MORTGAGE refinance can be tricky in the state of Louisiana. This is not only because of the many technicalities involved in such finance, but also certain misconceptions among some customers. You can of course trust the mortgage refinance lender or broker for proper guidance, yet it is always safer to arm yourself with basic knowledge of your eligibilities instead of placing all your trust on someone who stands to profit from you.
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Therefore, this article is designed to ensure that you use lenders / brokers to your advantage instead of leaving it to them to decide for you. After all, mortgage refinance is a decision whose effects you will feel for many years after you last shook hands with the brokers and lenders.
Before you start scouting for a mortgage refinance loan, you should do the following:
- Know what you want : Mortgage refinance does not have a single benefit for all. Each customer’s needs are unique. Some want to consolidate high-cost debts. Some want to meet with an urgent monetary need, hence want a cash-out refinance deal. Some want to pay off their mortgage liability quickly. Some want to increase the duration of their mortgage liability. Some want to simply avail of low interest rates. These are just some of the reasons for people availing of mortgage refinance. The point is that different people have different reasons for taking a mortgage refinance loan. You too should have a reason. If you don’t have a clear reason, calculate the different options as explained further down) and see if you find a reason.
- Know the types of loans : Mortgage refinance loans are basically mortgage loans. So, the types of loans are the same in both the categories. The most popular types in Louisiana are:
- Fixed-rate mortgage (FRM) loans : This type carries a fixed interest throughout the duration of the loan regardless of fluctuations in the market.
- Adjustable-rate mortgage (ARM) loans : This type comes with a fixed low rate for a pre-specified number of initial years followed by annual adjustments for the rest of the loan term. This type of loans is expressed in a unique nomenclature. For example, a 3/1 ARM means that the rate will be fixed for the first three years and will be changed every year thereafter. 15-year and 30-year ARMs are the most popular mortgage and mortgage refinance loans in Louisiana.
- Interest-only mortgage loans : In this type, you are required to pay only the interest on a monthly basis. The lender recovers the principal on the maturity of the loan, by liquidating your other assets such as securities, insurance policies, pension funds, and so on to the extent required to cover the principal amount.
- Cash-out loans : In this type of loans, the certainty is that you will receive a lump sum of cash, which you can obviously use for any purpose. What is uncertain is whether your other terms of repayment will change or not, since that would depend on prevailing market conditions.
- Jumbo loans : These loans are of amounts exceeding the limits specified annually by government-sponsored enterprises (GSEs) such as Fannie Mae (www.fanniemae.com) and Freddie Mac (www.freddiemac.com). Jumbo loans – also called ‘non-conforming loans’ – come at a higher interest rate than loans that fall within the limits specified by the GSEs (also called ‘conforming loans’). Jumbo loans are not popular in Louisiana. The GSE-specified limits for conforming loans for 2008 are:
- First mortgages
One-family loans: $417,000
Two-family loans: $533,850
Three-family loans: $645,300
Four-family loans: $801,950
- Second mortgages $208,500
- First mortgages
- Know APR : The cost of your mortgage refinance loan will be decided not by the interest rate alone but by a combination of several cost heads such as broker’s commission, property valuation fees, points (or percentage of the total amount of loan) you pay to reduce the effective interest rate, the penalty you pay to the lender of your original mortgage loan for premature termination of the loan account, and so on. All the cost heads added up and expressed on an annualized basis is called ‘annual percentage rate’ or ‘APR’. It is this APR that is of crucial importance in determining whether mortgage refinance makes sense for you; so you should never allow the apparent lure of ‘low interest rate’ to overshadow the APR.
- Know your eligibilities : Don’t be swayed by the advertised interest rates, which usually seem very attractive. The catch is that lenders / brokers advertise these rates to draw you into a negotiation with them. It’s not that those rates are fake. It’s just that they apply to people with a top credit rating. Most people have average credit ratings, and many have below-average too. So, most people get rates higher than the advertised ones. So, how will you determine your eligibilities? Do the following:
- Use online calculators: Visit the websites of some mortgage lenders and brokers. Most such websites have online mortgage calculators. Four such sites that this writer found satisfactory are: www.mortgageloan.com, www.bankrate.com, www.erate.com, and www.interest.com. Feed the calculators with the information they ask you about you, your property, and your refinance loan requirement. Be sure that you feed in accurate information, particularly your credit profile, amount of loan remaining to be repaid on your existing mortgage account, amount of refinance loan sought, desired duration of refinance loan account, and the number of years you want to live in that particular house. Enter these details (and other information asked for) for each type of loan – FRM, ARM and so on – and note the answers. These answers will indicate your approximate eligibilities in the current market scenario. Compare these answers, and judge what is best for you – or, if at all you have enough reason to opt for refinance.
- Final step : Results of online calculators are rarely accurate, but are reasonable indicators of what you can expect in the market situation of the day. With this information at the back of your mind, you should now take the final step of contacting mortgage refinance lenders or brokers in your city in Louisiana. You should get in touch with at least three of them (whom you can locate through the websites referred to above or through any other directory) and talk to them as if you know nothing about the market. Compare their advices with each other’s, as well as with the results of your online calculations. Ask questions. There should not be any wide variations from your online findings if you provided the same data to both the online calculators and the terrestrial brokers or lenders). Be satisfied that a refinance will do you good, and choose the best option.
To conclude, be informed that the broker’s commission is due only at the closure of the refinance deal. Brokers you consulted but whose offer you did not finally accept, are not required to be paid anything unless and until you had promised them anything (which you need not do). And the broker’s commission varies according to your credit rating. A high credit rating calls for low commission and a low credit rating calls for high commission – the range being 1% to 10% in Louisiana.