Refinancing

A refinanced mortgage is one in which a borrower pays down an old loan with a new loan.

There are a few reasons you may be looking to refinance your current mortgage:

1. Looking for a more favorable interest rate
2. Lower your payments
3. Pull equity out of your home in the form of cash

Whatever the reason, the Consumer Mortgage Bureau Plan of Attack will apply.

Consumer Mortgage Bureau Plan of Attack for Finding Your Best Mortgage

1. Interest Rate = Payments
2. Term of Loan
3. Points & Fees
4. Penalties
5. Credit Insurance
6. Once You Decide On a Lender

Interest Rate = Payments

  1. What are the monthly payments? Ask yourself if you can afford them.
  2. What is the annual percentage rate (APR) on the loan? The APR is the cost of credit, expressed as a yearly rate. You can use the APR to compare one loan with another.
  3. Will the interest rate change during the life of the loan? If so, when, how often, and by how much?

Term of the Loan

  1. How many years will you have to repay the loan?
  2. Is this a loan or a line of credit? A loan is for a fixed amount of money for a specific period of time; a line of credit is an amount of money you can draw as you need it.
  3. Is there a balloon payment–a large single payment at the end of the loan term after a series of low monthly payments? When the balloon payment is due, you must pay the entire amount.

Points and Fees

  1. What will you have to pay in points and fees? One point equals 1 percent of the loan amount (1 point on a $10,000 loan is $100). Generally, the higher the points, the lower the interest rate. If points and fees are more than 5 percent of the loan amount, ask why. Traditional financial institutions normally charge between 1 and 3 percent of the loan amount in points and fees.
  2. Are any of the application fees refundable if you don’t get the loan?
  3. How and how much will the the lender or broker be paid? Lenders and brokers may charge points or fees that you must pay at closing or add on to the cost of your loan, or both.

Penalties

  1. What is the penalty for late or missed payments?
  2. What is the penalty if you pay off or refinance the loan early (that is, is there a pre-payment penalty)?

Credit Insurance

  1. Does the loan package include optional credit insurance, such as credit life, disability, or unemployment insurance? Depending on the type of policy, credit insurance can cover some or all of your payments if you can’t make them. Understand that you don’t have to buy optional credit insurance–that’s why it’s called “optional.” Don’t buy insurance you don’t need.
  2. Credit insurance may be a bad deal for you, especially if the premiums are collected up-front at the closing and financed as part of the loan. If you want optional credit insurance, ask if you can pay for it on a monthly basis after the loan is approved and closed. With monthly insurance premiums, you don’t pay interest and you can decide to cancel if the premiums are too high or if you believe you no longer want the insurance.

Once you have decided upon a lender, make sure you get the following:

  1. A “Good Faith Estimate” of all loan charges. The estimate must be sent within 3 days of applying.
  2. Blank copies of the forms you’ll sign at closing, when the loan is final. Study them. If you don’t understand something, ask for an explanation.
  3. Advance copies of the forms you’ll sign at closing with the terms filled in. A week or two before closing, contact the lender to find out if there have been any changes in the Good Faith Estimate. By law, you can inspect the final settlement statement (also called the HUD-1 or HUD-1A form) one day prior to closing. Study these forms. Write down any questions you want to ask.