This article intends to be a guide for people who are in the middle of refinancing their mortgage or about to start refinancing. It is not difficult to become confused by all the different terms, types of mortgages and whatnot.
As refinancing one's mortgage loan is a very important decision, it is highly recommended for the lender to become familiar with each and every single step of the process, aside from being completely knowledgeable of the specific vocabulary associated with the process. Once the initial informational phase is over, the lender should decide whether it is wise to refinance or not. Being completely aware of the different types of refinance available is key.
All About Mortgage Loan Types
Let's start from the beginning. Before dealing with mortgage refinance, we will review the most common types of mortgage loans.
Adjustable Rate Mortgage (ARM): this type of mortgage is usually called variable rate mortgage. It normally lasts 30 years and, as the name very well implies, the interest rate varies according to a preselected index rate. The initial interest rate is lower than that of a fixed rate mortgage, but as the loan matures, the interest rate fluctuates according to an economic index. This is clearly an advantage if rates stay low, but if they increase, the payments will increase too.
Fixed Rate Mortgage: this type of loan also lasts usually 30 years, but the difference with the ARM loan resides in the interest rate which applies. In this mortgage loan, the interest rate stays steady all through the life of the loan.
There are also two types of fixed rate mortgage loans which are worth mentioning.
Balloon Mortgage: this type of loan carries a usually lower interest rate. It becomes due after five or seven years and you will have to pay it off or refinance by the time it matures.
Biweekly Mortgage: payments associated with this type of home loan are biweekly, the lender makes the equivalent to 13 months of payments a year. Advantages associated with this mortgage loan are considerably lower interest costs.
All About Refinance Mortgage Types
Knowing your options is fundamental. It will determine whether you will be saving money and how much you will be saving and whether it is actually advisable to refinance or not. In some cases, one comes to realize that the potential savings associated with refinancing are not high enough to refinance at all.
No-Closing Cost Refinance: few upfront fees are related to this type of refinance. If the rate on your current mortgage loan is at least 1.5% higher than that in the market, it will be a good idea to refinance as you will be benefited financially.
Sarah Dinkins is a financial advisor who has been associated with Personal Loans since long ago. She also holds a master degree in economics from Harvard University. To find Mortgage Refinance Loans, Online Bad Credit Loans, Unsecured Loans, Debt Settlement Programs, Bad Credit Auto Loans, Poor Credit Mortgage Home Loans visit http://www.badcreditfinancialexperts.com
Tuesday, May 26, 2009
Refinance Closing Costs (by Tristan Hunt)
Closing Costs. Zero Closing Costs. No Out of Pocket Costs, No Points. We hear a lot about this stuff but when it comes time to refinance, do we really know what closing costs we are paying? The truth of the matter is that mortgage companies know you're fixated on closing costs. Because it's next to impossible to make an apples to apples comparison of closing costs between competing lenders, even with Good Faith Estimates, unscrupulous marketers are frequently able to get you to take your eye off the ball by promising unrealistic closing costs, while smoothly throwing a fastball and couple of sliders right past you for a strikeout. So how do we avoid being hit by the pitch? We need to evaluate the costs as they amortize into the loan, one way or another.
First, I'd like to debunk the notion of "No Closing Costs", heavily advertised by national marketers and banks. Have you ever heard the expression "There's no such thing as a Free Lunch?". All things in this world have costs to produce, and if you know anything about the companies that produce things, you'll agree that they do their darndest to make you pay for them.
Here is a list of things which are the bare minimum costs of refinancing a loan:
1. Title Search & Title Insurance: An inescapable fact of life, these are the costs charged by a third party company whose job it is to find out whose names are recorded in relation to the property, establish a chain of title going back 24 to 60 months, to uncover any judgments, liens, zoning issues, etc. That's the title search. Title work will also include name searches and "plat drawing". Then, based on a variety of factors, including the level of risk that they perceive from the title search and the value of the property, they underwrite Title Insurance which covers the lender in case they did not find someone or something on title which make the loan uncollectible. Like taxes, there's no way to escape this fee, however you may be able to minimize it if you can use the same company you used when you bought the house or last refinanced (look at the closing documents)
Title Search averages $300 nationally, with some markets coming in lower and some much higher
Title Insurance is Variable because there are so many factors in involved including the property's value, but the national average is about $700, although it's not unheard of for title insurance to cost as much as $3000 or more depending on the size and complexity of the property and the chain of title.
