5 Ways To Get The Best Mortgage Deal

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It's much tougher to get a home loan these days. Lenders now are required to perform more due diligence on mortgage borrowers than in the past. And thanks to the Great Recession, many mortgage shoppers may struggle to pass these stricter tests.

But that doesn't mean you have to give up hope. Following are five expert suggestions to improve the odds of getting a loan at the best mortgage rate.

Make sure your credit is excellent
A mortgage shopper's most important move is to request a credit report and make sure it is accurate, according to Cindy Tessier, manager of mortgage processing and closing for Navy Federal Credit Union in Vienna, Va.

Tessier says lenders look to a borrower's credit score when deciding what interest rate to charge, so maintaining a high score is especially important.

"If there is anything negative on your credit report, you need to call the creditor to correct it or to work out a payment plan," Tessier says. "When you apply for a mortgage loan, be sure to provide documentation of any negative accounts, especially if this is something in dispute."

Once the error is corrected, go back to the credit reporting agency to see if the negative item has been updated.

Financial experts also recommend paying off collections and credit card balances before applying for a loan.

Todd Dal Porto, a national sales executive with Bank of America Home Loans, says, "Keep your debt low and the amount of credit you're using under 20 percent of what's available to you. Always paying your bills on time is one of the best ways to maintain healthy credit."

Be transparent in the loan application
Don't hide flaws such as credit problems, and don't fudge information about income or assets.

"Take your time to carefully fill out the loan application as accurately as possible," Dal Porto says. "Trying to hide credit problems or holding back requested documents can only work against an applicant by delaying the process and possibly even preventing a mortgage approval."

The lender wants to make sure the borrower has the capacity to repay the debt. So applicants should be prepared to disclose all assets and income, Tessier says.

"If you earn overtime pay or a bonus, be ready to provide documentation for extra income," Tessier says. "Make sure you document all your assets, including a 401(k), an IRA, CDs and savings, even if you won't be using those funds for the home purchase."

Make a big down payment
A large down payment can make a big difference in whether your home loan application succeeds.

"The more you can contribute to the down payment, the more attractive you'll be to lenders," says Dal Porto.

Contributions from family members or friends for down payment money are allowed by most loan programs. Lenders typically require such contributions to be accompanied by a gift letter asserting you won't have to repay the money.

Look beyond interest rates
Don't focus solely on getting the lowest rate. Evaluate your overall budget, monthly payments and fees.

"A home loan is not just about getting the best deal -- it's about getting the right mortgage with no surprises so you can be a successful homeowner," Dal Porto says.

"Everyone should calculate their own debt-to-income ratio, look at the full cost of homeownership and determine how much they can comfortably afford to spend each month."

Tessier recommends borrowers do their homework, comparing good faith estimates and making sure they won't have to pay a prepayment penalty if they decide to refinance in the future.

"Don't just focus on the interest rate," Tessier says. "Look at the discount points, origination fees, underwriting fees and document preparation fees when comparing loans. You also need to understand how your loan works, especially if it has an adjustable rate."

Refinancing: Prepare for the appraisal
Planning a refinance? Tessier says it's important to "have a realistic expectation of the value of your home."

"Know your market and consult with a good real estate agent before you apply for a new mortgage," Tessier says.

Dal Porto recommends making sure the home is in good working order prior to the appraisal. Repair leaky faucets and make sure all areas of the home are easily accessible to the appraiser.

"Give the appraiser a written list, including your purchase date and price, the special features of the home, any home improvements or repairs you have made and the age of items such as the roof, flooring, siding and heating and cooling systems," Dal Porto says.

via bankrate

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Now's The Time to Refinance Your Mortgage

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If you've been thinking of refinancing, mortgage experts say now is the time to take action.

Improving economic conditions, potential rate increases, and expected changes to government programs means you may soon find it more difficult and expensive to refinance your mortgage.

"People who are still waiting to refinance will realize that rates might never be this low again in our lifetime," says David Lazowski, branch manager at Fairway Independent Mortgage in Boston, MA.

Still not convinced? Read on to learn why mortgage experts say you should refinance before spring arrives.

Reason 1 - Changes to Mortgage Insurance Premiums (MIP)
Is your mortgage more than 80 percent of your home's value? If so, upcoming changes by the U.S. Department of Housing and Urban Development could increase your refinancing costs if you wait to refinance.

In fact, effective April 1, 2013, the Federal Housing Authority's (FHA) mortgage insurance premiums are set to increase.

Currently, lenders require mortgages greater than 80 percent of the home value to be covered by mortgage insurance, and the homeowner pays the premium cost.

Richard Booth, a certified mortgage banker, explains how the increased premiums affect homeowners:

Borrowers with less than 20 percent equity will pay more, he says, impacting their budgets and ability to borrow funds. "The result will be higher monthly costs and thus borrowers will have their borrowing capacity reduced," Booth adds.

But that's not all: "Included in the many changes is the removal of the provision which permitted borrowers to drop their MIP once they reached a 78 percent Loan-to-Value (LTV), and the five year threshold," says Booth. This means that "many will be required to carry MIP for the life of the loan."

Reason 2 - Home Affordable Refinance Program (HARP) May Be Ending
If you qualify for a HARP refinance but haven't taken advantage of it yet, you may soon be out of luck. Our experts believe the HARP programs may be discontinued.

"The Home Affordable Refinance Program, designed to help homeowners who have lost value in their homes refinance into lower rates, has been rumored to be coming to an end," advises Booth.

Wade Lovell, a California mortgage broker, agrees that if you feel you are a candidate for a HARP refinance, don't wait to give it a shot.

"HARP 2.0 and other programs make it possible to refinance even if you are underwater by as much as 25 percent and some lenders will go even higher," Lovell says. "Without these programs, homeowners whose houses are now worth less than they owe would be unable to refinance their primary residences. These programs may be short term. Take advantage of them now."

Reason 3 - Benefits to Refinancing During Tax Season
This may come as a bit of surprise, but yes, there are some perks to refinancing during the tax season.

"One benefit of refinancing during tax season is that you will need many of the same documents needed to file your taxes," says Lazowski. "So while in the mind set of doing taxes, it makes good sense to get into the mind set of refinancing."

If you wait until after tax season to refinance, however, you may be in some trouble. For example, if you have a rate lock or guaranteed mortgage rate for a specified period of time, you may have to wait longer for the verification of your paid income tax, which is often required in a mortgage refinance application.

"After April 15th it will take you longer to get an IRS verification of your taxes being filed through a third party because of everyone filing their taxes on the due date," explains Lazowski. As a result, "This backs up the process and can take four to six additional weeks, causing rate locks to be tested."

Reason 4 - Impending Rate Increase
How would you feel if you discovered your decision to delay refinancing cost your family thousands of dollars in interest?

If rates rise, you could face just that situation. And unfortunately, you could be facing this dilemma sooner rather than later. In fact, according to Freddie Mac's "Weekly Primary Mortgage Market Survey," the interest rate for a 30-year fixed rate mortgage is already on the rise from 3.34 percent on January 3 to 3.56 percent on February 21.

