Although the key elements and aspects of shopping for a mortgage are often very similar to a home purchase or a refinance, keep in mind that the mortgage refinancing process often begins with a goal to either enhance your cash flow or restructure your debt profile.
What is Mortgage Refinancing?
In simple words, refinancing a mortgage entails repaying a current loan to replace it with a new loan. Homeowners refinance their mortgage for many reasons: the chance to avail a lower rate of interest; the opportunity to reduce the term of the mortgage; the need to convert to a fixed-rate mortgage from an adjustable-rate mortgage (ARM), or vice versa; and the need to consolidate debt.
How to Shop and Refinance a Mortgage?
You should first figure out your specific goal for refinancing your mortgage before you get in touch with a mortgage professional. When you have decided whether you would like to lower your payments or repay the mortgage faster, you may start shopping for a suitable lender and a loan.
Experts recommend using a mortgage refinance calculator as it can help estimate your monthly repayments at different loan terms. Loans with shorter terms have lower interest rates; however, the monthly payment would be higher. It is vital to decide the amount you are comfortable paying before seeing a lender.
Know Your Current Credit Score
It is important to check your credit history and know your credit score as a better score can get you a better mortgage refinance interest rate.
Talk to Several Lenders
Research the various loan products you can opt for from regional banks, credit unions, and direct lenders (who will work with you directly, without a middleman or broker) as well as national banks to understand what kind of special programs they are offering.
Several lenders provide portfolio loans and are often more flexible with these loans, offering special promotion at times.
Consider Your Refinancing Options
Discuss different loan products when you interview lenders. There is a broad range of traditional financing, many government-backed programs such as FHA loans as well as special refinancing programs via the Making Home Affordable program of the federal government.
Decide How You Would Fund Your Refinance
You have several options; either pay the lender fees and closing costs or have these costs wrapped into the outstanding balance. You can also choose a “no-cost” refinance.
Compare Mortgage Fee and Rates
At times, advertised mortgage rates are based on paying points, where a single point is equivalent to one percent of your loan amount. Therefore, make sure you are contrasting and comparing loans with either zero points or the same points. It is essential that you compare the three important things that determine what your loan would cost: the loan origination fee, points and the interest rate.
Although shopping for a refinance might take a bit longer compared to refinancing with the current lender, keep in mind that the rewards could last as long as the loan.
Costs of Mortgage Refinancing
These are the main costs of refinancing a mortgage:
It is the fee you will need to pay to apply for your new mortgage when you refinance your home. Keep in mind that the application fee usually hovers around $250 to $400.
A majority of lenders need a house appraisal to make sure your house has enough value to be eligible for a new mortgage loan. The appraisal could cost between $300 and $600; also, the outcome of your home appraisal could determine if it is appropriate to refinance the home.
Loan Origination Fee
In most cases, the loan origination fee is about one percent of the value of the loan.
Prior to approving the refinance your lender might require a title search; this can cost you between $200 and $400.
The city or county you reside in might charge a recording fee to handle your paperwork, which could add about $25 to $300 to the total bill. In general, you may have to pay (as a rough ballpark) around 1.5% of the principal amount in various closing costs when refinancing your mortgage.
When is Mortgage Refinancing Worth it?
Here are some situations when refinancing a mortgage makes good sense.
You would like to benefit from smaller monthly repayments by lowering the mortgage’s interest rate. Ideally, you will have an outstanding credit score or credit rating, as a better credit profile can get you lower interest rates. Also, keep in mind that about 90% of lenders would check your credit score. The general rule of thumb is that if it is possible to slash your existing interest rate by about 0.75% to 1.25% or higher, it may make sense to refinance your mortgage. This is why it is important to calculate the monthly savings before making the decision.
You would like to reduce the term of your loan. For example, if you took out a 35-year mortgage with 25 years remaining on the loan, and you are 10 years away from your retirement, you will probably not relish the idea of making monthly mortgage repayments while being on a fixed and limited income. A lot of people want to own their house with little to no mortgage by the age of retirement; usually, a short-term loan could be helpful in this situation, but you will have to make steeper payments.
There is another situation where refinancing your mortgage is a good idea; it is when you would like to change the terms or conditions of the loan. You may have opted for an adjustable-rate mortgage with an ultra-low interest rate that was applicable for five years. Interest rates may rise after those five years have elapsed; you may not want to pay increasing mortgage payments in the future. Well, refinancing to a fixed-rate mortgage could be a lifesaver in this case.