Settlement, the actual coordination of the loan closing, is often listed as an Attorney fee or Escrow Fee. This is necessary to ensure that all the paperwork is correct and that everyone who needs to get a check at closing, be it you, a service provider, your old lender, or any number of creditors you may be paying off. The average is $500, and varies again with the market.
Other title expenses may or may not be required at the discretion of the lender or title company to ensure the security of the property, including surveys, bankruptcy searches, etc. These fees again vary but you can expect your title bill to be the largest third party fees in connection with a loan.
2. Government Fees: Another one you can't get around is the government's fees which can be broken down into Taxes and Recording Fees, but can include more.
City/County/State Tax Stamps and Intangible or Mortgage Taxes vary so dramatically that I cannot even begin to address this issue here, but range from nothing at all to 3% or more of the property value. This is NOT the same thing as property tax.
Recording fees are the costs your county recorders office charges to file your deed, is mandatory, and range from $75 to $250 dollars.
3. Other Third Party Fees:
1. Appraisal: National Average of $350 but can be much higher depending on property size and location.
2. Credit Report: Averages $30
3. Flood / Pest / Other Inspections: Averages $100
4. Basic Lender Costs:
(remember, there are significant regional variations for these fees, and bigger homes carry bigger fees)
1. Tax Service: $75 Average
2. Wire Transfer: $35 Average
3. Processing: $400 Average
5. Lender Discount Points:
These are the "Points" on a loan, used to lower the interest rate to help you qualify for the loan based on your income. 1 point is 1% of the loan amount, so one a $200,000 loan a point is $2,000. You usually don't need to pay points if your debt to income ratio or DTI, the measure of all of your debt payments plus your monthly housing expenses under the new loan, are below 40%. DTI guidelines are much more stringent today than they were even 3 months ago, especially for borrowers who are stating their income to qualify for the refinance.
6. Fees & Profit:
Up until now, everything we have discussed has been around the hard costs of the loan. Now we get into the fee for service, where the lender or broker actually tries to make money, not unlike any other service provider such as an investment advisor, realtor or lawyer:
1. Origination Fees: Often charged as a percentage of the loan
2. Broker/Lender Fees: Again often charged as a Percentage of the loan
It's important to remember that no one can do a loan for free, no matter how good of a customer you are, because each loan is a profit or loss to the lender by itself, and they have to assume that at one point or another the loan must be sold. Their time and their risk are valuable, just as your own or your lawyer's or your realtor's.
Closing costs vary not only by location, but depend heavily on what you qualify for, so your credit will affect the final numbers, especially with regard to Discount Points. Calculating your own closing costs can be best achieved by speaking with a mortgage company who can give you a Good Faith Estimate which outlines all of the above mentioned fees.
Different Ways We Wind Up Paying For Closing Costs
Now that you've seen everything laid out, do you believe anyone can offer a "No Closing Costs" refinance? These hard costs are always paid for one of two ways:
1. You are billed for each item and can choose to pay them in cash at closing or to roll the costs into the new refinance so that there is no money out of pocket to you.
2. You are charged a higher rate than you would normally qualify for over the life of the loan, which allows the lender to realize a premium, or a profit, which they can then credit toward your closing costs. So if the best rate you qualify for, with no discounts, is 6.00%, raising the rate slightly, to 6.375% or 6.625%, may provide you with a "rebate" which the lender can choose to apply to closing costs.
Sometimes these methods are used in combination. My recommendation is to compare the payments. Let's look at two completely hypothetical examples:
Example 1: Roll Your Costs into the Loan Balance
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2446 for Principal & Interest
And a Monthly Payment of $2040 for Interest Only
A Typical Minimum Payment Option Would be About $1500
Example 2: Use a Higher Rate to Finance Closing Costs
$400,000 Refinance Loan Amount
"$0" in Closing Costs (assuming the $8,000 in hard costs is advertised as Zero)
------------------------------------------
$400,000 Financed
At 6.625% Interest over 30 Years
Has a Monthly Payment of $2561 for Principal & Interest
And a Monthly Payment of $2208 for Interest Only
A Typical Minimum Payment Option Would be About $1465
The reason I've included Interest Only payment option figures above is to show you how much more interest you pay each month if you choose a "Zero Closing Costs" option from any leading lender, versus rolling those costs into the loan. The final option is to pay for these costs out of pocket, which is not a very popular option today, but deserves treatment.