It is data like this that is leading experts to anticipate a continued rate increase.

"Rates have started to move off of all time lows," Lazowski says. "With the economy improving it will come as no surprise that rates will move a bit higher. With that being said, rates moving a bit higher will help to spur both purchase and continued refinance activity."

via yahoo homes

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Five Costly Errors You'll Want to Avoid When Refinancing

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Are you thinking of refinancing your mortgage? Here are five things you don't want to do.

Refinancing could save you a lot of money. That is, if it's done right and under the best circumstances.

But do it wrong and it could cost you - a lot.

"Every person's situation is different, so it's a case-by-case question of whether refinancing makes sense. It doesn't make sense for everyone, and people should know the potential costs going in," says Jim Duffy, a mortgage banker with Cole Taylor Mortgage.

For that reason, we thought we'd look into the most common blunders people make when refinancing - and how much each mistake could cost you. Read on to see what blunders you should avoid...

Blunder #1: Not Shopping Around
Shopping is your right. Shopping is American. Shopping is just plain smart. And when refinancing, you should always shop around.

"While there's not a lot of difference in rates right now, that doesn't mean you shouldn't shop around," says Chris Boulter, president of Val-Chris Investments, Inc., a California-based company specializing in residential and commercial loans.

He says one thing that could vary from lender to lender is the mortgage terms, such as closing costs and fees. These can make a difference in the up-front cost of refinancing your loan. For instance, on a $300,000 mortgage, just a quarter of a percent difference in the up-front costs means a difference of $750.

But of course, the biggest contributor to your mortgage costs is the interest rate you pay over the life of the loan. For that reason, says Boulter, it's vital you get the lowest rate you qualify for. In fact, even a quarter of a percent difference between lenders can really add up.

Don't believe us? Let's check the math. Below is a comparison between two $300,000 mortgages. Both are 30-year fixed-rate loans, but Loan A has a 3.5 percent interest rate*, and Loan B has a 3.75 percent interest rate (a quarter of a percent higher).

The Lesson: Shop till you drop! Or at least collapse in a state of money-saving grace. Why? Because negotiating a quarter percent drop in interest rates could result in more than $15,000 in savings over the life of your loan. And you'll be reminded of that monthly with a $42 lower payment.

Blunder #2: Ignoring Closing Costs and Fees
If you thought those nice lenders would refinance your loan for free, well, think again. Refinancing is a service, and you've probably noticed banks (lenders) generally like to charge money for services.

And when it comes to closing costs and fees, ignore them at your own peril. That's because closing costs and fees could outweigh any refinancing savings. To see why, let's take a closer look at some specifics.

In general, closing costs add up to about 1 percent to 1.5 percent of your loan amount, says Jim Duffy. On a $300,000 loan, that's $3,000 to $4,500.

And in case you're wondering, closing costs and fees typically include things like loan origination fees, application fees, appraisal fees, and other charges, according to a refinancing guide published by the Federal Reserve System, which oversees national monetary policy and the banks.

The Lesson: Make sure refinancing your mortgage is worth the cost. Duffy says a rule of thumb is that if you can lower your interest rate by enough to pay for the closing costs and fees within 18 months, it's generally a good idea to pursue refinancing.

Blunder #3: Over-looking Shorter Term Mortgages
Mortgages last for 30 years, right? Right. Unless it's a 15-year mortgage. Yep, it turns out you have a choice, and choosing wisely could either save you a lot of money or lose you a lot of sleep.

"Typically, you'll get a slightly lower rate on a 15-year mortgage than a 30-year one," says Duffy. "But the real savings come in the amount of interest you pay over the life of the loan." He explains that because you're paying off your loan in half the time, you could save tens or even hundreds of thousands of dollars, depending on the amount of the loan.

However, there is one thing you need to understand: Even with the lower interest rate on the 15-year mortgage, your monthly payment will be higher. This is because you're paying off the loan in half the time and the principal (the amount you originally borrowed) remains the same, says Duffy. So it takes bigger payments to pay it off sooner.

But enough with the talk; let's move on to another example of why you shouldn't overlook shorter-term mortgages. For this one, we'll compare two mortgages of $300,000. The first will be a 30-year, fixed-rate loan with an interest rate of 3.5 percent*; the second will be a 15-year, fixed-rate loan at 2.75 percent*.

The Lesson: If you can handle the higher monthly payment, consider a shorter-term mortgage. You could save a lot in interest and own your home outright in half the time. That's about as far from a blunder as you can get.

Blunder #4: Not Getting a Fixed-Rate Mortgage
Have you been teased by those adjustable-rate mortgage rates that dip below 3 percent? While they are very attractive, it's good to note that they're likely to adjust upward when they do change, says Duffy.

But before we get to that, let's nail down exactly how an adjustable-rate mortgage (ARM) differs from a fixed-rate mortgage. For that, we'll turn to the Federal Reserve's handbook on adjustable-rate mortgages.

"An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways," notes the Federal Reserve. "Most importantly, with a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly."

The most common ARM stays fixed for five years, then adjusts every year or even six months, says Duffy.

Duffy and Boulter both recommend against ARMs except in very specific cases, such as a borrower being dead certain they will be selling their home within a few years. Otherwise, says Duffy, they're missing out on locking in a historically low interest rate and getting long-term savings, and instead, enjoying only short-lived gains.

"My recommendation is to remind [homeowners] that while that 2 percent rate is attractive now, it will adjust in year 6 and it's probably going to go up, because with rates this low, there's not much room for it to go down," says Duffy.

The Lesson: While no one knows what the future holds, with interest rates so low currently, Duffy says that getting an ARM and giving up the security of a fixed-rate mortgage makes little sense.

Blunder #5: Not Knowing Your Home's Value
Do you know what your home is worth? It's an important question if you're thinking of refinancing your mortgage. Why? Because it could affect many things, from whether you qualify for refinancing to the rate you pay, or if you have to pay private mortgage insurance (PMI), says Duffy.

The best case scenario, he says, is that your home is worth at least 20 percent more than the mortgage amount. In other words, you are trying to refinance only 80 percent or less of your home's current market value (and yes, the lender will want a professional appraisal).

What if your situation isn't the best case scenario? Don't fret. With other qualifications such as good credit and a stable job history, you still have hope - though you may not be able to get the lowest rates.

What's more, if you don't have 20 percent equity, you'll likely also have to pay private mortgage insurance (PMI), which is often required by lenders to insure them against you falling behind on your loan payments, according to the Federal Reserve.

In case you're wondering, Duffy says PMI costs range depending on the amount of equity you have, the amount of the loan, your credit score, and possible other factors. As an example, he says, for a $300,000 loan, it could range from $50 to $200 per month.