Keep the aforementioned factors in mind when refinancing your mortgage. If you refinance for the right reasons with a suitable term and reasonable interest rate, you can improve your financial position.
PITI – What Is It and How to Estimate It Yourself
PITI, or “Pity”, is a sum of mortgage payments that include the principal amount, Interest on the loan, property tax, and insurance premiums. PITI helps lenders calculate a loan applicant’s ability to pay their mortgage payments based on the income level. Using PITI, lending institutions, such as banks, decide on how much loan amount they can offer to an applicant. Lenders also use PITI to create a reserve requirement as well. This is a multiple of PITI, which the lender keeps as a deposit. They use it to cover any shortages, if the borrower faces financial hardship and defaults on their monthly payment.
Breaking It Down
Breaking PITI down into its individual components helps us understand the term better and realize why each element is important in a mortgage payment calculation.
This is the base amount that you borrow from your bank to finance the new property you require. Your monthly payment doesn’t depend only on the principal amount. Principal will only make part of it while other portions will include interest, taxes, and insurance premiums.
When a lender such as a bank or any other financial institution offers you a loan, they are losing out on an opportunity to invest that amount somewhere else. To cater to this opportunity cost, the bank will charge you an interest on your loan amount. Most banks want to recover maximum interest during the beginning of the loan tenure. Hence, interest amount forms a major chunk of initial mortgage payments.
The amount of PITI can vary based on the tax rate and assessed value of the property being financed. Some of the elements that determine your property tax include:
- The state in which your property is located
- Local tax assessor who comes to assess the value of property being financed
- Market value of the property and its surrounding areas
The property tax is calculated by applying your local county tax rate on the assessed value of the property. After the principal and interest amount, property tax is the major contributor to the PITI amount.
Just like property tax, home insurance is another variable that plays an important role in raising or lowering your PITI. The type and amount of home insurance you have to pay for depends on two factors:
- The area you would like to live in
- How much down payment you are willing to make
The most common types of insurances include:
- Homeowners Insurance – This type of insurance protects you against vandalism, theft or other hazards such as a fire.
- Flood Insurance – Depending on the area you are willing to move to, your lender may require flood insurance as well. This will be in the interest of both the parties in case of a natural disaster such as flood or hurricane, which can completely destroy the financed property.
- PMI or Private Mortgage Insurance – According to 20% down payment rule, if a borrower makes a down payment of less than 20%, they are liable to purchase PMI as well.
Various elements can increase or decrease the amount of insurance premium on a property. Hence, borrowers need to be mindful while choosing a locality and making down payment to minimize their monthly mortgage payments.
Estimating Your PITI
It is always good to do a little homework and get a rough estimate about your monthly mortgage expense before you finance a property. This will help you maintain your monthly budget once you start making your loan payments. Your interest rates and principal amount are determined by your bank, but having a good grip on variable expenses such as taxes and insurance premiums can help reduce your mortgage payments. Some useful steps to determine your PITI value include:
1. Looking For a PITI Calculator Online
An online PITI calculator will help you identify your monthly payments by amortizing your interest rate over the loan period. It will also take into consideration your property tax and home insurance by dividing the yearly payment in to 12 equal installments. It then adds all these elements together to form your monthly payment schedule.
2. How Much You Need
PITI is calculated based on the amount you are financing from the lending institution rather than the property value itself. Before entering the loan amount in PITI calculator, you need to subtract your down payment from it as well. It is important to note that there are some closing costs associated with the mortgage loan. It would be wise if you allocate some of your savings to these charges to avoid any surprises after you have paid your mortgage in full.
3. Tax and Insurance Variables
Almost any PITI calculator you choose will ask you for the tax and insurance amount. Banks usually include these variables in their monthly payment to protect themselves from property damage or tax liens.
- Estimating Insurance Premium – A general rule of thumb is to set aside $35 for every $100,000 of your loan amount. If your bank requires you to acquire flood insurance, then your insurance premium may rise accordingly.
- Tax Estimate – Check your local state regulations to figure out the tax rate and multiply it by market value of your property to get a rough tax estimate on your property.