Example 3: Pay your own closing costs
$400,000 Refinance Loan Amount
$8,000 in Closing Costs Paid out of Pocket
------------------------------------------
$400,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2400 for Principal & Interest
And a Monthly Payment of $2000 for Interest Only
A Typical Minimum Payment Option Would be About $1465
Compared to rolling the closing costs into your loan, paying them out of pocket saves 46 dollars per month of principal and interest or 40 dollars of interest, a savings of about $500 a year or less. So unless you can't get a return of more than $500 per year on your $8,000 investment (about 6.25%), there's no strong argument to pay for the closing costs out of pocket. Online savings accounts and CDs already offer rates equivalent to this, and the S&P 500 has been returning about double this rate, so I personally would rather have access to my money and have it working for me. I won't get into the fact that the extra $500 or so dollars of mortgage interest per year should be tax deductible as well (and please consult your CPA, we don't give tax advice).
Cost - Benefit Analysis
Finally, we can turn to the benefits of refinancing and weigh them against the costs. We are going to do this by taking a before and after hypothetical situation, with the closing costs rolled in.
Hypothetically, let's say that you want to refinance to Lower Your Monthly Payment, Change Your Loan Terms to get a fixed rate, and Take Advantage of the Equity Growth in Your Home to pay off your personal loans and credit card bills, and to improve your home to increase your quality of life. You are not planning to retire in this home, and plan on selling it in 5 years, but like the idea of a secure, fixed rate just in case rates go up a lot over the next 5 years. With the way the economy is going, you also want to keep your mortgage payment as low as possible, so in case anything happens you have the option to pay less on your mortgage.
You have a current mortgage balance of $350,000 dollars on which you pay $2250 per month, and your home is worth $600,000 dollars today compared to the $425,000 it was worth when you bought it.
You have about $32,000 in debts, on which you pay minimum payments of about $1500 a month and would like to take an additional $18,000 to do the kitchen, which you believe would improve the value of your home by $30,000.
So your total monthly spending on mortgage + cards etc. is $3750
Let's say your credit score is 620, very average for a person with your level of credit card and other unsecured debt, and you prefer to state your income.
Hypothetically (this is only meant to be illustrative), you receive a rate quote and Good Faith Estimate which outlines the following:
Quote 1: Conventional 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.250% Interest over 30 Years
Has a Monthly Payment of $2783 for Principal & Interest
A Savings of $967.00 a month
Quote 2: Interest Only 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
A Savings of $1200.00 a month
It seems like a no-brainer right? The interest only is much lower, however your basic housing expense has still gone up $300, even though you've paid off all the cards and saved almost 1200 there. With the credit cards, even if you experienced a loss of income due to circumstances outside of your control, at least you could have afforded to miss those payments and scratch together money to make your mortgage payment, because the credit card lates would not cause you to lose your house. But with this refinance, which meets most of your goals, now you have to come up with a larger mortgage payment. So you get one more quote for a mortgage which allows for deferred interest, or making a minimum payment when you want to:
Quote 3: 30 Year Fixed Rate Cash Flow option mortgage
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
Has a Minimum Payment Option of $1497
A Savings of $1200.00 a month on Interest Only
Ability to Defer Interest and Reduce your current minimum payment by over $2250.00
This is a fixed rate loan with the ability to defer interest, or a negative amortization loan, which allows you to use your remaining equity like a home equity line of credit whenever you want, with no closing costs. When you want to make a lower payment so your monthly cash flow goes further, you can do so by making the minimum payment, which borrows from your home equity to cover the difference between the interest only payment and the minimum payment. While the adjustable rate version of these loans are too risky to achieve your particular goals, a truly fixed rate cash flow option might be the answer, fulfilling all of your reasons to refinance while giving you security and flexibility for when a lower payment might be helpful.
Conclusion:
All loans costs money to originate and refinance, even if it's not always clear how you may be paying for them. As we have seen, if you aren't taking out a fixed rate cash flow option mortgage with the intent of only paying the minimum payment, most of the time it's better to roll your closing costs into your loan, so that there is no out of pocket expense to you. Always remember to see if the loan achieves your goals, and don't put too much stock in the GFE's you receive while shopping around, because people, whether broker or bank, are more than willing to lie to you to beat out their competition initially, so they can lock you into a process which you cannot easily reverse. My recommendation is to speak with as many people as you can, but evaluate them on the basis of trust. You may find that the person who gives you the highest quote may be the only one telling you the truth. This is not a simple subject to discuss, and while we have tried to treat the subject thoroughly, a consultation with a refinancing specialist would be the best way to get answers specific to your situation.