The Lesson: Before you start down the paper trail of refinancing, have a sober assessment of how much your home is worth. If you have less than 20 percent equity, make sure you can reduce your mortgage interest rate by enough to make up for the added cost of PMI.

*The November 8, 2012 average for 30-year fixed-rate mortgage was 3.4 percent and 2.69 percent for a 15-year, fixed-rate mortgage, and 2.73 percent for a 5/1 ARM, according to Freddie Mac, an institution established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets.

via yahoo's Homes

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Popular Refi Programs for Homeowners with Equity

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Interest rates have been hovering near all-time lows for weeks now, and many people are watching reports on both how low rates are as well as “new” refinancing programs such as the HARP refinance for underwater borrowers.

But what if you don’t currently owe more on your mortgage than your house is worth? Can you still refinance?

Of course!

In fact, in many circumstances it will actually be easier to refinance if you have equity in your home.
When considering refinancing, the first step is to identify your goal. Do you just want a lower monthly payment? Do you want to get cash in exchange for some of the equity you have built up in your home?

Once you have identified your goal, the second step is to learn more about the refinance program that will best match your needs.

Conventional refinance
If your loan is backed by Fannie Mae or Freddie Mac, it is considered a “conventional” loan. Refinancing a conventional loan is the most common refinance option. Highlights of conventional refinance programs include:

• Appraisal required
• Full employment and income verification
• Employment history of two years
• 620 credit score
• Popular to go from 30-year term to 15-year term
• 95 percent loan-to-value with mortgage insurance, 80 percent without
• Lender credit allowed to cover closing costs

FHA streamline refinance
The FHA streamline refinance program is designed for people who currently have a Federal Housing Administration (FHA) loan and just want to lower their monthly payments. If you have done an FHA streamline refinance in the past, you may still be eligible to do another FHA streamline as long as it benefits you financially. Highlights of the FHA streamline program include:

• No appraisal required
• No income verification
• No credit score verification required by HUD, but payment history will be considered
• Low fixed rates
• Lender credit allowed to cover closing costs

VA streamline refinance
The VA streamline refinance is a popular program for veterans or active-duty military personnel who have a Veterans Affairs loan. Similar to the FHA streamline, the VA streamline is designed for people who want to lower their monthly mortgage payment without getting cash out. Highlights of the VA streamline program include:

• No appraisal required
• No income verification
• No credit score verification required by HUD, but some lenders may set minimum score requirements
• Low fixed rates
• Reduced funding fee requirement (0.5 percent)
• Lender credit allowed to cover closing costs

Cash-out refinance
In the event that you want to convert part of your home’s equity to cash, there are programs called “cash-out” refinance programs. FHA, VA and conventional loans all have different cash-out refinance requirements, but generally speaking, here are some highlights of what to expect:

• Appraisal required
• Full income and employment verification
• 620 credit score
• 85 percent loan-to-value for FHA; 80 percent for conventional; 100 percent for VA
• Lender credit allowed to cover closing costs

While rates are low, it will often make sense to refinance — whether you want to get cash out of the equity of your home or just lower your monthly mortgage payment.  In each of the above scenarios, one thing sticks out regardless of which program you’re interested in: "Lender credit allowed to cover closing costs."

Let your lender pick up the tab for you!

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Seven Steps To Take Before You Refinance

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If you're considering refinancing your home, here are a few essential steps to take before signing on the dotted line.

Are you taking note of the low interest rates and wondering if refinancing might be a good option for you?

If done right, it could save you a significant amount of money.

But before you jump into this process, there are some important steps you should take to make sure refinancing is in your best financial interest, says Chris L. Boulter, president of Val-Chris Investments, Inc., a company specializing in residential and commercial loans. This includes checking your credit score and knowing the value of your home, among other things.
Want more details? Read on for specific steps you'll want to take before you refinance.

#1 - Understand What Refinancing Can Do for You
Refinancing your home is a big move, so you should know exactly what it is and how it could benefit you.

Essentially, refinancing is the process of getting a new mortgage to replace your existing one. The new loan, says Boulter, pays off the first and could give you a new interest rate, new monthly payment, and a new term length.

Usually, says Boulter, people refinance to reduce their interest rate (also known as the price of borrowing money) on their loan. This means that when you reduce your interest rate, you'll also lower the cost of borrowing money and therefore save money.

But that's not all. Refinancing could also help you go from a 30-year loan term to a 15-year loan (or vice-versa), switch from an adjustable-rate mortgage to a fixed-rate mortgage, consolidate your first and second mortgages, and much more.

So, do your research, contact a mortgage lender, and find out how you could benefit from refinancing.

#2 - Check Your Credit Score
Do you know what your credit score is? If not, you should probably get on top of it because having a good credit score is important when it comes to refinancing, says Boulter.

Particularly, your credit score determines whether you qualify for refinancing, as well as what kind of interest rate you'll get. Generally, the higher the score, the lower your rate, says Boulter. And to get the historically low rates now available, you'll need a very good score: 720 or above, he adds.

In case you're wondering, that's on a scale of 300 to 850, according to the Fair Isaac (FICO) scale, which Boulter says is the one that most banks use.

So, what happens if you're not thrilled with your score? You can still make strides to help improve it. In fact, 65 percent of your credit score is determined by two factors: your payment history and the amounts you still owe, according to the FICO website.

So, it may take time to build up your score into the positive, but if you make sure to pay all bills on time and pay down as much debt as possible, you'll definitely be going in the right direction.

You can get one free copy of your credit score every year. The only authorized website to fill orders for the free annual credit report is annualcreditreport.com, says the Federal Trade Commission, a federal agency that prevents business practices that are unfair to consumers.

#3 - Check Your Equity
Equity is something else you'll want to become familiar with, too. Why? Because equity - the difference between the current market value of your home and the amount you still owe on your mortgage - plays a part in determining whether or not you can refinance.

Lenders normally want you to have at least 20 percent equity in order to refinance, according to Boulter. He says this is because of the real estate market downturn, and the fact that lenders are cautious when lending money with real estate as collateral, which is exactly what they do when you refinance your home.

The good news is that there are still options out there for those with little or no equity, according to Making Home Affordable (MHA), an official program of the Department of Treasury & Housing and Urban Development.

#4 - Shop Around
You probably shop around for the best price on bread, so when it comes to a mortgage - which could be hundreds of thousands of dollars - it makes sense to shop for the best interest rate.

However, according to Boulter, don't expect to find a lot of difference in rates. Because of recent laws and a banking industry with fewer companies, he says there is less variety in rates.

"That said, it certainly makes sense to get a second opinion on the terms that have been negotiated," he says.

And even if it's just the slightest different in interest rates, when it comes to borrowing hundreds of thousands of dollars for 15 or 30 years, a small difference in the rate could mean a big difference in cost over time.

#5 - Learn How Much You Will Lower Your Interest Rate
For you, the whole point of refinancing is probably to save money by lowering your interest rate, which, remember, is essentially the price you are paying to borrow the money.