Putting all these variables along with the loan tenure in the calculator will give you a rough idea of how much your PITI would come around to. You can then use this figure to manage your monthly budget accordingly.
Having an understanding of PITI is an essential part of taking out a mortgage. Lenders use the ratio of PITI to your gross income to determine your repayment capacity on a mortgage loan. For most lenders to offer you a mortgage loan, this ratio should be above 25%. Hence, doing your own PITI calculation beforehand will help you choose property that will provide you with best value for money.
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Financing a House Boat
If you are a water lover and wish to enjoy the nautical feel of living a relaxed life on the water, a houseboat should be one of your options. A houseboat is not only for millionaires. In fact, if you meet certain requirements, you can also own a house on the water. However, a visit to the grocery store might become more complicated than ever once you start living on the water.
The overall cost of your houseboat will vary depending on different factors such as the size of the boat and its location. However, the trend of owning a houseboat has increased over the years and there are many first-time buyers that are investing in owning a houseboat rather than a traditional home.
Understanding the Difference between a House Boat and a Floating Home
When it comes to living on the water, not all options are the same. Primarily, there are two living options, a House Boat and a Floating Home. Now, if you have thought they both refer to the same setting, this section will give clarify the differences for you. A House Boat, as the name suggests, is considered to be a house that can move around, which means that it can also be seen as a vehicle, whereas, a Floating Home is one that is attached to the dock and hence cannot move around.
Therefore, a floating home can be seen as a fixed house located on the water. The total cost of your water-based home will vary depending on the size of it. However, you should be expecting to pay a higher amount than usual owing to the peculiar nature of the lifestyle. Fortunately, you have the option to finance your lifestyle with the help of a lender.
How to Finance Living on Water
1. House Boat
The first challenge that you should be ready for when looking for financing options for your houseboat is to find the right lender. It is no surprise that there are not many lenders in the community that help to attain such loans considering the unique nature of such a living condition. However, the basic way in which the financing of both, a houseboat and a floating home will vary lies in how the lender treats them.
A House Boat, due to of its ability to move, is considered to be more of a vehicle than a home and therefore the term of the loan will be much shorter as compared to one in the case of a traditional home. Also, another reason why the lender prefers to keep the term short is that of the amount of maintenance required in owning a House Boat. When financing a House Boat, you should know that there is a massive amount of maintenance that will be needed to make sure that it can function in an ideal manner.
Therefore, you should not expect the mortgage’s term to be more than 20 years. In fact, you might also get a term that is considerably shorter than 20 years as well. The interest rate paid is also expected to be 3-4 percent higher than in the case of a traditional home. There will also be a yearly inspection that you will have to pay for and will be carried out to ensure that the House Boat can function well. The inspection costs around $300-500. The down payment will also be higher than in the case of a traditional home and hence you should be ready to pay around 35%in down payment.
2. Floating Home
In the case of a floating home, the loan terms are more similar to that of a traditional home. A floating home is connected to the utilities of the city and is therefore considered to be property rather than a vehicle. As the owner of a floating home, you will be required to pay taxes and depreciation will play an important role in determining the value of the home.
The price of a floating home, however, is higher than that of a traditional one. The interest rate that you will be paying on the loan for your floating home will be 1-2% higher than for a traditional home. The term of a loan taken on a floating home will be around 15 years and a minimum down payment of 20% will be required. Also, to be eligible for a loan on your floating home, you should have a credit score of at least 680.
Apart from the costs associated with financing the loan, there are also other costs that you will incur when you decide to choose a water-based lifestyle. Maintenance is generally costly when it comes to houses such as floating homes and houseboats. That is because when the house will be situated on the water, there will be more damages over the years. Also, you are also required to pay a monthly fee that is somewhat like a home owner’s association fee which is approximately $700.
Even though living on the water has its various advantages, the high costs associated with this kind of living can discourage people from choosing this route. Also, it is not uncommon for buyers to face difficulty in locating a lender that can help them finance their dream home. Because of their rarity in the market, the lenders have the power to charge higher rates than usual. Therefore, carefully considering all your options is a must when looking for financing options for your water-based home.
Understanding Subprime Mortgages
When seeking for financial assistance in the form of a Mortgage loan, it is imperative that the intended borrower has a good credit score to secure the ideal loan. In addition to a good credit score, a debt to income ratio of less than 35 percent is also required. Unfortunately, not all borrowers can meet such requirements because of their credit history and low income.
