Friday, April 26, 2013
Refinancing for a Lower Rate: How Much Do I Need to Reduce My Current Rate to Make Refinancing Worthwhile?
There are several good reasons to refinance your mortgage such as consolidating debt, getting cash out, extending your term for a lower monthly payment, but I think the rate/term refinance is my favorite. It often puts members in a better financial position both in the short-term and in the long-term. But, how low should a mortgage rate be to make refinancing a worthwhile decision? I have heard several different theories on what the interest rate savings needs to be for refinancing to be advantageous. Some say the magic number is a 0.5% rate reduction. I’ve also heard the rule of thumb is 1% off your current rate. However, I’ve even heard it must be at least 2%, as well.
With all these differing views, here are a few factors that I think are important for you to consider:
Your current mortgage balance
- The greater your remaining balance, the more you will benefit from refinancing and obtaining a lower mortgage rate.
The cost of refinancing
- Financial institutions often allow you to add in all of your closing costs into your new loan. However, closing costs do exist (even when you are only looking to pay off what you owe on your existing mortgage) and can be expensive. Closing costs will include a full appraisal, a new title examination, lender’s title insurance, processing fees, underwriting fees, and other necessary miscellaneous fees. These fees will increase your loan amount, which decrease your equity.
The remaining term on your loan
- As with the mortgage balance, the greater the term you have remaining on your loan, the more you will benefit from a lower interest rate.
Whether you have plans to sell your house or pay off the entire loan in the near future
- If the answer to this question is yes, you will need to calculate potential interest savings over the estimated time you plan to keep your loan, rather than the entire loan term. The longer you plan to stay in your home without paying off the loan, the more a rate/term refinance will benefit you.
As you can see, I do not believe there is a specific numeric rate reduction needed to refinance. Every situation is different. As long as you are not extending the term on your loan, the decision is really simple math. If you lower your interest rate, you will lower your monthly payment. This will create a savings over the course of the remaining loan term. With the current record low mortgage rates, your savings can be significant and in many cases, refinancing is a no-brainer. You can benefit from these savings in the form of a lower monthly payment or you could chose to keep a similar monthly payment and benefit from the savings in the form of a shorter term.
A great exercise to see what your potential interest savings may be is to research the current mortgage rates and use a mortgage calculator online to compare your current mortgage to what your new mortgage would be if you refinanced. Below, I’ve included a sample calculation to demonstrate this for you.
Example of Interest Savings Exercise:
Current loan balance: $150,000
Remaining term: 180 months (15 years)
Current rate: 5.375%
Current monthly payment: $1216.03
Current total payments amount: $218,884.88
Proposed loan balance with closing costs: $153,000
Proposed term: 180 months (15 years)
Proposed rate: 2.875%
Proposed monthly payment: $1047.58
Proposed total payment amount: $188,563.92
Current Total Payment Amount $218,884.88 – Proposed Total Payment Amount $188,563.92 = $30,320.96 Savings
In this case, is it worth it to add in the closing costs to your loan and go through the refinance process? As you can see, you could potentially save more than $30,000 over the next 15 years by refinancing. In my opinion, the answer to this question is yes. Because this exercise is an easy step in helping you consider refinancing, I would suggest taking a few minutes to plug in your numbers and check out your potential savings.
Thursday, February 28, 2013
A common theme I see in denied purchase applications is members not positioning themselves to be approved for their first mortgage loan in advance. I so often hear statements like "If I had only known about that earlier, I could have taken care of that by now." But, after they do take care of the item and get their credit file in order, it may be too late to buy that starter home they had their eye on.
CU Promise loans, VA loans, FHA loans, and Rural Housing loans are all great examples of loan programs designed to get people into homes with little or no money down. Each loan program has varying qualifying standards but many look at the same qualifying factors such as credit score, debt to income ratio, loan to value ratio, and cash reserves just to name a few.
Here are a few tips that can help you put yourself in position to be approved to buy your own home:
- Make sure you have at least three trade lines reporting on your credit report for at least 12 months – Open a share secured loan or a share secured credit card if you are falling short of the three trade lines needed.
- Get your credit score up to at least 640 – Dispute any incorrect information reporting on your credit report and make sure the dispute has been resolved before starting the application process, pay your monthly bills on time, and clean up those collections.
- Save money – Even if you are approved for 100% financing, you may still need to pay for closing costs or leave yourself with two months worth of cash reserves in the bank.
- Employment stability – If using either self-employment or employment income to qualify for the loan, you will need to show two full years of employment history in the same line of work.
- Get pre-approved for a loan before shopping for your home
It is an ideal time to take advantage of the current buyers’ real estate market while mortgage rates continue to stay low. Call 1-800-418-1486 to speak with a Mortgage Loan Officer who will be happy to find the loan program that will best fit your needs.