Tristan Hunt is a seasoned financial professional with a wealth of experience in the mortgage business, advising clients on their biggest single investment at Refinance One, one of the nation's leading specialty mortgage companies.
Phone: (800)515-8443
Email: Customers@RefinanceOne.net
First, I'd like to debunk the notion of "No Closing Costs", heavily advertised by national marketers and banks. Have you ever heard the expression "There's no such thing as a Free Lunch?". All things in this world have costs to produce, and if you know anything about the companies that produce things, you'll agree that they do their darndest to make you pay for them.
Here is a list of things which are the bare minimum costs of refinancing a loan:
1. Title Search & Title Insurance: An inescapable fact of life, these are the costs charged by a third party company whose job it is to find out whose names are recorded in relation to the property, establish a chain of title going back 24 to 60 months, to uncover any judgments, liens, zoning issues, etc. That's the title search. Title work will also include name searches and "plat drawing". Then, based on a variety of factors, including the level of risk that they perceive from the title search and the value of the property, they underwrite Title Insurance which covers the lender in case they did not find someone or something on title which make the loan uncollectible. Like taxes, there's no way to escape this fee, however you may be able to minimize it if you can use the same company you used when you bought the house or last refinanced (look at the closing documents)
Title Search averages $300 nationally, with some markets coming in lower and some much higher
Title Insurance is Variable because there are so many factors in involved including the property's value, but the national average is about $700, although it's not unheard of for title insurance to cost as much as $3000 or more depending on the size and complexity of the property and the chain of title.
Settlement, the actual coordination of the loan closing, is often listed as an Attorney fee or Escrow Fee. This is necessary to ensure that all the paperwork is correct and that everyone who needs to get a check at closing, be it you, a service provider, your old lender, or any number of creditors you may be paying off. The average is $500, and varies again with the market.
Other title expenses may or may not be required at the discretion of the lender or title company to ensure the security of the property, including surveys, bankruptcy searches, etc. These fees again vary but you can expect your title bill to be the largest third party fees in connection with a loan.
2. Government Fees: Another one you can't get around is the government's fees which can be broken down into Taxes and Recording Fees, but can include more.
City/County/State Tax Stamps and Intangible or Mortgage Taxes vary so dramatically that I cannot even begin to address this issue here, but range from nothing at all to 3% or more of the property value. This is NOT the same thing as property tax.
Recording fees are the costs your county recorders office charges to file your deed, is mandatory, and range from $75 to $250 dollars.
3. Other Third Party Fees:
1. Appraisal: National Average of $350 but can be much higher depending on property size and location.
2. Credit Report: Averages $30
3. Flood / Pest / Other Inspections: Averages $100
4. Basic Lender Costs:
(remember, there are significant regional variations for these fees, and bigger homes carry bigger fees)
1. Tax Service: $75 Average
2. Wire Transfer: $35 Average
3. Processing: $400 Average
5. Lender Discount Points:
These are the "Points" on a loan, used to lower the interest rate to help you qualify for the loan based on your income. 1 point is 1% of the loan amount, so one a $200,000 loan a point is $2,000. You usually don't need to pay points if your debt to income ratio or DTI, the measure of all of your debt payments plus your monthly housing expenses under the new loan, are below 40%. DTI guidelines are much more stringent today than they were even 3 months ago, especially for borrowers who are stating their income to qualify for the refinance.
6. Fees & Profit:
Up until now, everything we have discussed has been around the hard costs of the loan. Now we get into the fee for service, where the lender or broker actually tries to make money, not unlike any other service provider such as an investment advisor, realtor or lawyer:
1. Origination Fees: Often charged as a percentage of the loan
2. Broker/Lender Fees: Again often charged as a Percentage of the loan
It's important to remember that no one can do a loan for free, no matter how good of a customer you are, because each loan is a profit or loss to the lender by itself, and they have to assume that at one point or another the loan must be sold. Their time and their risk are valuable, just as your own or your lawyer's or your realtor's.
Closing costs vary not only by location, but depend heavily on what you qualify for, so your credit will affect the final numbers, especially with regard to Discount Points. Calculating your own closing costs can be best achieved by speaking with a mortgage company who can give you a Good Faith Estimate which outlines all of the above mentioned fees.
