MORTGAGE refinance (MR) is an option different people take for different reasons. At the time of writing (first quarter of 2008), interest rates are on the decline, so the temptation to consider MR is strong. But interest rate alone is not enough reason to opt for MR. In the state of Delaware, there are so many MR options that the average person can be confused and, worse, end up making a wrong choice by depending only on a 'low' interest rate. In this article, we shall try to demystify MR and equip you with knowledge that you can leverage to get the best deal for you regardless of the current interest rate scenario.
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To begin with, let's understand what MR is. Technically, it's just another mortgage loan. The difference lies in that MR is used to pay back your original mortgage (or purchase mortgage) and then it remains as your mortgage loan to service. The property used as collateral for the MR loan is the same as the one used for the purchase mortgage loan.
Why refinance
As said above, different people have different reasons for availing of MR. If the market value of your property has increased considerably, you can get a lump sum of cash if you refinance. If you intend to sell off your property within the next few years, it may make sense to convert your fixed-rate mortgage loan into an adjustable-rate mortgage loan, so that you pay a lower interest for a few years and sell your property before the rate adjustment starts. If interest rates are low, and indications are that rates will increase in the near future, it may be prudent to convert your adjustable-rate mortgage into an fixed- rate mortgage.
If you want to reduce your monthly payments but you expect to be in a financially superior position by the end of the loan term, you may find it worthwhile to go in for a balloon mortgage, i.e., you pay low throughout the life of your mortgage and then make a big payment at maturity. Or, if you want to pay only the interest, you opt for the interest-only loan, i.e., you pay just the interest every month throughout the life of your loan and lender recovers the principal at the end of the loan term by liquidating your savings in securities, pension, etc. Thus, there is no single reason applicable for all -- and there are more reasons than stated in this paragraph.
The risks
Risks in MR arise basically from lack of knowledge, which can possibly be exploited by the black sheep among mortgage brokers. By no means is it being implied here that mortgage brokers are unscrupulous. All that is being said here is that there can be black sheep among mortgage brokers too, just as in any other market segment. So, as consumer, you should be careful. And what care should you take?
First, do your homework. Let the lender / broker not know that you are not well-informed about the MR market. So, visit websites of different lenders / brokers and use their online mortgage loan calculators to know of the possibilities applicable to you. You should also use the tax-benefit calculators available on such websites to know if MR will save you tax too -- and if yes, how much. Though online calculators may not give you exact information, they do give you a fair idea around which you can negotiate with your lender / broker. Four websites on which you will find mortgage calculators are: www.erate.com, www.mortgageloan.com, http://www.mortgages-magazine.com, and www.bankrate.com -- though there are many others equally good, which you can search out through www.google.com.
Second, you should not depend on any one lender / broker, online or with a street address. If you depend on one advisor, you might be offered biased options. In that case, you will not know what the larger market has to offer you. So, consult three or four lenders/brokers registered in Delaware, compare and contrast their offers, and select the one that meets with your needs.
Third, you should not pay anyone anything for consultation. Payment is to be made to the broker only at the loan closure stage, which is the meeting which you, the lender, broker, real estate agent, and others meet and formally sign the documents. Even though you don't pay for consultation, you should ask the broker what his fee will be in the event of you accepting an offer he makes. Usually, the broker's fee ranges from 1% to 10% of the MR loan amount depending on your credit profile. A good credit profile means lower broker fee or commission.
Fourth, you should know that loans of short durations come on lower interest rates. For example, on 3rd March, 2008, the 15-year fixed rate mortgage carried a 4.94% interest while a 30-year loan of the same type carried 5.58%. Similarly, with adjustable rate mortgage loans. Even if you are reading this article much later, by which time interest rates might have moved considerably, the directly proportionate relationship between duration of loan and interest rate will remain.
Finally, you should not be swayed by low interest rates alone. It can happen that a MR deal based on a lower interest rate has actually worked out costlier than your original mortgage loan at a higher interest. This happens because interest rate is one item of cost. In MR, there are other costs too, which you have pay, and these include penalty for prepayment of your original mortgage account, property valuation fee, brokerage, 'points' (lump sums to reduce the annual cost of loans, one point being equal to one per cent of the loan amount), and so on. Therefore, you should ask the lender / broker about the annual percentage rate -- or APR -- of your MR loan. APR is the correct cost of your MR loan on an annual basis, not the interest rate.
Conclusion
MR is a useful option for people already servicing a mortgage loan. However, how MR can benefit one depends on one's own needs and state of finances. Therefore, the MR seeker should know how he wants his MR to work for him or her. They can try out different options on online mortgage calculators accessible on the websites of many mortgage lenders / brokers. These calculators give a fairly reasonable, though not necessarily fully accurate, idea of the MR possibilities for each person after factoring in personal and property variables such as credit-rating, type of property, amount of loan required, and so on. These approximate ideas serve you well during negotiations with actual lenders / brokers. Lastly, remember to talk to several lenders / brokers, compare their advice and offers, and select the best for you.