In such cases, borrowers can apply for a subprime mortgage which is specifically designed to offer assistance to people with low credit scores and other financial issues. In this article, we will explain what a subprime mortgage is, when you might need it and how to apply for it.
What is a Subprime Mortgage?
Many times borrowers with low income face difficulties while applying for a loan. A conventional mortgage requires the borrowers to have a good credit score and a steady income. However, a subprime mortgage is offered to people who have a credit score of 600 or below.
One would expect such a loan to be at a greater risk of default since the borrowers already have a bad history when it comes to the repayment of loans. This risk is compensated for at the beginning of the process by offering higher interest rates as compared to the conventional loans. In some cases, banks may also charge the borrowers in some other way, such as a greater down payment or a higher closing cost.
Types of Subprime Mortgage
Within the category of Subprime Mortgage, there are other subtypes to choose from. These are:
The main advantage of choosing this type of subprime mortgage is the longer term of repayment. Instead of the traditional 30 year period for the repayment, a fixed-interest mortgage allows the borrower to have a longer repayment period of 40 to 50 years.
This longer-term translates into reduced monthly payments for the buyer, however, since the lender has to compensate for the risk associated with the greater inability of the borrower to pay off the total amount, a higher interest rate is added. While choosing such a mortgage, it is important to find out the amount of interest rate that is being offered by different lenders and choose the one that offers the lowest.
2. Interest-Only Mortgage
An interest-only mortgage allows the borrower to have a period of 5, 7 or 10 years in which they are required to pay only the interest payments that are charged. Under such type of payment, the principal payment can be delayed and the borrower, if wishes, can regularly make payments towards the principal.
At the end of the term, the borrower is expected to pay off the mortgage or can refinance the mortgage. Such a mortgage is considered ideal for borrowers that are expecting to witness an increase in their income or an improvement in their financial condition over the years.
3. Dignity Mortgage
This kind of mortgage is considered to be relatively new and gives the borrower ease in paying off the principal amount. In the beginning, the borrower is required to pay about 10% of the principal amount. After this, if the borrower is found to be diligent in paying the regular interest payments for five years, the amount that has been paid in the form of a higher interest rate is compensated to pay off the principal amount by reducing the interest rate to the prime rate. This gives the borrower an opportunity to prove their ability to pay off the loan which is why the term “dignity’ is used.
4. Adjustable-Rate Mortgage
An Adjustable-Rate mortgage (ARM) uses a fixed interest rate at the beginning of the loan’s term after which the payment keeps changing and resetting according to an index. At the beginning of the repayment schedule, the borrower might be paying off a reduced amount. However, the unpredictable nature of such a mortgage does not give the borrower any guarantee about how the change might affect the payment schedule. There is a lot of unpredictability associated with such a mortgage due to its high dependence on the economic conditions and the index.
How to Get a Subprime Mortgage
When applying for a subprime mortgage, you will find the process to be extremely similar to the process that is followed when applying for a conventional mortgage. However, we have summarized the complete process of getting a subprime mortgage in the following steps:
- At the beginning of the process, it is important to consider your options by making a list of all the lenders that offer subprime mortgages. By looking at the interest rates offered by each lender, choose one that best meets your needs.
- Even though the documentation required in the case of subprime mortgage is not as complex as in the traditional mortgage, the lender will ask you for a steady proof of income, bank statements, and documents that reflect your monthly expenses.
- Read the contracts thoroughly and sign them.
- You might need to offer additional documents if the lender requires. Hence, you should not expect all the documents mentioned above to be sufficient and should be ready to gather and present any additional documents.
Pros and Cons of Subprime Mortgage
The biggest advantage of a subprime mortgage is the ability of borrowers with poor credit scores to get a loan and the less complex nature of the overall process as compared to that of a conventional one. Whereas, the disadvantages of subprime mortgage include, the higher interest rates and the requirement to show a steady income for borrowers who are presently unemployed.
Even though getting a subprime mortgage might be risky, as a borrower it allows you to have a more versatile mortgage option that you can use to buy a home for yourself without having to worry about your credit history or debt responsibilities. In case you expect your financial condition to improve shortly and are in need of temporary financial assistance getting a subprime mortgage is your best option.
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