Different Ways We Wind Up Paying For Closing Costs
Now that you've seen everything laid out, do you believe anyone can offer a "No Closing Costs" refinance? These hard costs are always paid for one of two ways:
1. You are billed for each item and can choose to pay them in cash at closing or to roll the costs into the new refinance so that there is no money out of pocket to you.
2. You are charged a higher rate than you would normally qualify for over the life of the loan, which allows the lender to realize a premium, or a profit, which they can then credit toward your closing costs. So if the best rate you qualify for, with no discounts, is 6.00%, raising the rate slightly, to 6.375% or 6.625%, may provide you with a "rebate" which the lender can choose to apply to closing costs.
Sometimes these methods are used in combination. My recommendation is to compare the payments. Let's look at two completely hypothetical examples:
Example 1: Roll Your Costs into the Loan Balance
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2446 for Principal & Interest
And a Monthly Payment of $2040 for Interest Only
A Typical Minimum Payment Option Would be About $1500
Example 2: Use a Higher Rate to Finance Closing Costs
$400,000 Refinance Loan Amount
"$0" in Closing Costs (assuming the $8,000 in hard costs is advertised as Zero)
------------------------------------------
$400,000 Financed
At 6.625% Interest over 30 Years
Has a Monthly Payment of $2561 for Principal & Interest
And a Monthly Payment of $2208 for Interest Only
A Typical Minimum Payment Option Would be About $1465
The reason I've included Interest Only payment option figures above is to show you how much more interest you pay each month if you choose a "Zero Closing Costs" option from any leading lender, versus rolling those costs into the loan. The final option is to pay for these costs out of pocket, which is not a very popular option today, but deserves treatment.
Example 3: Pay your own closing costs
$400,000 Refinance Loan Amount
$8,000 in Closing Costs Paid out of Pocket
------------------------------------------
$400,000 Financed
At 6.000% Interest over 30 Years
Has a Monthly Payment of $2400 for Principal & Interest
And a Monthly Payment of $2000 for Interest Only
A Typical Minimum Payment Option Would be About $1465
Compared to rolling the closing costs into your loan, paying them out of pocket saves 46 dollars per month of principal and interest or 40 dollars of interest, a savings of about $500 a year or less. So unless you can't get a return of more than $500 per year on your $8,000 investment (about 6.25%), there's no strong argument to pay for the closing costs out of pocket. Online savings accounts and CDs already offer rates equivalent to this, and the S&P 500 has been returning about double this rate, so I personally would rather have access to my money and have it working for me. I won't get into the fact that the extra $500 or so dollars of mortgage interest per year should be tax deductible as well (and please consult your CPA, we don't give tax advice).
Cost - Benefit Analysis
Finally, we can turn to the benefits of refinancing and weigh them against the costs. We are going to do this by taking a before and after hypothetical situation, with the closing costs rolled in.
Hypothetically, let's say that you want to refinance to Lower Your Monthly Payment, Change Your Loan Terms to get a fixed rate, and Take Advantage of the Equity Growth in Your Home to pay off your personal loans and credit card bills, and to improve your home to increase your quality of life. You are not planning to retire in this home, and plan on selling it in 5 years, but like the idea of a secure, fixed rate just in case rates go up a lot over the next 5 years. With the way the economy is going, you also want to keep your mortgage payment as low as possible, so in case anything happens you have the option to pay less on your mortgage.
You have a current mortgage balance of $350,000 dollars on which you pay $2250 per month, and your home is worth $600,000 dollars today compared to the $425,000 it was worth when you bought it.
You have about $32,000 in debts, on which you pay minimum payments of about $1500 a month and would like to take an additional $18,000 to do the kitchen, which you believe would improve the value of your home by $30,000.
So your total monthly spending on mortgage + cards etc. is $3750
Let's say your credit score is 620, very average for a person with your level of credit card and other unsecured debt, and you prefer to state your income.
