The Best Reasons to Refinance

This is part one of a three part series on refinancing. Parts two and three will be linked at the end of this article when they are published.

Interest rates have fallen again and many people are considering refinancing their homes. Before refinancing it’s important that you understand all that refinancing involves, especially since the process is similar to what you went through when you purchased your home. That’s because when you refinance you pay off your existing mortgage and start a new one. Here are some of the most common and best reasons for refinancing.

One of the best reasons to refinance your mortgage is an improved credit score. A better credit score means you may be able to get a lower rate. Your mortgage interest rate directly impacts your monthly payment. With a lower interest rate you can build equity in your home more quickly. For example, let’s say you’re interested in refinancing your existing mortgage which is a 30-year fixed-rate loan of $200,000 at 6.0% with a monthly payment of $1,199. Refinancing with a 30-year fixed rate loan of $200,000 at 5.5% would make your monthly payment $1,136, a savings of $756 over a year’s time and $7,560 over 10 years.
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New FHA Streamline Rules Help Make Refinancing Easier

Effective June 11th 2012, new rules regarding FHA Streamlines will help some borrower refinance into lower rates.

While everyone is well aware of mortgage rates being at all time lows, access to those low mortgage rates remains tight, with credit score minimums,  increasing mortgage insurance premiums and falling home property values.

In the Midwest, St. Louis, Kansas City, and Indianapolis, home values have not been hit as hard, but still, many customers who make their mortgage payments on time have missed out on the benefits of these low rates because of inability to qualify.

Specifically, for those who have a HUD backed mortgage, increasing mortgage insurance premiums have become the largest obstacle to helping borrowers take advantage of lower rates, having gone through numerous premium increases as rates have fallen in recent years.

However, effective June 11th, 2012 some who have paid their FHA mortgage on time will have the opportunity to cheaply save money by lowering their rate, and mortgage insurance premiums(both upfront and monthly)

In order for a borrower to qualify, the following will be needed:

  1. Must have an existing FHA mortgage endorsed prior to May 31st, ,2009.(Endorsed, not closed)
  2.  Mortgage must be paid on time.
  3. May be done without an appraisal.

Upfront Mortgage Insurance Premiums (UFMIP) will be reduced from 1.75% currently being charges to .01%(yes. 01%)

Monthly premiums will be reduced from 1.25% on 30 year mortgages over 95% LTV to .55% on most loans.

So What does that translate to?

About $100 on a $175,000 30 year fixed rate refinance compared to today’s FHA mortgage insurance tables.

What is Private Mortgage Insurance and why am I paying it?

Clinically put, Private Mortgage Insurance, or PMI or MI, is insurance that will help to protect a lender from loss in the case of a default by the borrower. MI is almost always required on loans with less than twenty percent equity. That means, if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your home’s value, you will be required to pay mortgage insurance. While it is a payment that the borrower pays to insure another party, it does have its benefits.

How is mortgage insurance charged?

There are a couple of ways MI is charged. There is Monthly MI, which is computed based on various factors such as credit score, LTV(Loan to Value), and term, then there is MIP(Mortgage Insurance Premium) which is charged up front, and most of the time added to the loan amount. Some programs charge one or the other, while some, (Gulp) charge both. In some cases, there is an add on to the interest rate which pays the premium, called Lender Paid MI. (LPMI)

Why should I pay MI?

Simply put, if you don’t have 20% to put down on a mortgage when you purchase or refinance, then be happy you get to pay MI. For example, in Kansas City and St. Louis, the average home sales price is right at $145,000. I don’t know about you, but I didn’t have 20% down ($29,000) sitting around in my checking when I purchased my first home.

Having MI to purchase a home allows most buyers to get into a home with as little as 2.5% down in some cases. So without the benefit of MI, purchasing a new home would be very difficult.

However, here are some tips to be as efficient as you can with the premiums you pay.

How to pay as little MI as possible

  1. Save as much money as you can. The larger the down payment, the lower the MI, and/or MIP.
  2. Keep your credit score as high as possible. Remember, the minimum score to get a home loan these days is 640. The higher the score, the lower the MI.

How to get out of paying MI if you are already paying

  1. Most MI contracts cancel when you pay the loan amount down to 78% of the original value of the home at purchase or value on the last refi. However, that takes almost 10 years if you put down 5%.
  2. The 2nd way to get out of paying MI, is by refinancing your home assuming you have built up 20% equity through a combination of principle payments and appreciation. However if you are content with your existing loan, you should call your lender to see on what conditions they will cancel your MI.

To summarize, while MI is a premium you pay to insure someone else’s interest, it helps people buy homes and refinance homes with less that 20% equity and with some good planning and discipline, there are ways to keep the premiums to a minimum.

Understanding the New HARP Home Refinance Program.

Understanding the new HARP home refinance program.

Effective December 1st, 2011 new changes to the government’s Home Affordable Refinance Program (HARP) offer hope for homeowners paying their mortgages on time, but unfortunately owe more than their home is worth.

Here’s a look at some of the key elements of the changes to the government-backed mortgage refinance program, announced by the Federal Home Finance Agency (FHFA).

Loan-to-value restriction reduced

The first thing that jumps out is how far your home has fallen in value since you took out your mortgage is no longer a consideration.

Previously, HARP limits triggered if your mortgage balance exceeded your home value by more than 25 percent. That limit has been totally eliminated, making refinance even if your home value is a third of what you owe on your mortgage, or even less!

Fees Reduced

The new HARP rules waive certain fees charged at closing, particularly for borrowers who choose to refinance into 15- or 20-year fixed-rate mortgages. Closing costs have been seen as a barrier to HARP financed transactions, so FHFA is hoping that waiving these fees will attract more interest to refinance. With values no longer an issue, appraisals are no longer required, provided a reliable automated estimate is available, provided participating lender overlay’s do not say otherwise.

Some fees associated with closing costs on the new loan, however as customary with most refinance transactions, can be financed into the new mortgage.

What types of Loans are covered under HARP?

HARP transactions are available to borrowers who have mortgages backed by Fannie Mae or Freddie Mac. To find out if your loan is already owned by Fannie or Freddie, you can check on their websites at www.fanniemae.com or www.freddiemac.com . The Fannie or Freddie owned loan must have been on their books prior to May 31st, 2009. One to 4 unit dwellings.

Who’s eligible?

Provided your loan is already owned by Fannie or Freddie, you are required to have been current on your mortgage payments for the last six months and been late a maximum of once in the last 12 months.

How much can I save?

Underwater borrowers refinancing through the program will save an average of $2,500 a year on their mortgage payments, or more than $200 a month, according to Shaun Donovan, Secretary of the Department of Housing and Urban Development. The government estimates the changes to the program will benefit up to 1 million people, although Moody’s Analytics puts the figure at 1.6 million. The Obama administration may be a bit cautious after their original estimates for borrowers helped by the current version of HARP and its companion HAMP loan modification program turned out to be too optimistic.

What kind of loans can I get?

This is a significant change from the current HARP. The administration is encouraging underwater borrowers to refinance into short-term 15- and 20-year fixed-rate mortgages by waiving most or all program fees for those loans. The current program mandates that borrowers refinance into 30-year fixed-rate mortgages only. Homeowners will still be able to refinance into 30-year loans if they wish, but they’ll have to pay more fees if they do. Combined with the ultra-low rates now available on 15-year mortgages, that’s a significant prod for borrowers who’ve been in their homes a number of years to shorten up their term and start building back more quickly toward positive equity.