MORTGAGE REFINACING
Replacing the current mortgage with some other kind of financing thus securing the same asset.
City of Bloomington Housing and Neighborhood Development
TYPES O REFINANCING S OF C G
1. Standard fixed mortgage with better terms. g g a. Lower rate is offered b. Equity in home has increased positioning the home owner for better interest rate. refinancing mortgage so only the bottom value of the home is now being mortgaged.
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Types of Refinancing Continued
II No closing Cost Refinances g Reduces upfront fees but the interest rate offered is generally higher than if closing costs were not rolled into loan.
City of Bloomington Housing and Neighborhood Development
Types of Refinancing Continued
III.
Cash out loan-refinancing a loan or series of loan debts g Assists the borrower in paying off high-interest debt, e.g. credit cards, with lower interest rate financing Net savings can be applied toward debt or other purposes Non-tax deductible debt can be transformed to taxdeductible debt. This could lower taxes and put the client in a more advantageous tax bracket.
City of Bloomington Housing and Neighborhood Development
Know Your Client
Evaluate your clients financial and personal situation. Understand physical, behavioral and psychological signs of distress. Know your client’s financial situation-past, present and future.
City of Bloomington Housing and Neighborhood Development
Information you need to help your client decide if they should refinance.
1. Why is your client refinancing? 2. What type of refinancing are they considering? 3. What are other alternatives for your client? 4. Where did your client get the idea to refinance?
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Know your client continued continued…
5. Is this a scare tactic from a debt collector? 6. Did they attend a get rich seminar? 7. Did their current mortgage company initiate this refinancing idea? 8. 8 Is it really a tax advantage?
City of Bloomington Housing and Neighborhood Development
PRO’S OF MORTGAGE REFINACING
I. Lower Monthly Payments Reduce interest costs-refinance to a lower rate. Money saved can be used to pay down principal of loan further reducing loan, number of payments. Longer term loan-reduce amount of payment loan reduce From ARM to Fixed – continued affordability of the home.
City of Bloomington Housing and Neighborhood Development
Pro s Pro’s continued
II. Reduce Risk From Adjustable Rate Loan to Fixed Ensure a steady interest rate over term of loan and insure constant amount for payment and interest
City of Bloomington Housing and Neighborhood Development
Pro s Pro’s continued
III Liquidate q
equity to p y off other debt q y pay
a. Cash out refinancing Assist borrower in paying off high-interest debt such as credit cards with lower interest debt. Net savings can also help pay down mortgage debt early.
City of Bloomington Housing and Neighborhood Development
CON’S OF MORTGAGE REFINACING
I Closing g
Cost Fees
a. Fees may out weigh savings expected from refinancing. Clients generally are looking for the bottom line or what their monthly payment going to be and do not realize that they are being offered loaded loans.
City of Bloomington Housing and Neighborhood Development
Con s Con’s Continued
II Greater Risk Even if the payment is lowered, the total loan may result p y y in larger total interest costs over the life of the loan Bad B d spending h bit continue after refinancing di habits ti ft fi i Client becomes upside down with loan to value loan-to-value.
City of Bloomington Housing and Neighborhood Development
Con s Con’s Continued
Example:
• • • • • • • • • • • • • • Original mortgage $100,000 at 7% interest. Remaining life on the loan is 26 years ( g y (has made p y payments for 4 years of $ y $665.30). ) Total interest paid for 4 years - $27,409. Loan balance at end of 4 years $95,475 If held loan for 30 years total interest = $139,509 Refinance mortgage for $100,000 at 6% interest (assume closing costs & pre-paid to set up escrow = $4,525) Monthly payment $599.55 (increase in monthly cash flow of $65.75) Total interest over life of loan = $115,838 + interest paid on original mortgage $27,409 $143,247 $27 409 = $143 247 Overall result of refinancing: Increase in monthly cash flow of $65.75 per month or $789 per year. However, 4 years are b i H being added to the mortgage so would make additional dd d t th t ld k dditi l mortgage payments for that time Paid 2 sets of closing costs
City of Bloomington Housing and Neighborhood Development
Con s Con’s continued
III Penalty Clauses y language in the mortgage contract being refinanced charges the borrower a substantial fee for paying off debt early in the life of the loan. cost to cover penalty increases amount of new loan substantially.
City of Bloomington Housing and Neighborhood Development
EDUCATE CLIENTS
1. 2. 3. 4. Consider refinancing if they will stand to save g y a substantial amount of money over time. If there is a need to pay off unexpected costs, e.g. medical. However, e g medical However rolling unsecured debt into a secured loan is not recommended. Explore alternatives especially when the refinancing i b i considered d t poor fi i is being id d do to spending choices. Make su e t e c e t knows what a p edato y a e sure the client o s at predatory loan is: “IF IT SEEMS TO GOOD TO BE TRUE IT PROBABLY IS”.
City of Bloomington Housing and Neighborhood Development
STREAMLINE REFINACING BY FHA
STREAMLINE REFIANANCING BY FHA
The “ t Th “streamline” refers t th f t th t th li ” f to the fact that there is reduced d i d d documentation t ti required and reduced underwriting requirements for lender. It does not mean that there are no costs in the refinancing. BASIC REQUIREMENTS: REQUIREMENTS The mortgage to be refinanced must already be FHA insured The mortgage to be refinanced should have payments current The refinancing is to result in lowering the borrower’s monthly principal and interest payments No cash may be taken out on mortgages refinanced using the streamline refinancing process
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Streamline Refinancing Continued
TYPES OF STREAMLINE REFINANCING Some lenders offer "no cost" refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on p g the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the lender pays any closing costs that are incurred on the transaction. Lenders may offer streamline refinances and include the closing costs into the new mortgage amount. This can only be done if there is sufficient equity in the property, as determined by an appraisal. Streamline refinances can also be done without appraisals, but the new loan amount cannot exceed the original loan amount.
City of Bloomington Housing and Neighborhood Development
REFINANCING DO S & DON T S DO’S DON’T’S
HANDOUT “13 RULES FOR HOMEOWNERS” FROM THE NATIONAL CONSUMER LAW CENTER
City of Bloomington Housing and Neighborhood Development