Should You Refinance Your Home Mortgage?

Drop it by at least 1% on a comparable Mortgage.

Typically a good mortgage broker will tell you that you need to drop your interest rate by 1% to make it worth your while and pay all the fees (origination, appraisal, recording, etc.).  So if your rate is 7% or more and you are planing on staying in the home, it should be a no-brainer… refinance!

Consider the Terms of Existing Mortgage

You also need to consider the terms of the existing loan.

Are there any prepayment penalties, or prepaid mortgage insurance?

Is the Mortgage (Note and Deed of Trust)  a fixed or a variable rate loan?

Right now the variable rate loans are still in the 4%-5% range and some HELOCs (Home Equity Lines of Credit) are running even lower.

Variable Rate Loans - are not by definition bad and can be useful for the right circumstances.  For example if you know you will sell your home (due to kids leaving, divorce or marriage plans, etc.), then a 3 or 5 year fixed rate loan that is a lower than a fixed rate loan now and adjusts later might be the best decision for you.  A good mortgage broker or lender should discuss your overall financial picture with you and try to help you determine what will best fit your needs.   The bottom line is you are borrowing money and the lowest interest you can pay on that money is the best deal… but you need to look at both the short term and long term realistically.

A key problem with these ARM (Adjustable Rate Mortgages), that has given them a lot of bad press and even the blame for the flood of foreclosures on the market, is that they were sold to people unscrupulously (not explained accurately) or the people were just more optimistic about their futures than they should of been, but they have been used successfully by millions of people.  

You have to pick the right tool for the Job.  As a rule for the average homeowner, first time home buyer, etc. I would recommend a fixed rate 30 year note and suggest strongly to them that they should regularly pay in an extra couple hundred dollars to pay it off in 15 years. 

What position is the loan you want to refinance and are their others that will be affected?

If you have a second or third mortgage, It is rare but possible for them to complete a subordination agreement, to allow the first to be “re-written” and/or remain in “first” position.  It might also be possible to consolidate multiple loans into one loan, however if you go over 80% of the value then you will be paying mortgage insurance often called MIP or PMI. 

The Mortgage Insurance Premium, effectively raises your interest rate, but will go away after you reduce the mortgage principle balance to 78% of the LTV (Loan to Value).  It is like the Credit Card “Insurance” protection that if you lose your job they will “hold” the account “for only .89 per 100″ (just pitched to me today on an account with a balance of over 13,000, so for only…. $115/MO insurance, I can have the surety that if I cannot pay, I won’t have to.   It is basically an extra 1% (.089) of interest monthly which is effectively raising my interest rate by 10% annually…. Thanks but NO THANKS… I never do this!)

The MIP or PMI is not that expensive but is usually about 1 to 1 1/2 percent additional interest or at least cost to you, which is a cost of borrowing the money, so I call it interest even though it is actually insurance.

Insurance Sucks, but is a necessary evil in our society.  But Credit Card Insurance and Mortgage Insurance in general should be avoided wherever possible.

Other Considerations…

It is amazing but very few people actually read their Note and Deed of Trust, but they really should…

The Note and Deed or Trust or in some cases a Mortgage, defines all the terms surrounding your debt and its expected repayment as it relates to the lender (usually a bank). 

The Note and Deed of Trust also defines what constitutes a default of the terms and what the default interest rate and penalties are.  The other critical thing is when the Deed of Trust is recorded, this defines the order…. So your primary loan is usually in the first position.  Subsequent loans would take, second, third, etc.

A Deed of Trust is a three party document, you have the Lender, the Borrower and the Public Trustee (at least in Colorado).  This is a publicly recorded document and it defines essentially a contract of your repayment.  If you should default on this contract, i.e. not pay your mortgage, then the lender/bank has the right to foreclose on the Note and Deed of Trust by filing a Notice of Election and demand.  

PLEASE NOTE:  If you are behind on your current mortgage your chances of refinancing are probably very low.  Your best bet is to try to do a Loan Modification.  A late mortgage payment is a big credit score ding that stays with you for about 2 years, it is essentially the same as a Short Sale.

So how low will Mortgage Rates go?

Rates are low and no one knows for sure when they will go up but the consensous is that they will eventually go back up.  Based on the fact that they are at historic lows it seems inevitable.  Yet with the housing market being what it is, with a flood of Foreclosed, Reposessed, REO properties, often in “rough” condition, but still selling at a significant discount to the neighbors house that is a FSBO (For Sale By Owner) or the other neighbor who is trying to get the price from two years ago when the market was vibrant and a “sellers market”.  It is without doubt a “buyers market” right now.  Prices are down, bargains and deals are all over the place and interest rates are low.   