And because there are costs and fees associated with refinancing (more on that in #6), you need to make sure you lower your rate enough to make refinancing worthwhile. Generally speaking, if you can lower your rate by three-quarters of a percent, refinancing is worth considering, says Boulter.

To get an idea of what your new interest rate might be, Boulter says that most lenders will give good faith estimates that spell out costs, fees, and interest rates - with no commitment on your part.

One important point to note, says Boulter, is that the more fees and costs you pay up front or out of pocket, the lower your rate may be. Similarly, you could also have the option to take a lower rate and then add the amount you would pay for fees and costs into the amount you borrow.

#6 - Understand Your Closing Costs
Did you think that paying interest on the loan was the only price you had to pay?

Well, your bank thinks otherwise. There are other costs and fees associated with your loan, known as closing costs, and it's important to make sure that the refinancing savings outweigh them.

To help you better understand what closing costs involve, here's a brief breakdown of some of the more common major costs and fees, although they could change from lender to lender:*

Loan Origination Fee: Your lender charges this to cover such things as attorney fees, document preparation fees, notary fees, and more. It might be called an underwriting fee, administrative fee, or processing fee. The average cost is $2,537 with a 10 percent down payment.

Application Fee: Your lender charges this fee to cover processing your loan request and checking your credit. The median cost is $365.

Points: These represent a one-time fee from the lender. One point equals one percent of the amount of the loan. For example, one point on a $100,000 loan is $1,000. These fees are usually between .5 and 1 percent, according to Boulter.

Appraisal Fee: This is a determination by a professional appraiser of the worth of your property. The lender wants to make sure it is worth at least the loan amount. The Federal Reserve notes that the median cost is $292, but Boulter says it could be up to $700.

Lender-Required Home Inspection Fees: Depending where your home is located, the lender may want inspections of the house's systems and structure. This cost is estimated to be anywhere from $300 to $500.

Private Mortgage Insurance (PMI): If you are borrowing more than 80 percent of the market value of the home, or in other words, if your down payment is less than 20 percent, the lender will usually require mortgage insurance. This insurance covers the lender's loss if you don't make the mortgage payments. The estimated cost is $50 to $100 per month.

#7 - Determine How Long You Plan to Stay in Your Home
Is this your dream home? The one in which you want to stay until you're old and gray? You should know, because the answer can help you determine whether refinancing is the right move for you.

Basically, says Boulter, if you're planning to stay in your home for at least a year to two years after refinancing your mortgage, it's probably worth it to refinance.

Why? Because of those closing costs we discussed earlier. Essentially, since getting a new loan costs money, it takes time for the savings to outweigh the costs. For example, let's say you borrow $300,000 and it costs 1.5 percent in closing costs. That's $4,500. If your monthly payment goes down by $300 per month, it will take 15 months to pay for those closing costs in savings.

*Unless otherwise stated, all costs and fees information according to "A Consumer's Guide to Mortgage Settlement Costs" published by the Federal Reserve Board, the main governing body of the Federal Reserve System which oversees national monetary policy and the banks.

via yahoo homes

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The Top 6 Mortgage Mistakes

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During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high-end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages? Let's take a look at the biggest mortgage mistakes that homeowners make.

1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.

Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.

2. No Down Payment
During the subprime crisis, many companies were offering borrowers no-down-payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers who place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.

3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.

They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.

4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.

There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.

5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.

Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70s?

6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.

The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.

The Bottom Line
As you can see, the road to homeownership is riddled with traps. If you can avoid the traps that many borrowers fell into, then you can keep yourself from financial ruin.


via yahoo homes

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The Secret to Getting a Mortgage or Refi Rate Near 3%

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The headlines are buzzing: Mortgage interest rates have dropped to 3.875 percent for a 30-year fixed rate loan. Want a 15-year loan? You'll pay even less, maybe 3.25 percent.

Can you get a 3.875 percent interest rate? First, you have to understand that not every lender offers a loan carrying a super-low interest rate, and only people with the best credit need apply.

But there's more to the story. If you want to land the best loan with the best rate and terms, you'll need two things: credit and cash.

Your Credit
Many borrowers don't understand the direct link between your credit and your loan. The better your credit history and the higher your credit score, the lower your interest rate and the better your terms.
If you've missed some payments – or even if you're only 30 days late on one bill – your credit history is tarnished, your credit score reduced, and your interest rate will be far higher.

Your Cash Outlay
But don't forget about cash. These days, lenders want to see you walk through the door with at least 20 percent to put down on the property. If you don't have at least 20 percent equity (if you're refinancing) or 20 percent in cash for your down payment, your interest rate will be higher.

For example, if your credit score is 760 to 850 and you have at least 20 percent equity, you're in the highest credit tier, which means you might qualify for an interest rate at 3.282 percent on a 30-year fixed rate loan or less than 3 percent on a 15-year fixed rate mortgage.

But if your credit score drops into the second-highest tier (700 to 759), you might only qualify for a 30-year loan at 3.504 percent. To be sure, a loan at 3.5 is still a historically amazing rate. In fact, today's interest rates are so low that you might qualify for a loan below 4 percent even if your credit score is a 660. But you may need to have as much as 50 percent in equity or for your cash down payment.

The right lender
The key to finding a great loan with a terrific interest rate is finding the right mortgage lender to give it to you. But here's where it gets a little sticky. There are plenty of lenders who don't want your business. They might be overweighted with bad real estate loans, or they might not need any loans from people with less than perfect credit scores, even if you have plenty of equity in the property.

But instead of telling you they don't want your business, they'll just quote you an interest rate or loan terms that are, shall we say, less than palatable. By comparison, these quotes will look downright expensive.

Of course, if you don't shop around for a lender, you won't know that you're being quoted an interest rate that's too high or offered a loan program that doesn't make sense for your finances. So talk to a variety of lenders and make sure you understand exactly what you need to do to close on a loan that offers an interest rate for less than 4 percent.

via yahoo homes

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7 Reasons Why You Should Refinance

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Does a new home loan make sense?

Why refi? There are at least seven reasons to refinance a mortgage. You probably can think of the first one -- to get a lower mortgage rate.

The average interest rate on an outstanding mortgage at the beginning of 2010 was 5.979 percent, according to the Bureau of Economic Analysis. However, lenders today are offering rates well below that benchmark, making a refinance a no-brainer for many.

But low rates are not the only motive for refinancing a home loan nowadays. The following are good reasons to consider a new home loan.

Refi for a lower rate
The No. 1 reason to refi is to get a lower mortgage rate. Despite sinking rates, a lot of people haven't refinanced.

Many homeowners would like to refinance but can't because they have little or no equity due to falling home values. Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla., says too many of his clients can't refi for this reason.

"But there are people who can, and some people who get so into whatever they're doing that they don't pay attention to the news and don't pay attention to where rates are at," Sahnger says.

So Sahnger will call to tell them that rates are near record lows.

Convert an ARM
Stability-hungry borrowers are ditching adjustable-rate mortgages and refinancing into fixed-rate loans.