Tuesday, August 14, 2012
Ocean Communities FCU is proud to announce that on August 15th, 2012 we will be rolling out yet another service that has great rewards for our members and non-members who are interested in buying or selling a home.
We will be partnering with CU Realty to bring their services to
for the very first time. The process is easy and FREE! Maine
Online at: www.oceancommunities.com/
realestateservices or call us toll free
at 1-800-418-1486 and we will register
2. Search: Through the Multiple Listing
Service (MLS) for homes like realtors do.
3. Select an Agent: Select a REALTOR®
from our pre-approved network of trusted
4. Close & Save: When you buy or sell
real estate using one of our agents, you
will receive your rebate* at closing.
HERE IS WHAT YOU GET: By using our services which includes a realtor from our trusted network of realtors, on your closing statement you will earn a rebate of 20% of your realtors commission which is applied towards your closing costs . . . simple . . . .and it’s FREE!
Rebate to Member
REBATE DISCLAIMER: Rebate examples shown are based on a 3% commission rate. Since agent commissions vary, your rebate figures may adjust accordingly.
Friday, April 20, 2012
Very recently there was yet another change by the Federal Housing Administration (FHA) that you want to know about if you are considering using FHA to buy a home in the future.
FHA, which has been around since 1934 is basically a government (Department of Housing and Urban Development (HUD)) entity which insures lenders money in cases of loss from default. FHA allows for financing of up to 96.5% of the purchase price of a home or appraised value whichever is lower.
On April 9th the FHA increased its fee structure which gets passed along to the borrowers who use them. FHA charges a one time fee known as Upfront Mortgage Insurance Premium which is increasing from 1% of the loan amount to 1.75%. So for instance on a $100,000 loan request the fee used to be 1% of that $100,000 which translated to a $1000 fee, but now in the same scenario it is 1.75% of the $100,000 loan request translating to a $1,750 fee.
Along with the Upfront Mortgage Insurance Premium, FHA also charges a monthly Mortgage Insurance Premium that is collected with your monthly payment and these premiums too are rising. Premiums on a $100,000 loan request prior to the recent change had an estimated $95.83 monthly mortgage insurance premium, but today that premium would increase to $104.17. Less then a $10 increase for that scenario but the difference becomes more prominent as the loan request increases. Historically, it was just about a year ago (April 4th, 2011) when FHA last increased their premiums.
FHA still offers a great way to buy a home with little money down, but Ocean Communities FCU has some other great products where costs could be much less for you. I suggest you contact one of our experienced mortgage loan officers and ask about our CU Promise Products which offers more features you will enjoy outside of the costs savings.
Friday, March 2, 2012
Our CU Promise Programs are expanding to now include 100% financing! In the past few years, programs for buying homes have diminished due to changes in regulation along with other risk factors that lenders take into consideration.
There are a lot of homes on the market but just not enough buyers. The economy has hit everyone hard, so the majority of home buyers lack the down payment needed to buy it. Up until now! FHA offers high loan to value financing and requires just a 3.5% down payment plus closing costs, but it comes with fairly high private mortgage insurance* premiums. USDA offers 100% financing for those that qualify but comes with a 2% charge to obtain the 100% financing. VA offers a 100% financing for veterans, but comes with a fee of over 3% of the loan amount.
Ocean Communities FCU is proud to say that we have a new home buying program that offers 100% financing as well. Our CU Promise 100 comes with no add on fees to obtain the 100% financing (of the purchase price) other then the normal private mortgage insurance premiums when financing over 80% of the homes value. Will everyone fit into the program? Well no but it is a great addition to all of the other products available to home buyers that wish to speak with our knowledgeable Mortgage Loan Officers.
If you recall me speaking of CU Promise in the past, our borrowers enjoy this program because the servicing of your mortgage is guaranteed to be serviced in Maine for the life of the loan. A very important feature, especially if you have had a mortgage before, or any type of installment loan or credit card you have tried to call when you had a question that was out of state.
The other CU Promise Programs are made up of: CU Promise 97 which is a 3% down payment program and most importantly our CU Promise 90 which requires 10% down payment of the purchase price but requires no Private Mortgage Insurance coverage. Normally you need to pay 20% down to avoid the need of Private Mortgage Insurance but with CU Promise 90 we just need 10% down.
March is usually the time of year when we start thinking about spring which usually brings out the home shoppers. Please contact one of our Mortgage Loan Officers as soon as possible so we can get you preapproved and ready for when you find the home you want to make that offer on. Call 1-800-418-1486 and allow some time to speak with a Mortgage Loan Officer that will help find the loan program best suited for your needs.