A key problem is the money supply is very tight.  The required credit score is much higher than it was two years ago.  Stated Income or “Liars” loans are a thing of the past, which I think sucks, cause a self employed Realtor has to “Project” or “Plan” on an income, but obviously is not in full control of that destiny, and for that matter neither is the guy who has worked for the County for 20 years or the big Corporation, etc…   None of us know the future, so I think the bias to W2 employees, by completely ditching the “stated income loan” is BS…. But that is just my opinion! 

I think this whole default debacle was created on Wall-street, when they packaged up ”crap” loans with a few “mid” rated loans and a few “good” loans and called it a “better than average” portfolio of loans and sold off these 100 million dollar packages at a higher than fair or market rate and then the crap loans in the portfolio started to default, now we have essentially a B rated “Bond” that is really a “D” or ”F” and it screwed up the trust and rate factors in the secondary market.

Overall is was a Madoff like plan to rob wealth from the masses…  This was done by Investment Banks, that our government Republican and Democratic has decided to “Bail Out” with our money… So now the Government is incentivising the banks to “work with people” and in my opinion promoting further default.

Its scary folks, but all we can really do is play the game as best we can amongst the rules and players that are present here and now.

I just heard today that many banks are currently holding onto some of their REO properties waiting to get a higher price… Apparently they are getting tired of losing money.   Those big bonus checks from the TARP money must be stopping…

Sorry about the rant.

So where will rates go?

Easy answer no one knows…  I think up eventually, I just don’t know when.  If you do an ARM you are betting they will go down or hold basically flat so you can redo the ARM or convert/refinance into a fixed rate mortgage if you stay in the home.

I remember paying 12% in the late 80s and thinking I had a good rate.  So everything is relative.  Right now rates are running in the low 5% range, but I also have a variable rate HELOC that is only charging me 3.5% right now. 

My General Advice on Mortgages is:

I usually recommend to my clients to get a fixed rate 30 year loan even if they intend to pay it off in 15 or 20 years.  Most loans allow prepayment of the principle without any penalties (you want this kind of loan). 

So if you have the 30 year loan and amortize your payments for the 15 year loan then you should payoff your home in 15 years, but if you get laid off or otherwise lose your income stream then you have a lower mandatory payment. 

Realize however, that even if you have been paying an extra 200 per month for 20 years if you don’t make the required minimum payment, they don’t count the extra you have paid toward the amount due.   Therefore every home owner should try to save up 3-6 months of mortgage payments to cover rough times.  

This is also where a second line of credit or HELOC (Home Equity Line of Credit) can come in handy and could be drawn down to cover the monthly payment of the first mortgage.  It can and should be used as a type of safety net.  Its best to construct or define your net before you need it.  Once you need it you may not qualify for it.  In otherwords they too look at ability to repay and employment, etc.   If you lose your job you might not qualify for a HELOC.  If you get the HELOC first, then lose your job, you can draw from the HELOC.  (They seldom if ever based on my knowledge - requalify the individual before drawing actual funds.  Therefore the static qualification now to establish the HELOC is good until you either close the account or try to refinance your first mortgage.

So happy borrowing and while I love cash buyers, they are typically retired people that have had a whole “successful” life to save up money or gain equity in their prior home, so for the proponents of ony ever buy anything with just cash…  My advice is think about borrowing, there are bargains everywhere and rates are low.  Keep you cash so you can be sure you can make the payment.  Borrowing and Lending and even charging interest aren’t evil as some would suggest, they are just business.

Good Day!  Chris

Chris Ormsbee is a license Real Estate Broker in the State of Colorado.  He works for Century 21 Action Realty in Montrose, CO 81401 at 1245 E Main St, right on the NW corner of Main St. and San Juan Ave.
Chris Ormsbee is not a lawyer or an accountant but he is a “real” person and an Internet Marketer and he has occasionally slept at THE Holiday Inn Express!

Check his other stuff out at:

On Facebook as myself: ChrisOrmsbee

Real Estate Blog: http://www.YourCOREAdvisor.com/blog

Divorce Advice Blog: http://www.thedivorceworkshop.com/

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NAR Real Estate Summit - Summary Videos…

Ok, here is a short post.  Some great informational video snipits from the Real Estate Summit.

http://www.realtor.org/meetings_and_expo/real_estate_summit

Check it out!  Elegant and well edited.  Takes about an hour to watch them all.  Some great ideas and explainations of what is going on… A view from the top!

