Mortgage Refinancing

July 24, 2009by CaraTan

0
Mortgage Refinancing

Interest rates have been rising recently, but looked at long term they are still at or near historic lows. This coming together of market and political forces to keep down the cost of borrow will not last long. Does it make sense for homeowners to look at home loan or mortgage refinancing? This is an updated guide to help you understand what refinance is, whether mortgage refi is for you, and how to go about finding the best refinancing package.

Last updated: 24 July 2009

What is Mortgage Refinancing?

Mortgage refinancing is taking on a second loan, secured against the same asset, to pay off a first loan on that asset.

For most people mortgage refinancing is about buying a second home loan or mortgage, and using that to pay off the first mortgage or loan in place. There can be a lot of paperwork and time spent in mortgage or home loan refinancing, so why do people go through that effort?

If you have an existing fixed rate mortgage, then you are almost certainly paying more interest on the loaned amount than if you were to sign a new mortgage now, taking advantage of record low interest rates, but probably on a floating rate package. This would reduce your monthly outgoings.

Mortgage refinancing is now over 70 per cent of the activity in the USA Mortgage market in 2009, although it has dropped off a bit recently thanks to continued economic and employment concerns. Sadly foreclosures make up much of the rest of the activity in the mortgage market, so if you can refi instead of defaulting on payments and ultimately losing your home, you should consider this option seriously.

How do I pick the Best Mortgage Refinance Package for Me?

According to the Mortgage Bankers Association, the average interest rate on a 30-year mortgage in April was 4.76 per cent. This was down from 5.14 per cent in March. This is probably lower than the mortgage interest rate that you are paying now. Be warned, however, that there are big variations in the rates and fine print from different banks, so you need to shop around and do your research. Experts advise that because of some of the problems you may encounter (see below), it only makes sense to look at a home loan refinance option if it is significantly lower.

There are two approaches that tend to be the most popular in the refinance game. The first is to work with a Mortgage Broker. They will have a good grasp of the different offers, promotions and strings currently being attached in the marketplace - and with the economy as volatile as it is right now, these tend to change from week to week. You can find good Mortgage Brokers from refers or by researching online.

The other approach is to carry out your own research directly. This is normally done online, by looking both at the mortgages that banks and credit unions are advertising themselves, and at the comparisons listed on price comparison and mortgage search engine sites. You may get a much wider view of the market by doing this, but you will need to spend a lot of time reading all the terms and conditions to really understand what is best for you.

It sounds great, but what problems are there with Mortgage or Home Loan Refinance?

Mortgage Refinancing Tax Implications:

In April, President Obama said that with interest rates so low, mortgage refi was like a tax cut. Not true.

Since the interest paid on a low or mortgage is normally tax deductible, if you refinance and reduce your interest payments, you are likely to end up paying more tax.

The good news, however, is that you are likely to save much more on your monthly mortgage bills than the extra tax you pay, so you still come out a winner.

Paying off Your Mortgage Could Take Longer:

Mortgage refinancing often involves working out a longer tenure for your loan to reduce your monthly outgoings.

While you benefit immediately from lower costs, you have the liability of the loan under your name for longer. If you plan to be mortgage-free or even debt-free, then this will delay that moment of peace that you might be dreaming of. Interest Rates are Lower, But Getting a Mortgage is Harder:

Sure banks are being encouraged, even ordered, by government to lend more and overcome the Credit Crisis (or Credit Crunch). However we have to remember that banks making bad loans is a big part of what got us into this mess. Remember sub-prime loans everyone?

Banks still have lots of bad debt, or ‘toxic assets’, on their books, and they only what to take safe business on now. Credit checks are more stringent, valuations are more conservative, and the demands of ‘skin in the game’ are now higher.

If you have any credit issues, then getting a new mortgage might be tough. The process is time-consuming, so you may need to get your credit history sorted out first before applying. Better to have the bird-in-the-hand of your current mortgage than end up with nothing at all.

We are hearing stories of banks arbitrarily changing their lending rules week to week, as they get new evidence of lending issues or on the whim of the bosses when they can’t sleep at night. One bank recently decided it wasn’t going to lend for one bedroom flats anymore, while another decided no more foreign owners. The cash component that an owner needs to put in has also increased. No more 90 per cent, 100 per cent, or insane 125 per cent loans.

Buyers are being asked to cover 10 per cent to 20 per cent of the down payment in their own cash, whereas foreign owners or buy-to-let investors are being asked to stump up 25 - 50 per cent of the valuation of the property themselves.

So even if you have a good credit score, if your outstanding mortgage is worth more than 80 per cent of the current value of your house, then you might be asked to come up with the balance in your own cash, before you can take advantage of a refinance package.

If your home loan payment is too high, you may be able to consult with a mortgage rate reduction attorney to determine if you have a legal case for loan modification.

Compiled by the Mortgage team at EconomyWatch.com