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REFINANCE A HOME - FAQs
When does it make sense to refinance?
There are three questions that need to be answered. First, how much will a refinance cost? Second, how much will this save me each month and finally, how long will it take me to break even before I start saving. If you plan on owning the property one month after the savings kick in, then it makes sense. Otherwise, keep what you have.
What are adjustable rate mortgages and how do they work?
The most comprehensive yet easy to follow definition of an Adjustable Rate Mortgage and how they work can be found in the U.S. Department of Housing and Urban Development's Consumer Handbook on Adjustable Rate Mortgages.
What is a Home Equity Line Of Credit?
The Federal Reserve Board published a fantastic educational pamphlet on home equity lines of credit. If you're not sure what a home equity line of credit is or how it works, you should read the publication.
When Your Home Is On The Line:
Capital First Home Loans, Inc. offers one of the most flexible equity lines available.
· Borrow up to 100% of the value of your home!
· Play it safe with convenient lock options.
If you take out a $50,000.00 line of credit with a $25,000.00 initial advance, you can lock the rate on the $25,000.00 advance and keep the remaining $25,000.00 as a line of credit for future use. You can then advance another $10,000.00 and lock that as well. Now you would have a fixed rate loan for $50,000.00 another fixed rate loan for $10,000.00 and a $15,000.00 line to use whenever you like. You can lock portions of your line of credit up to three times.
· No closing costs.
There are no closing costs to open a line of credit. Appraisals, etc. are all done at no cost to you.
· Is the interest I pay considered tax-deductible mortgage interest.
The general rule of thumb is that interest paid on lines of credit under $100,000.00 secured by your primary residence is tax-deductible mortgage interest. Consult your tax adviser to be absolutely certain that it applies to your situation.
How much will a refinance cost?
There are a few factors that determine how much your closing costs will be or if you will have any closing costs at all. If you choose to pay closing costs, these are typically included in the new loan and not "out-of-pocket" that you would have to bring to the loan closing.
• Zero or low closing cost loans.
We have all seen them advertised. One fee ($395.00) or "No Closing Costs" for a mortgage loan. Capital First Home Loans, Inc. also offers no closing costs and low closing costs mortgage loans. But don't be fooled, nobody is going to give you anything for free. You are trading interest rate for closing costs. So which is better? This depends on how long you are going to own the home. If you pay an extra $30.00 per month because you chose (whether you knew it or not) a higher interest rate to avoid closing costs, you will pay an additional $10,800.00 over the life of a 30 year loan or roughly three times the closing costs. In the same scenario, if you sold your home after two years, you would have paid an additional $720.00 in interest but avoided $2,500.00 in closing costs. So, Calculate the break-even point (Closing costs/monthly savings for the lower rate). If you plan on being in the home past this point (usually 3-5 years), pay closing costs. Otherwise a zero or low closing costs loan would be better.
• Should I pay discount points?
If you know you will own the home for a very long time, then it may make sense to pay points to buy a lower interest rate. Again, you have to calculate the break-even point. One point equals 1% of the amount borrowed. If you borrow $100,000.00 then one point equals $1,000.00. Let's say you paid 1 point to buy your rate down from 6% to 5.625%. Paying the additional $1,000.00 up front would save you $23.90 per month. $1,000.00/$23.90 per month = 41.8 months to break even. If you plan on owning this home for 3.5 years, you will have broke even for paying the point and save an additional $23.90 per month for the remainder of the 30-year mortgage or about $7,500.00.
• Loan Size.
Size does matter when it comes to total closing costs but not greatly. Assuming no discount points are paid (which are calculated as a percentage of the amount borrowed) the only other fee that is tied to loan size is title insurance. This is typically $5.75 per thousand borrowed up to $150,000.00. It then begins to decline to $4.50 per thousand up to $250,000.00 then again to $3.50 per thousand up to $500,000.00.
What is an interest only loan?
A mortgage is "interest-only" if the scheduled monthly mortgage payment (the payment the borrower is required to make) does not include a principle payment. The option to pay interest-only lasts for a specified period, usually two to 10 years. Borrowers have the right to pay more than interest if they want to.
• What happens after the "interest-only" period.
After the initial "interest-only" period, the loan is reamortized over the remaining term. For instance, on a 30-year fixed, interest-only loan, the principle balance is reamortized at the end of year 10 over the remaining 20 years. This allows for a low payment at the beginning of the loan but eventually you will have to pay interest and principle to pay back the loan.
What terms are available?
The current fixed rate terms available for mortgage financing are 10, 15, 20, 25, 30 and 40 years. When choosing the terms of a mortgage it is important to keep in mind that paymentis a function of term. The longer the term, the lower the payment will be.
While a lower term loan comes with the benefit of a lower interest rate, remember that the payment will be higher in order to compensate for the shorter time frame to pay the loan back. Consider a longer term as you can always apply additional principle to your monthly payments to pay the loan off faster.
The current adjustable rate terms available are 3, 5, 7, and 10 years. These are 30 year loans with an initial fixed rate period. After the fixed period, the rate can periodically adjust but is capped. For more information on adjustable rate mortgages click here now.
The current interest-only terms available are 30-year fixed (interest only for 10 years), and 3, 5, 7, and 10 year ARMs (30 year loans fixed for 3, 5, 7, and 10 years respectively then may adjust: An interest-only period of 10 years, reamoritized over the remaining 20 years).
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