Hypothetically (this is only meant to be illustrative), you receive a rate quote and Good Faith Estimate which outlines the following:
Quote 1: Conventional 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.250% Interest over 30 Years
Has a Monthly Payment of $2783 for Principal & Interest
A Savings of $967.00 a month
Quote 2: Interest Only 30 Year Fixed
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
A Savings of $1200.00 a month
It seems like a no-brainer right? The interest only is much lower, however your basic housing expense has still gone up $300, even though you've paid off all the cards and saved almost 1200 there. With the credit cards, even if you experienced a loss of income due to circumstances outside of your control, at least you could have afforded to miss those payments and scratch together money to make your mortgage payment, because the credit card lates would not cause you to lose your house. But with this refinance, which meets most of your goals, now you have to come up with a larger mortgage payment. So you get one more quote for a mortgage which allows for deferred interest, or making a minimum payment when you want to:
Quote 3: 30 Year Fixed Rate Cash Flow option mortgage
$400,000 Refinance Loan Amount
$8,000 in Closing Costs
------------------------------------------
$408,000 Financed
At 7.500% Interest over 30 Years
Has a Monthly Payment of $2550 for Interest Only
Has a Minimum Payment Option of $1497
A Savings of $1200.00 a month on Interest Only
Ability to Defer Interest and Reduce your current minimum payment by over $2250.00
This is a fixed rate loan with the ability to defer interest, or a negative amortization loan, which allows you to use your remaining equity like a home equity line of credit whenever you want, with no closing costs. When you want to make a lower payment so your monthly cash flow goes further, you can do so by making the minimum payment, which borrows from your home equity to cover the difference between the interest only payment and the minimum payment. While the adjustable rate version of these loans are too risky to achieve your particular goals, a truly fixed rate cash flow option might be the answer, fulfilling all of your reasons to refinance while giving you security and flexibility for when a lower payment might be helpful.
Conclusion:
All loans costs money to originate and refinance, even if it's not always clear how you may be paying for them. As we have seen, if you aren't taking out a fixed rate cash flow option mortgage with the intent of only paying the minimum payment, most of the time it's better to roll your closing costs into your loan, so that there is no out of pocket expense to you. Always remember to see if the loan achieves your goals, and don't put too much stock in the GFE's you receive while shopping around, because people, whether broker or bank, are more than willing to lie to you to beat out their competition initially, so they can lock you into a process which you cannot easily reverse. My recommendation is to speak with as many people as you can, but evaluate them on the basis of trust. You may find that the person who gives you the highest quote may be the only one telling you the truth. This is not a simple subject to discuss, and while we have tried to treat the subject thoroughly, a consultation with a refinancing specialist would be the best way to get answers specific to your situation.
Tristan Hunt is a seasoned financial professional with a wealth of experience in the mortgage business, advising clients on their biggest single investment at Refinance One, one of the nation's leading specialty mortgage companies.
Phone: (800)515-8443
Email: Customers@RefinanceOne.net
Refinance in Foreclosure (by Tristan Hunt)
People across America are increasingly being faced with a homeowner's worst nightmare: Foreclosure. The possibility of losing your home to the bank is very real, and it's very normal to be scared and confused as the process moves along. What's important is to keep a cool head, don't panic, and evaluate your options as early in the process as possible. Many people who are approaching or are currently in a foreclosure do not realize that they may be qualified to refinance while in foreclosure and save their home, mainly because by this point in the process they have experienced rejection and denial by their own lender and often several others. But if you have Equity in your home, you can refinance in foreclosure and get back on track to improving your credit.
Refinancing in foreclosure is not like normal refinancing. When you apply for a regular, or conventional mortgage refinance, the most important thing a lender looks at when deciding whether or not to approve the loan is your credit and mortgage payment history. If you have not been more than 90 days late or behind on your mortgage payments, and your FICO credit score is above 500, conventional lenders will look at your refinance application and consider it. They may not approve it, but you'll at least get looked at. When you go beyond 90 days late on your mortgage payments, no conventional lender will review your application, no matter how much money you make or how much better your situation is now than when you fell behind. Once you are considered 120 days late or behind on the mortgage, or your credit score falls below 500, the conventional lending industry simply cannot take the risks of lending to you anymore. If you've been rejected for a loan during the foreclosure process, even before the notice of default was recorded, it is usually because you are over 90 to 120 days late or your credit score is under 500, or both.
You are now in a special situation, and banks don't like "special". They just aren't set up for "outside the box" financing, no matter how much sense it makes, so their response is to either deny your application, or in the case of the lender who holds the mortgage on your home which has fallen behind, they do the only thing they can, foreclose on the home and force its sale at auction to the highest bidder.