"Everybody's frightened about inflation, so if they have an adjustable loan, that's the No. 1 reason they're getting out of them," says Jeff Lazerson, president of Mortgage Grader, a lender based in Laguna Niguel, Calif. "It's not because you can get them at a better rate, but because you can get them at a stable rate."

Other borrowers swing from one hybrid ARM to another, says Matt Hackett, underwriting manager for Equity Now, a direct mortgage lender based in New York City.

"We've done a few of those for people who were in a five-year ARM that they originated four years ago, that was getting ready to adjust," Hackett says.

Even though the rates were about to adjust downward, they got new 5/1 ARMs to extend low rates another five years.

Get a mortgage on a paid-off house
This isn't, technically, a refi, but it's close. Mortgage-free homeowners sometimes get mortgages to put cash in their pockets.

"There's a lot of people who don't have a mortgage," Hackett says. "Maybe they want to go to Florida, buy a second home with cash. So they cash out their first home and take the cash and go down there and don't need a financing contingency, and they're in a better position to bargain."

They could also take out a mortgage on a paid-off property to start a business or for other

Cash out to consolidate debt
When house prices were rising by 10 percent or more a year, millions of borrowers got cash-out refinances. They refinanced for more than they owed, got cash, and spent or invested it.

The cash-out refi craze ended when the housing bust began. But there are still a few cash-out refis.

"We're still in the business of cashing out people -- paying off credit cards, for example," says Michael Moskowitz, president of Equity Now.

Michael Becker, mortgage banker at Happy Mortgage in Lutherville, Md., says: "It's not like it was years ago, when people took cash out to buy things, like a pool, a car or an RV. It seems more to be paying down debt, lowering their debt service, trying to save money."

Cash out to buy other property
Lately, Lazerson has noticed an interesting refinancing trend.

"One thing that's a trend now is that people are taking money out to purchase other properties," he says.

Often, it's to buy investment properties.

Refinancing to buy property can bring up unexpected tax and mortgage underwriting issues. A lot depends upon how the refinanced house and the new property will be used.

For example, which property will be the primary residence? Will the other property be rented out? Those are issues for a financial adviser or tax professional to untangle.

Consolidate two mortgages
Some homeowners want to combine their first mortgage with the home equity line of credit.

"I'm seeing a lot of people, even if their rates on their home equity line of credit is 3 percent, refinancing to get rid of them," Becker says.

Why get rid of a loan with such a low rate?

"Because they're worried if five years from now, what if that rate jumps up to 12 (percent), 11 (percent), 13 percent?" Becker says.

Address family matters
Divorces often lead to refis as a means of removing the absent former spouse from the note.

"That has less to do with rates and is more about timing," Lazerson says.

Moskowitz says he recently did a $110,000 cash-out refi from a woman who used the money to bail out a son facing foreclosure on his own house.

That's not how Moskowitz would spend his money from a cash-out refi. But to anyone who agrees with him, he says, "You're clearly not a mother."

via bankrate

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Better Mortgage Rates Start With Better FICO Scores

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If you plan to use a mortgage for your next home purchase, you’ll want to keep your credit scores as high as possible. Credit scores play an out-sized role in determining for which mortgage product you’ll qualify, and to which rate you’ll be assigned by your lender.

The higher your credit score, the lower your mortgage rate will be.

What Is A Credit Score?
History has shown that the best way to predict a person’s behavior over the near-term future is to look at that person’s behavior in the recent past. It’s a concept similar to the First Rule of Physics — an object in motion tends to stay in motion.

We can apply this theory to consumer credit, too. A person who has recently paid his bills on-time should continue to pay his bills on-time in the near-future.

This is the basis of credit scoring; using your past to predict your future.

To mortgage lenders, your credit score represents your likelihood of making on-time mortgage payments for the next 90 days. “90 days” matters because, after 90 days without payments, a homeowner falls into default.

Higher credit scores correlate with lower default risk which explains why people with high credit scores tend to receive lower mortgage rates than people with low credit scores. This is true across all loan types, including conventional, jumbo, and FHA mortgages.

Like most else in finance, those with the lowest risks get to pay the lowest rates.

Lenders Use The FICO Scoring Model, Exclusively
There are three main credit bureaus in the United States. They are Equifax, Experian and TransUnion. Each offers a bevy of credit-scoring products, available for purchase on their respective websites. Prices range from “free” to several hundred dollars.

None, however, are particularly relevant in the home-buying process. This is because the nation’s mortgage lenders rely on a different credit model — the FICO model.

FICO is named for the Fair Isaac Corporation. It was “invented” in the 1950s and has become the mortgage industry standard for credit ratings. Today, FICO scores are omnipresent to the point that people generically refer to all credit scores as “FICO scores”.

This is akin to calling all adhesive bandages “Band-Aids”. FICO is the brand name — not the product.

FICO scores range from 300-850.

Credit Scores Change Mortgage Rates
Your FICO score has always influenced the mortgage rate for which you’re eligible. In 2008, though, it began to change your loan fees.

In response to major mortgage market losses, in April 2008, both Fannie Mae and Freddie Mac introduced something called Loan-Level Pricing Adjustments (LLPA). Loan-level pricing adjustments are “discount points” added to a mortgage rate, based on a specific borrower’s risk to the lender.

A discount point is a loan fee, paid at the time of closing. 1 discount point is equal to 1 percent of your loan size.

Example : A $300,000 mortgage that’s assessed 1 discount point will have $3,000 in extra fees due at closing.

Fannie Mae and Freddie Mac know that low credit scores correlate to high default rates so, like an insurance policy, they assigned the highest costs to the highest-risk borrowers.

Assuming a 20% downpayment, look at how discount points change based on credit score. Fees get massive for FICOs under 700.

• 740+ FICO  : There are no discount points required. This loan is “low risk”.
• 720-739 FICO :  0.250 discount points are charged to the borrower, or $250 per $100,000 borrowed
• 700-719 FICO :  0.750 discount points are charged to the borrower, or $750 per $100,000 borrowed
• 680-699 FICO :  1.500 discount points are charged to the borrower, or $1,500 per $100,000 borrowed
• 660-679 FICO :  2.500 discount points are charged to the borrower, or $2,500 per $100,000 borrowed

Now, not many new home buyers just have that kind of extra cash just laying around. Therefore, as an alternative to paying discount points with cash, many choose to “roll up” the fees into their respective mortgage rates. In general, 1.000 discount point can be “traded in” for a 0.250 increase to your mortgage rate.

Example : A consumer with a 680 FICO score is required to pay 1.500 discount points at closing, or can alternatively accept a mortgage rate increase of 0.375%.

This is why it’s important to keep your credit score high. There are real dollar costs for having scores under 740.

Improving On Your Credit Score
If your credit score is not as high as you’d like, the good news is that you can take steps to raise it — sometimes without even changing your spending habits.

via trulia

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Are You Upside Down?

