing that homeowners should be paying close attention to – a refinancing expansion bill the White House is urging the U.S. Senate to vote on as early as this week.
Continue reading “A Refinancing Expansion”

For the past decade many homeowners have taken advantage of cash-out refinancing, taking out a new mortgage with a loan amount that’s bigger than the balance on the old mortgage with the homeowner receiving a check for the difference at closing. However, today mortgage lenders are seeing much more of what’s known as “cash-in” refinancing where the borrower refinances their home mortgage for a smaller amount than their old loan, with the homeowner taking a check to the closing.
Continue reading “Why Cash-in Refinances are in Vogue”

Most people who consider refinancing their home mortgages do it to get a lower mortgage rate. According to the Bureau of Economic Analysis the average interest on an outstanding mortgage at the beginning of 2010 was 5.979%. With mortgage rates at historic lows and well below 5.979%, refinancing is a no-brainer. But what many home owners don’t know are the other reasons why they should consider refinancing their home mortgages.
Continue reading “Why You Should Refinance”

Benefits of a Debt Consolidation Loan

If you have a great deal of outstanding debt, there are a number of benefits to getting a debt consolidation loan. Consumers who qualify for debt consolidation loans have the opportunity to begin paying down their debt much sooner than they would without one. Here are some of the benefits of using a debt consolidation loan.

One of the first benefits people experience from using a debt consolidation loan is stress reduction. The most common factor known to create stress is debt. By consolidating your debt into one account you significantly reduce stress in your life because you’ve taken the steps necessary to get your debt under control. There’s a peace of mind that comes with knowing you’re back in control of your spending habits having worked with professionals to create a workable plan for paying down your debt.

Another benefit to using a debt consolidation loan is reducing several payments due every month to one payment. A debt consolidation loan is a loan that’s used to pay off all of your other accounts. Many consumers have multiple credit cards either maxed out or nearly maxed out that charge high interest rates. With a debt consolidation loan you’ll have one payment instead of worrying about multiple payments with varying deadlines. Having only one payment allows you to focus in on paying your debt down sooner. Rather than worrying about which account to pay off first, you only have to put your extra money into one debt account to begin paying off your debt. In many cases your monthly payment is much smaller because a debt consolidation loan gives you a longer time period to pay off the loan.

Collection agencies

With a debt consolidation loan those annoying calls from collection agencies stop too. Calls from pestering collection agencies only add to the stress of trying to pay down your debt. When you have a lot of debt it’s easy to get behind on payments with creditors ultimately turning your account over to collection agencies who often call you several times a week or daily. By taking out a debt consolidation loan your outstanding balances with collection agencies are paid off so collection calls stop.

Save Money

Consumers who qualify for a debt consolidation loan are also able to save a significant amount of money each year on interest. Most folks who are in over their heads with debt often have several credit cards that are maxed out. And credit card companies take full advantage of such a high balance by charging astronomical fees and interest rates compared to other interest rates in the market. With a debt consolidation loan consumers are able to secure a lower interest rate than the one charged by the credit card company, saving them money on their monthly payment and long term over the life of their loan.

Improve Your Credit Score

A debt consolidation loan also helps improve your credit score. When your debt is out of control and you’re consistently late making payments on your accounts you significantly damage your credit score. By consolidating your debt into one payment and staying on top of this payment you are better equipped to rebuild your credit score.
If you’re ready to take control of your debt, a debt consolidation loan may be for you. Working with a Homestead Financial Mortgage loan officer can help you get the debt consolidation loan process started.

It’s a temptation many of us have when we’re looking to borrow money. Should you cancel your credit card account as a way to increase your credit score? Would closing a credit card account impact your FICO score? While situations vary, the answers to these questions may surprise you. With banks and credit card companies charging more fees than ever before consumers have to be on top of their game. Reading the mail and the fine print on bank and credit card statements could be the difference between paying more in interest and securing an attractive mortgage rate when it comes to refinancing your home.
Continue reading “Should You Cancel Credit Card Accounts When Refinancing?”

Homeowners can realize significant savings each month when they refinance their mortgage loan to one with a lower interest rate. But how much a homeowner can save depends on the size of the mortgage loan and the amount of interest you can shave off. Before you refinance your home mortgage it’s important to remember refinancing isn’t always simple and it isn’t free. That’s why doing some research before you begin the process so you don’t wind up spending a lot of money to save a little.
Continue reading “Best Ways to Prepare for Refinancing Your Home Mortgage”

With so many expenses these days it’s nice to know homeowners have choices when it comes to borrowing against the equity in their homes. While some will refinance and get cash out with cash-out refinancing, others will take out a home equity loan or line of credit (HELOC). But if you still haven’t refinanced because you don’t know which option is best for you, the following information can help when it comes to distinguishing the differences between these three financing options.
Continue reading “Determining if Cash-out Refinancing is Right for You”

To learn more, please reach out!

You heard it all over the news through the course of the mortgage meltdown, “Home Values Down 10%…20%”. “Homeowners owe more that their homes are now worth.”

While cities in the Midwest like St. Louis, Kansas City and Indianapolis didn’t get hit as hard as other larger cities, everyone knew someone who lost a home or is struggling to manage bills, in any city.

Enter then, a market that has once in a generation interest rates that should be helping everyone with a mortgage recover financially, but for those who are upside down on their mortgage, they have been left on the outside, looking in leaving them unable to refinance on the basis that they owe more than their home is worth; in other words, they are, “upside down” on their mortgage. Continue reading “Can I Refinance My Home if I Owe More than its Worth?”

With rates that come around once in a generation, everyone is in a rush to try to refinance their mortgage. However, with government regulations burying home owners and mortgage originators with mountains of disclosures, the process can seem daunting. However, here are some tips for you to be ready to make your next refinance as painless as possible.

1.       Have All of Your Documentation Ready….Yes All That Documentation.

File your taxes, get your w2’s, checkstubs and have bank statements ready.  Also in some cases, bankruptcy papers, divorce decrees. Continue reading “5 Tips for a Faster Mortgage Refi”