*Private Mortgage Insurance (PMI) – A necessary insurance for mortgages when financing over 80% of the value of a home. It is a 3rd party insurance that will require approval once all loan conditions are in, the appraisal has been complete and the Underwriter has a Title Commitment for the property you choose to buy. PMI will automatically cancel itself after your loan balance reaches 80% of the original value. There may be other ways to cancel out the PMI after a certain amount a years but this ability varies with PMI companies so please ask your Mortgage Loan Officer. As stated earlier our CU Promise 90 loan does not require PMI if 10% is put down.
Monday, January 30, 2012
There are many different reasons to buy homes, whether you are the first time homebuyer looking for a place of your own, looking to start a family or even looking at the purchase as an investment, they all carry the same loan products and terms but there are differences.
By choosing a shorter term not only does it generally offer a lower rate, but there may be even lower costs as well. For conventional mortgages (the use of Freddie Mac or Fannie Mae directly) these entities charge what is called "loan level pricing adjustments" or "post settlements delivery fees." These fees can impact you in a number of ways. An example would be if you want to finance for 30 years, have a credit score between 720-740 and are putting down 20% for your purchase there is additional fee of .50% points (equates to $500 on a $100,000 loan). For the same scenario but choosing a 15 year term, there is no fee.
Another way to look at it, if you can afford to handle a shorter term, is how much you will repay over the life of the loan. Look at this example:
Scenario 1. $150,000 loan @ 4% for a 30 year term.
Scenario 2. $150,000 loan @ 3.25% for a 15 year term.
Scenario 1 offers a monthly principle and interest payment of $716.12 a month. Now if you make your payment on time each month you will pay $257,804 over the life of your loan for your investment.
Scenario 2 offers a monthly principle and interest payment of $1,054 a month. The payment would be higher in this scenario because the term is half as long although not drastically enough to make you not consider it right? Here is where you would save - the repayable amount if you made your monthly payment on time each month is $189,720. This option saves you over $68,000.
Always look at the picture from every angle to find out what is right for you now and in your future because buying a home is truly an investment. One common thought I hear is that "I want the lowest payment". Well, we all do, but my example shows a good reason that it may be better to go a different avenue if your budget allows. Another advantage to look at a shorter term is that if you know the home you are buying will not be your last, the shorter term allows you to pay less interest, therefore paying the principle balance down quicker. If you stay in the home for 5 years and made your loan payments on time, Scenario 1 from above would have your payoff around $132,445 after the five years and Scenario 2 would have the payoff around $98,580. That means that if home values stayed the same since you purchased the home, you would receive more money back from the sale of the home in Scenario 2 to use towards your next home.
Friday, December 23, 2011
It is important to know the estimated cost of doing business upon completion of your mortgage. No doubt that borrowing money today is a bit more difficult due to the increased guidelines lenders must adhere to, but when you get approved for a mortgage there is no better time than now to borrow money due to low mortgage rates.
Below are some questions to ask your lender but be prepared with questions of your own. The right lender to choose will have great programs to offer but most importantly will take the time to listen and address all of your questions.
It is also important to know that different loan programs have different fees as well as the lender you choose. Here are some good questions to ask when approaching a lender about mortgage programs:
- Do you charge application fees, and if so, what happens with them?
- Application fees are gathered mostly because of the increased amount of costs the lender faces to maintain and complete a compliant loan file. Ocean Communities collects a $375 application fee for Single Family Residences, however this fee is credited towards closing costs as long as your loan closes with us.
- How do you get compensated to do loans and will it be included in my costs to do business with you?
- Mostly referring to commissioned based lenders such as Mortgage Brokers, they generally get paid by delivering loans to larger Banks by charging additional fees or receiving compensation directly from the end Bank. This is also known as Yield Spread Premiums. Yield Spread Premiums are not part of your loan, nor do borrowers pay this fee, it comes directly from the end Bank.
- What risks do I face moving forward with my loan?
- Simply put, issues can and do happen. If appraisals for properties come in low it could prompt changes to the loan meaning a possible additional down payment, change of loan program, additional fees, etc. It is important to know the risks you could face. If you are already preapproved, generally the issues that you run into are with the home you are buying. Be proactive and get a home inspection done of the property prior to your contractual commitment of a Purchase and Sale Agreement.
- Do I pay for the fees out my own pocket or can they be included in the loan?
- When buying a home very seldom do you have the ability to finance the closing costs. A good negotiating tip would be to request the seller pay for some or even all of the closing costs, but keep in mind if the seller receives multiple offers on their property and you request costs to be paid and someone else doesn’t, well, who would you choose?
I hope you find this information helpful. Happy Holidays!