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Do you owe more on the home then what its worth?
Are you or anyone you know UPSIDE down?
HARP 2.0 can help.
NO APPRAISAL needed.
Not everyone can qualify for this program.
Call me for details. 480-721-6253.

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7 Things You Didn't Know Affect Your Credit Score

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We all know to pay our bills on time and carry as little debt as possible, and most of the time, that is all that matters in your credit score. Yet, there are other, smaller factors that many people aren't aware of that can cause your score to suffer.

Small Unpaid Private Debts

Many people pay their mortgage, credit card and utility bills with unflappable consistency, yet neglect smaller debts. They may feel that these debts are illegitimate or that they will just go away if ignored. For example, municipalities have been known to report unpaid parking tickets and even library fines to credit bureaus. Unfortunately, any unpaid debt can weigh down your credit score.

Tax Liens 

You might not think of the IRS as an agency that reports to credit bureaus, but Uncle Sam figured out long ago how to use your credit history as leverage. In fact, these records remain in your credit history for 15 years; even longer than a bankruptcy. If you have an unpaid tax lien, paying it off will certainly help your credit score, but it can't undo all the damage done by having there in the first place.

Utility Bills

Your electricity bill or gas bill is not a loan, but failing to pay it will hurt your credit score. While these companies won't normally report their customer's payment history, they will report delinquent accounts much more quickly than other institutions, so be careful.

Too Many Recent Credit Applications 

It can be tempting to sign up for various credit cards that offer some bonus for your business. Banks can offer tens of thousands of points or miles, while retailers grant in-store discounts when you apply for their credit card. By themselves, these applications have an insignificant effect, but too many credit checks in too short of a time period can lower your credit score. To avoid this problem, limit the number of applications for credit, especially when you are shopping for a home, car or student loan.

Long-Term Loan Shopping 

Consumers may know that too many credit inquiries will lower their credit score. Nevertheless, to allow consumers to shop around for the best rates on automobile, student and home loans, the FICO will not penalize borrowers who have multiple credit checks in a short period of time. Various FICO formulas negate multiple inquiries with either 14 or 45 days. Therefore, continuing to shop around for a loan over several months will fall outside of this safe harbor and will lower your score.

Business Credit Cards 

Do you have a credit card in the name of your business? Nevertheless, almost all banks will still hold you personally responsible for your debts. Furthermore, your payment history is reported to the credit bureaus. Therefore, any late payments or unpaid debts in the name of your business will affect your personal credit, so long as you are the primary account holder on a business card.

Mistakes 

Any incorrect information in your credit history can hurt your score. For example, people with common names frequently find other people's information in their file. In other cases, typos and clerical errors result in adverse information affecting your score. This is one of the reasons why consumers are encouraged to complete soft inquires at least once a year and dispute any mistakes they find.

The Bottom Line

By paying close attention to the decisions they make, consumers can avoid taking actions that seem harmless, but can really hurt their credit.

via yahoo finance

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INSIGHT 2012 - The Arizona Real Estate Summit

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Attended a great event this morning at Ocotillo Golf Resort with great and honorable speaker Arizona Department of Real Estate Commissioner Judy Lowe gave us a insight and up coming plan of the department on this coming year.

The most interesting speaker, I personally think will be Michael Orr from The Cromford Reports. The tittle "AZ Statistics That Will Change Your Way of Thinking", how true is it?

Here are some market insight presented by Mike based on statistics for Greater Phoenix Market.



Foreclosure Summary

• We are about 85% through the disaster
• REOs are becoming an endangered species
• Banks increasingly prefer short sales
• 3rd parties becoming trustee's primary buyer
• HARP 2.0 is proving effective for Arizona
• A government program that actually works!
• Fannie/Freddie loans only
• 2012 will be a very different market

Predictions for 2012 (warning - these may or may not come true)

• Phoenix will not behave like the national market
• Case-Shiller Index for Phoenix will rise for the next 2 months
• Supply shortage will get worse
• Foreclosure levels close to normal by end of year
• Distressed properties will get scarcer
• Lenders will slightly ease loan underwriting
• Buyer sentiment will improve
• Builders will start to re-enter the market
• Pricing will get more interesting.

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Refinancing Gets Even More Attractive

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Homeowners who have resisted the urge to refinance their mortgages until now could be rewarded for their willpower. Mortgage rates have fallen to new lows—and banks are rolling out incentives to win business.

Economic uncertainty in Europe and slow growth in the U.S. are prompting investors to pile into ultrasafe U.S. Treasurys. That, in turn, is pushing down mortgage rates, which are tied to Treasurys.

The average interest rate on a 30-year mortgage fell to 4.05% for the week ended Dec. 23, the lowest in 60 years, according to HSH Associates, a mortgage-data firm. And rates on jumbo mortgages—private loans that in most parts of the country are larger than $417,000—also have hit new lows, averaging 4.61%.

"It's hard to argue rates will get much lower than they are today," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

That's good news for homeowners. A person who refinanced a $400,000 30-year mortgage in February would pay an interest rate of 5.04% on average, according to HSH Associates, and fork over $2,157 a month; at the current rate of 4.05%, he'd save $236 per month, or $2,830 per year.

What's more, demand for refinancing is declining, since many homeowners already took advantage of lower mortgage rates. Applications for refinancing are 17% below this year's peak in September, according to the latest data from the Mortgage Bankers Association.

That and other factors have prompted some lenders to offer incentives to win new business—particularly regional and community banks, which are focusing more on jumbo mortgages, says Stu Feldstein, president at SMR Research, which tracks the mortgage market.

The discounts can be sizable. Regional bank Valley National Bank charges homeowners in New Jersey and eastern Pennsylvania a flat fee of $499 for closing costs on mortgages as large as $1 million. Since average closing costs on a refinance run about 2% of the total loan amount, a person with an $800,000 mortgage could save about $15,500.

A spokesman for the bank says it is aggressively marketing the discount in part to bring in more customers.

While many lenders don't refinance mortgages that are larger than about $2 million, Union Bank—which has branches in California, Oregon and Washington—refinances up to $4 million at no extra cost. (Many banks that refinance multimillion-dollar mortgages tack up to an extra quarter of a percentage point on the interest rate.)

Since November, Union Bank has also allowed borrowers to roll the costs of a refinance, like the appraisal fee and loan processing fee, into the mortgage. And borrowers whose original mortgage is from Union Bank don't have to provide all of the income documentation that other customers do in order to refinance.

In part, the bank's goal is to develop relationships with high-net-worth clients, says Stuart Bernstein, national production manager of residential lending at Union Bank.

Despite the incentives, many would-be applicants remain sidelined because they can't meet the long list of qualifications.

The home-equity requirement is one of the toughest hurdles, says Mr. Feldstein. Homeowners with at least 10% home equity make the cut, but people with less have a tougher time.