In order to handle special situations like this, you need a lender who specializes in refinancing foreclosures. There are only a few out there, but you'll know one when you find one, because the first question they will ask you is "If you had to sell your home quickly, how much would it sell for?", followed quickly by "And how much do you owe on your first mortgage". This is because they are trying to establish how much Equity you have in the property. Equity for these purposes can be calculated easily:
1. Just subtract the Balance of your first mortgage from the Value of your home.
2. Take that Number and divide it by your property Value (there's that word again),
3. Multiply by 100 and you've got your gross Equity percentage.
Because your credit and mortgage history cannot be considered for the purpose of qualifying you for a foreclosure loan, foreclosure refinancing is all about Equity. Lenders specializing in foreclosure refinancing will routinely request that you order an appraisal and an additional appraisal review performed by a realtor, commonly referred to as a BPO or Broker Price Opinion.
Here's a general guideline: If you have 35% or more Equity in your property, and your property is Valued at $200,000 or more, you are probably qualified for a foreclosure refinance, and you can save your home from the auction block if you act quickly. Again, this is a rule of thumb. Sometimes, you may be able to get away with having a little bit less Equity, or a little bit less Value, and in some states you will need much more Equity and a much higher Value to qualify for a refinance in a foreclosure scenario.
If you have two mortgages, a first and second, you still may be eligible for a foreclosure refinance if you meet one or more of the following conditions:
1. The Balances of your 1st and 2nd mortgages added together amounts to less than 70% of the Value of your home.
2. Your 2nd mortgage can be "subordinated", or kept in place while you refinance the 1st mortgage.
I can't emphasize enough the importance of acting as quickly as possible to save your home through a foreclosure refinance. The foreclosure clock starts ticking from the day on which you receive a notice of default or on which you become 120 days past due on your mortgage payments, and it can move very quickly. While most foreclosures don't get to the stage of a property auction, sherrif's sale or trustee sale in which you will lose your home until about 120 days from the recording of the NOD ( Notice Of Default ), in many states this can happen much more quickly, as fast as 60 days. While you delay, your mortgage company's payoff balance, the mount required to cure the default and prevent foreclosure, will increase as legal fees and interest pile up, eating away at your Equity and robbing you of the ability to refinance out of the foreclosure. It's easy to feel lost, almost paralyzed by the shock and fear of losing your home, but if you are serious about saving your home from foreclosure, get on the phone and find a foreclosure refinancing specialist as quickly as possible.
Don't forget, your first priority is to save your home, and a foreclosure refinance is considered a short term loan, usually with a fixed rate for 2 or 3 years. This gives you enough time to get your credit back together and refinance at the end of the fixed period into a much lower payment. Because you have shown your current lender, as well as the credit reporting agencies and by association every other lender in the country that you could not make the mortgage payments in accordance with the terms of the loan which is in foreclosure, it's understandable that the lender providing the foreclosure refinance is taking a substantial risk in lending you the money to prevent the foreclosure, and the financing will not be at a very low rate. However, in most cases, the foreclosure refinance loan's payments are Interest Only, and will be lower than the payments on most forbearance, or payment agreements, which your lender may have proposed or enrolled you in prior to filing for foreclosure. And if you consolidate high interest debts like credit cards and personal loans, payoff judgments, and clear away liens, you can potentially free up a lot of cash flow from your monthly budget and begin improving your credit score with a clean slate.
Don't waste time talking to lenders and brokers who don't know the foreclosure refinance process inside out, there are simply too many out there who will just waste your time and money trying to learn how to get your foreclosure refinanced while you slide closer and closer to a sale date and the real possibility of losing your home. On the other hand, the right lender can help you lay out other options to save the equity in your home even if you don't qualify for a foreclosure refinance. Find a special lender for your special situation, and you will have a fighting chance of refinancing in foreclosure and saving your home.
Tristan Hunt is a seasoned financial professional with a wealth of experience in the mortgage business, advising clients on their biggest single investment at Refinance One, one of the nation's leading specialty mortgage companies.
Phone: (800)515-8443
Email: Customers@RefinanceOne.net
Refinancing in foreclosure is not like normal refinancing. When you apply for a regular, or conventional mortgage refinance, the most important thing a lender looks at when deciding whether or not to approve the loan is your credit and mortgage payment history. If you have not been more than 90 days late or behind on your mortgage payments, and your FICO credit score is above 500, conventional lenders will look at your refinance application and consider it. They may not approve it, but you'll at least get looked at. When you go beyond 90 days late on your mortgage payments, no conventional lender will review your application, no matter how much money you make or how much better your situation is now than when you fell behind. Once you are considered 120 days late or behind on the mortgage, or your credit score falls below 500, the conventional lending industry simply cannot take the risks of lending to you anymore. If you've been rejected for a loan during the foreclosure process, even before the notice of default was recorded, it is usually because you are over 90 to 120 days late or your credit score is under 500, or both.
