Archive for October, 2011

Closing costs…certainly one of the least attractive components of refinancing a home mortgage. In many cases, closing costs can be as great as 3% or more of the loan amount. When you combine underwriting fees, title fees, appraisal costs and origination fees, the total can be a significant amount. In most cases, there are options that will greatly reduce the amount of fees that a borrower pays, even to as little as nothing.

Many homeowners have refinanced multiple times since interest rates began their initial decent in November of 2008. Unfortunately, far too many of these borrowers were charged thousands of dollars each time they refinanced. As a result, their mortgage balances are now much higher than they were before the initial refinance. Although they now have lower interest rates, one can argue whether or not they are better off having added to their principal balances. In the current age of falling home values, it is more important now than ever that mortgage balances move lower not higher.

The solution to avoid having a mortgage balance continually increase, while still taking advantage of falling interest rates, is by managing the mortgage with no-fee loans. By definition, a no-fee loan is one where in exchange for a slightly higher interest rate a borrower can have all the closing costs that are legitimately incurred in doing a mortgage paid for them through the higher rate. Because there are loan size and credit score requirements, and the home must be owner occupied, a total no-fee loan may not be possible in some cases. However, a lower fee loan is always available and should be the second alternative to a true no-fee loan.

A Case Study

Let’s assume that a homeowner has a $250,000 mortgage with an interest rate of 4.75%. If the current market rate is 3.875% with $5,000 in closing costs, a no-fee loan will be in the ballpark of 4.25%. I have adjusted the loan amounts to compare apples for apples. In other words, if there is a difference in loan costs between the two options of $5,000, the no-fee option will have a loan amount that is $5,000 lower. That will most effectively show the true cost of paying closing costs to obtain a lower interest rate. Therefore, we would compare a balance of $255,000 at a rate of 3.875 vs. a loan amount of $250,000 at a rate of 4.25%. The results are as follows:

• Full-Fee Option: $255,000 @ 3.875% has a P&I payment of $1,199.10
• No-Fee Option: $250,000 @ 4.25% has a P&I payment of $1,229.85

You will see that by paying $5,000 in closing costs, the monthly payment will be $30.75 lower than the no-fee option. Therefore, the breakeven point is 162 months. If the loan will be in place for at least 13.5 years, then paying the fees for the lower rate may be the best option. However, that is very rare and does not account for the option to move the rate lower again should interest rates continue to fall without losing the amount paid for the loan.

Even if you have refinanced your mortgage in the most recent three years and would love to take advantage of the low interest rates available, a no-fee loan may be just what you need. Contact me at 801-501-7950 or e-mail me at mike@citycreekmortgage.com for a free mortgage review.

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Given the amount of misinformation continually circulating about mortgage loans, we’re ready to set the record straight – Mythbuster style! Oftentimes, misinformation keeps people from making decisions that could benefit their financial situation. However, through clarity and understanding of mortgage fact vs. fiction, different opportunities never realized before may arise.

Myth #1 – All loans have closing costs that the borrower must pay.

Truth: In exchange for a slightly higher interest rate you can receive a credit back that may cover all of the closing costs involved in the mortgage. This includes paying for the appraisal, underwriting fees and all title fees. Although there are certain restrictions involved (such as owner occupancy, loan size, loan-to-value and credit score), we typically suggest this option when it is available.

Myth #2 – Only refinance if there is at least a 1% savings to the interest rate.

Truth: If the loan does not have any closing costs that are being paid by the borrower and if the new mortgage balance is not increasing, any level of savings will be of benefit. For example: If a $250,000 loan is currently at a rate of 4.75% and we can do a no-fee loan at a rate of 4.25%, there will be a .5% savings to the interest rate without increasing the balance.

Myth #3 – All loans must be kept for 5 years in order for it to be worth refinancing.

Truth: If there are not any closing costs that are paid by the borrower, the breakeven point is immediate. Therefore, even if there are plans to sell the home in two years, it is worth completing a refinance to lower the interest rate. The borrower will, in turn, benefit from this lower interest rate for as long as the loan is in place.

Myth #4 – If I have already refinanced my loan in the last two years I should not refinance again.

Truth: First of all, the sad truth is that many people have paid thousands of dollars to refinance their home loans two or more times since mortgage rates began to fall in November of 2008. Now that rates have dropped even lower, many are stuck in the dilemma of wondering if they should refinance again. Although the decision to refinance in the past seemed to be good at the time, the reality is that many now owe more on their home loans than they did before they refinanced the first time. This is typically the result of receiving bad advice.

Even if a homeowner has refinanced recently, it is worth looking at the option again as long as a no-fee interest rate is lower than their current interest rate. If the no-fee interest rate is the same or higher than the current interest rate, it is best not to refinance.

Having a professional mortgage planner who offers superior advice is the way to ensure you are making wise decisions with regards to your home loan. For a no-cost or obligation mortgage review, call my office at 801-501-7950 or e-mail me at mike@citycreekmortgage.com to schedule your review.