Borrowers with 10% to 19% equity in their home usually have to buy private mortgage insurance, whose cost varies based on many factors, including their credit score. A borrower with 15% equity and a FICO credit score above 720 could pay 0.44% of the total loan amount, says Keith Gumbinger, vice president at HSH Associates. On an $800,000 loan that would be $3,520 a year—eating into the potential savings of a refinance.

In December, the federal government rolled out a revamped version of the Home Affordable Refinance Program with relaxed home-equity requirements, to allow more borrowers to refinance. To qualify, the current mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, and borrowers need to be mostly current on payments.

For regular refinancing, applicants need a FICO credit score of at least 740 to get the best rates, says Mr. Gumbinger. And they must provide copious documentation, including at least two years' worth of tax returns and proof of income as well as recent statements for assets such as retirement and brokerage accounts.

After clearing those hurdles, you might wait about 60 days for refinancing to be completed, says Mr. Gumbinger—longer than the typical 45 days. While some lenders are offering 60-day rate locks for free, others charge a quarter of a percentage point of the total loan amount for the service. On an $800,000 mortgage, that's $2,000.

Or you could opt to take your chances with a free 45-day lock and hope rates don't spike between day 46 and the date your loan closes. With the euro zone still in economic crisis and global investors rushing to the safety of U.S. Treasurys, housing-market analysts say it could be at least six months before rates rise significantly.

By AnnaMaria Andriotis | The Wall Street Journal

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HARP 2.0

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*If you are underwater homeowners and would like to refinance, read this now*

For underwater homeowners who want to refinance their mortgages, the details of HARP 2 are coming into focus.

HARP 2 is a liberalized revision of the Home Affordable Refinance Program. (See Bankrate's HARP page.) HARP's goal was to allow homeowners to refinance their loans, even if they owed more than their homes were currently worth. Millions of homeowners are in this predicament because their homes lost value in the bursting of the housing bubble.

HARP was introduced in 2009, and it was designed to help homeowners with mortgages owned by Fannie Mae or Freddie Mac. The program let borrowers refinance at up to 125 percent of their homes' current values. For example, under HARP, if you owed $125,000 on a house that was now worth $100,000, you could qualify for a HARP refi, because your loan was 125 percent of the home's value. But if you owed more than 125 percent of the home's value, you were out of luck.

That 125 percent loan-to-value limit has been eliminated under HARP 2. Under new rules issued on Tuesday, there is no loan-to-value limit on HARP refis -- at least, for borrowers who have fixed-rate mortgages.

The elimination of the loan-to-value limit is the biggest change under HARP 2. Here is a rundown of HARP 2's guidelines:

• The program is for borrowers whose mortgages are owned by Fannie Mae or Freddie Mac, and who got their loans before May 2009.
• HARP had been scheduled to expire at the end June 2012; HARP 2 extends the expiration to the end of 2013.
• There is no loan-to-value cap anymore for borrowers who now have fixed-rate mortgages.
• For borrowers with ARMs, the loan-to-value cap remains 105 percent.
• Borrowers can qualify for HARP 2 refis if they have paid on time for the last six months and have no more than one 30-day late payment in the last 12 months. Originally, HARP didn't allow any delinquencies in the last 12 months.
• Fees have been reduced. Lenders are fond of adding fees to loans that have an added smidgen of risk. Fannie and Freddie call these fees "loan level price adjustments," and the charges easily can climb to 2 percent of the loan amount on HARP refis. Under HARP 2, the fees are reduced to zero percent on loans for 20 years or fewer, and 0.75 percent for mortgages for more than 20 years and for ARMs.

Generally speaking, the changes go into effect  Dec. 1.

Regulators and analysts expect HARP 2 to result in 1 million more refis than would have closed under HARP, with an average loan balance of $150,000 to $175,000.

By Holden Lewis · Bankrate.com

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New Discounts for Mortgage Borrowers

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By ANNAMARIA ANDRIOTIS, SmartMoney

Lenders are cutting closing costs and offering other discounts to go along with low rates. What's the catch?

As mortgage rates continue to fall, lenders are rolling out splashy discounts and promotions to inspire reluctant home buyers. But critics say the newest offers still stop short of the best deal for borrowers: Lower rates.

From large banks to credit unions, a growing number of lenders are waiving fees, lowering rates and finding new ways to cut loan prices for would-be home buyers and refinancers. Capital One is waiving some closing fees for refinancers, which can save $3,300 on average. Citi and Bank of America are discounting fees by as much as 0.75 percentage point. And online lender Quicken Loans is telling customers who get a mortgage through December that if mortgage rates fall in the future, they'll be able to get the lower rates with most refinancing costs covered.

While some of the deals are available to refinancers, they are mostly aimed at home buyers. In this market, new purchase mortgages can be more profitable for banks. But they currently account for just about 20% of all mortgage applications, according to the Mortgage Bankers Association. "We are still amazed that record low interest rates and significantly lower home prices have not resulted in strong loan demand," says Tim Zimmerman, president and CEO at Standard Bank in Pittsburgh, which is lowering closing costs by up to $500 for home purchases and refinances.

That's a small discount, relatively. Closing costs typically run up to 2% of the loan amount -- $500 would fully cover closing costs for a $25,000 loan. Zimmerman says that on refinances closing costs tend to be lower, and that this discount along with low mortgage rates creates an opportunity for borrowers.

But other offers are more generous. In a rare deal for refinancers, Capital One is eliminating on average $3,300 closing costs -- including the appraisal and title-related charges -- for homeowners who refinance into a 30-year mortgage in some locations, including New York, Texas and the Washington D.C. metro area. Some credit unions are also slashing closing fee costs. In August, for example, the largest credit union, the Navy Federal Credit Union (designated for Department of Defense employees and their families) began offering $2,500 off of closing costs for borrowers.

Other lenders are discounting costs that borrowers may pay when they sign up for a mortgage. Borrowers have the option to pay what are called "discount points" -- a prepayment of interest -- in exchange for a lower interest rate. One point equals 1% of the loan amount. Citi is offering home buyers 0.75% of the loan amount that can be used to offset discount points. On a $375,000 mortgage, the credit would be $2,812.50 -- plus the lower interest rate over the life of the loan. Earlier this year, Bank of America began offering 0.25 percentage point off discount points in 12 states; next month, the bank will extend the offer in nine more states, including South Carolina, Texas and Washington D.C.

But if you're seeing incentives, says Keith Gumbinger, vice president at mortgage-data firm HSH Associates, there might be a catch. To qualify for the Bank of America discount, for example, consumers must have at least $50,000 socked away with the bank or its investment firm.

Other incentives may be designed to distract from a rate that's not as low as it could be. The average rate consumers get on a 30-year fixed-rate mortgage is 4.25% -- about 0.75 percentage point higher than the lowest advertised, according to LendingTree.com. That's almost the widest spread since the firm began tracking the data in February 2010. On a $275,000 30-year fixed rate mortgage, the difference adds up to about $120 more per month, or more than $42,000 over the life of the loan.