You are now in a special situation, and banks don't like "special". They just aren't set up for "outside the box" financing, no matter how much sense it makes, so their response is to either deny your application, or in the case of the lender who holds the mortgage on your home which has fallen behind, they do the only thing they can, foreclose on the home and force its sale at auction to the highest bidder.
In order to handle special situations like this, you need a lender who specializes in refinancing foreclosures. There are only a few out there, but you'll know one when you find one, because the first question they will ask you is "If you had to sell your home quickly, how much would it sell for?", followed quickly by "And how much do you owe on your first mortgage". This is because they are trying to establish how much Equity you have in the property. Equity for these purposes can be calculated easily:
1. Just subtract the Balance of your first mortgage from the Value of your home.
2. Take that Number and divide it by your property Value (there's that word again),
3. Multiply by 100 and you've got your gross Equity percentage.
Because your credit and mortgage history cannot be considered for the purpose of qualifying you for a foreclosure loan, foreclosure refinancing is all about Equity. Lenders specializing in foreclosure refinancing will routinely request that you order an appraisal and an additional appraisal review performed by a realtor, commonly referred to as a BPO or Broker Price Opinion.
Here's a general guideline: If you have 35% or more Equity in your property, and your property is Valued at $200,000 or more, you are probably qualified for a foreclosure refinance, and you can save your home from the auction block if you act quickly. Again, this is a rule of thumb. Sometimes, you may be able to get away with having a little bit less Equity, or a little bit less Value, and in some states you will need much more Equity and a much higher Value to qualify for a refinance in a foreclosure scenario.
If you have two mortgages, a first and second, you still may be eligible for a foreclosure refinance if you meet one or more of the following conditions:
1. The Balances of your 1st and 2nd mortgages added together amounts to less than 70% of the Value of your home.
2. Your 2nd mortgage can be "subordinated", or kept in place while you refinance the 1st mortgage.
I can't emphasize enough the importance of acting as quickly as possible to save your home through a foreclosure refinance. The foreclosure clock starts ticking from the day on which you receive a notice of default or on which you become 120 days past due on your mortgage payments, and it can move very quickly. While most foreclosures don't get to the stage of a property auction, sherrif's sale or trustee sale in which you will lose your home until about 120 days from the recording of the NOD ( Notice Of Default ), in many states this can happen much more quickly, as fast as 60 days. While you delay, your mortgage company's payoff balance, the mount required to cure the default and prevent foreclosure, will increase as legal fees and interest pile up, eating away at your Equity and robbing you of the ability to refinance out of the foreclosure. It's easy to feel lost, almost paralyzed by the shock and fear of losing your home, but if you are serious about saving your home from foreclosure, get on the phone and find a foreclosure refinancing specialist as quickly as possible.
Don't forget, your first priority is to save your home, and a foreclosure refinance is considered a short term loan, usually with a fixed rate for 2 or 3 years. This gives you enough time to get your credit back together and refinance at the end of the fixed period into a much lower payment. Because you have shown your current lender, as well as the credit reporting agencies and by association every other lender in the country that you could not make the mortgage payments in accordance with the terms of the loan which is in foreclosure, it's understandable that the lender providing the foreclosure refinance is taking a substantial risk in lending you the money to prevent the foreclosure, and the financing will not be at a very low rate. However, in most cases, the foreclosure refinance loan's payments are Interest Only, and will be lower than the payments on most forbearance, or payment agreements, which your lender may have proposed or enrolled you in prior to filing for foreclosure. And if you consolidate high interest debts like credit cards and personal loans, payoff judgments, and clear away liens, you can potentially free up a lot of cash flow from your monthly budget and begin improving your credit score with a clean slate.
Don't waste time talking to lenders and brokers who don't know the foreclosure refinance process inside out, there are simply too many out there who will just waste your time and money trying to learn how to get your foreclosure refinanced while you slide closer and closer to a sale date and the real possibility of losing your home. On the other hand, the right lender can help you lay out other options to save the equity in your home even if you don't qualify for a foreclosure refinance. Find a special lender for your special situation, and you will have a fighting chance of refinancing in foreclosure and saving your home.
Tristan Hunt is a seasoned financial professional with a wealth of experience in the mortgage business, advising clients on their biggest single investment at Refinance One, one of the nation's leading specialty mortgage companies.
Phone: (800)515-8443
Email: Customers@RefinanceOne.net
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