For their part, banks say they're looking to attract new customers, or drum up more business with old ones, and that rock-bottom rates, though difficult to get, are accessible for borrowers with the highest credit scores, large down payments and low debt levels. But they also acknowledge that these promotions are good without being too good: A Bank of America spokesman says the institution is looking to price competitively but not low enough to spark an overflow of applications that would prevent it from being able to process the mortgages in a timely manner, the spokesman says.

Still, a low interest rate is still the key to finding the cheapest mortgage. Experts direct borrowers to consider lenders who are most eager for business, including online outfits, which can offer a lower rate because they have lower overhead, and smaller institutions like community banks and credit unions that might have more wiggle room on rates. With rates expected to stay low for a while, qualified borrowers can afford to haggle to get a low rate, which will help them save more than most incentives on the table now.

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Tax consequences of refinancing

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By Stephen Fishman

Inman News™

With home mortgage interest rates at historic lows, many homeowners are seeking to refinance their mortgages. If you are planning to refinance, knowing the interest deduction rules and how they apply to your property may help you maximize your tax savings.

Interest deduction

If the old mortgage is paid off, but no additional cash is received by the homeowner, all of the interest payments on the new loan are tax deductible up to a loan limit of $1 million.

The rules differ if the new mortgage is larger than the original mortgage -- that is, the homeowner refinances the old loan and also obtains additional cash. That portion of the new loan that is used to replace the original loan is treated the same as the original loan -- the interest paid on the amount is fully deductible.

Tax treatment of the portion of the new loan used to obtain cash depends on what the cash is used for. If the cash is used to improve or remodel the house, the interest is fully deductible.

However, if the cash is used for some other purposes -- for example, to pay for a child's college education or medical bills -- the interest is deductible only up to a loan amount of $100,000.

Deducting points

Points paid to obtain a refinanced mortgage must be deducted over the life of the loan. To figure the annual deduction amount, divide the total points paid by the number of payments to be made over the life of the loan.

Usually, this information is available from the lender. For example, a homeowner who paid $2,000 in points on a 30-year mortgage (360 monthly payments) could deduct $5.56 per payment, or a total of $66.72 for 12 payments. Taxpayers may deduct points only for those payments actually made in the tax year.

A homeowner who uses part of the refinanced mortgage money to pay for improvements to the home, and meets certain other requirements, may generally deduct the points associated with the home improvements in the year paid, spreading out the rest of the points over the life of the loan.

When refinancing for a second time, or paying off a loan early, a homeowner may deduct all the not-yet-deducted points from the first refinancing when that loan is paid off.

Closing costs

Other closing costs, such as appraisal fees and processing fees, generally are not deductible.

Prepayment penalties

Some loans contain a clause that charges a penalty if the mortgage is paid off early. This penalty is generally deductible as a mortgage-interest expense in the year that it is paid.

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5 refi blunders to avoid

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When interest rates are low, plenty of homeowners rush to refinance before evaluating the true consequences of their actions. A mortgage refinance can benefit some homeowners, particularly if they intend to stay in their home for the long term or if they can significantly reduce their interest rate. Sometimes, though, a mortgage refinance can be the wrong move.

"People often make poor decisions because of what I call 'interest rate envy' around the coffee table," says A.W. Pickel III, CEO of LeaderOne Financial in Overland Park, Kan. "They jump at refinancing just so they can say to their neighbors that they got a lower rate."

Here are five of the worst mistakes homeowners make when refinancing.

Not Comparing the Real Rate

"Borrowers should shop around for a mortgage by comparing the APR (annual percentage rate) of each loan rather than the quoted interest rate," says Gregg Busch, vice president of First Savings Mortgage Corp. in McLean, Va. "You need to look at the true cost of the loan and compare it to your current APR to make sure you will really be saving one-half point or more on the new loan."

Busch points out that a lot of homeowners today find out that their home is worth less than they assumed when they have an appraisal.

"Fannie Mae and Freddie Mac have added fees on loans with a high loan-to-value, so borrowers need to re-evaluate the rate and fees before they decide to refinance," Busch says.

Borrowers who have little or no equity may qualify for a refinance under the government's Home Affordable Refinance Program, or HARP, available to those with a current mortgage owned or guaranteed by Fannie Mae or Freddie Mac.

"The beauty of the HARP program is that it does not require an appraisal, so if you suspect you are underwater on your loan, this could be a good option," says Busch. "Just make sure you compare the rate and fees to see if the new loan is worth the cost."

Choosing the Wrong Loan

Pickel says the first step when deciding to refinance is to establish a clear objective.

"If you think you may lose your job but you have one now, your focus should be to lower your overall payment regardless of the length of the loan," says Pickel. "If you want to be debt-free by a certain year, then you need to find a loan that meets that objective."

Pickel says that sometimes, even with a lower interest rate, you could end up making higher monthly payments because wrapping in the closing costs has increased the size of your mortgage.

Every borrower should look at the cost of refinancing along with the financial benefits before choosing a loan, Busch says. Some borrowers forget that refinancing into another 30-year mortgage can add years of payments, especially if they have been paying on the current loan for a long time.

"A 10/1 ARM (adjustable-rate mortgage) or a 10-year fixed-rate loan can sometimes be a better choice depending on the individual borrower's circumstances," Busch says.

Not Shopping Around

While many borrowers compare loan offers from more than one lender, they can also shop for title services and save hundreds or sometimes thousands of dollars on their loan.

"Check at least three lenders and at least three title companies before choosing one," Busch says. "There can be an advantage to going to the same servicer that handles your loan now, because they may require less documentation, but I also recommend consulting with at least one other direct lender to compare rates and fees."

Ask the title company for a reissue rate on your owner's title insurance -- Busch says this can save as much as 35 percent on the premiums.

Refinancing When You Shouldn't

Charles A. Myers, president and CEO of The Home Lending Group in Jackson, Miss., says refinancing can be a mistake if you don't plan to stay in your home for several years.

"One customer wanted to refinance in order to improve his property and rent it, but he would have ended up with a larger mortgage and then needed a different loan because the property would no longer be his principal residence," says Myers. "The key is to make sure the refinance has a net tangible benefit to the homeowner."

Borrowers need to decide how long they intend to stay in the property and determine the break-even point when the savings outweigh the costs before choosing to refinance, Myers says.

Not Keeping Up With Borrower Responsibilities

Homeowners must rely on a lender to refinance, but they have obligations of their own that, if not met, could derail the mortgage refinance. Borrowers must have good credit to refinance, with most lenders requiring a credit score of 640 and above even for a loan insured by the Federal Housing Administration, says Myers.

Lenders can check the borrowers' credit again just before the closing, so you need to maintain good credit and avoid taking on new debt even after the refi has been approved.

"Check the lock-in date for the interest rate on your new loan to make sure you can close before the rate expires," says Busch. "Be sure to turn in all your documentation as soon as it is requested, because a delay could mean that your closing date must be pushed back."

via bankrate

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