Here is a link to the site for Loan Modifications

http://www.makinghomeaffordable.gov/

and if you want even more cool info check out:

http://www.realtor.org

They provide tons of free information and tips and keep you up to date on current affairs and new laws.

Cease Making Payments?

The State of Colorados Position Statement on Loan Modifications that was just revised and released to the general public indicates that some people are advising consumers to cease making mortgage payments even when are already delinquent on payments.

First realize if you want advise on this type of thing I recommend you talk to the government counselor first and then an attorney or accountant if you have one.

The Basic Options

Earn enough income, keep paying on your mortgage and eventually you will own your own home or sell it when you want hopefully for a profit and payoff the balance of the mortgage at the sale.  You are happy the bank is happy. 

If you don’t pay your loan or mortgage, then you are in default.  The bank will indicate this on your credit report and you will most likely not be able to get a home loan or a typical refinance for at least two years.  It is my understanding that this is the same effect on your credit as a Short Sale.   Where a Foreclosure will stay on for at least 7 years and a Bankruptcy for 10 years.  

I am no credit expert, but these are the things I hear consistently from the people who claim to be.

When People Ask Should I Pay?  I Say

When people have asked me what to do I tell them I cannot make that decision for them, but that there are some obvious options. 

If Current now, and you have the income, then Stay current on your mortgage and try to sell your home.  Save your credit.  If you need to short sale banks will consider a discount in some situations even if you haven’t had a late payment.  If you don’t qualify for a short sale due to other assets or earnings, you may have to bring money to closing or sometimes the Bank will agree to carry back the difference as an unsecured debt, that you repay over time (kind of a workout/sale combo).

If Current now but your income has ceased or shrunk to where you cannot make your payment.  You have three choices:

1. Borrow money elsewhere and make the payment planning to catchup with new lender later. 
2. Make a partial payment (what you can afford) and notify the lender of your inability to pay the full amount.    It is worth noting that a partial payment will sometimes be considered when the Bank is weighing whether or not to Foreclose.   It can also make the extra that needs scraped up later to stop the foreclosure from starting, smaller.   Be sure to note the month it is to be applied to (the one you are latest on).  NOTE - I believe a partial pay is the same as a late pay on your credit report.  BAD.
3. Make no payment to the bank and feed your family, pay your utility bills and keep trying to sell your house and/or find new sources of income.  NOTE - this will impact your credit very negatively for at least 2 years. 

How does a homeowner decide?

If the homeowner has no money to make the payment and they aren’t sure how to feed themselves or their kids and their home (in this market) is not worth what they owe on their mortgage.  Then I think they need to seriously consider if they should even try borrowing from a friend or family to make this payment.  They may need that avenue or last ”lifeline” call for funds later when they have lost the house.

In my opinion, no lawyer, mortgage broker, realtor, family member, counselor or anyone else can tell you what to do in this situation. 

You have to look into your soul.  Examine your morals.  Feel your faith about your future - Will it be better soon or will it be worse?   Can you visualize yourself on a path to financial recovery or not?

You must also think about where you will go.  An apartment usually requires at least 2 months rent to move in and with “Bad Credit” a late pay on your mortgage, they may require more and it may limit your options.  What is rent in your market?  Can you afford it?  How much reserve will you need to get back on your feet without getting evicted first. What is availability?   You need to know these things to figure out your plan and make your decision.  Moving is expensive, reconnection charges, change of addresses take time away from life and/or work.

I think if you have kids, then as a parent it is your responsiblity to try to do everything in your power to keep your kids off the street and if this means not paying the bank then don’t pay the bank.

I am a believer of positive thinking and attitude helping to steer your course.  However you can be overly optimistic.  If you just got fired from your high paying job and divorced in the same month or week and you think everything is going to be ok, you might be overly optimistic.  You might also be overly pessimistic.  Only you know your true capabilities, marketing abilities, desire, drive, etc. that will determine the correct path for you.

If you think realistically you will not have income for months, then just like in planning for a divorce or a bad economy or a disaster a person needs to watch out for themselves, have a reserve fund, know they can take care of their loved ones and consider what that is worth compared to their credit or even their home. 

A person also has to be able to look themselves in the mirror and sleep at night.  If the circumstances beyond your control are what is causing your problems, then I think you should be guiltless.  If it is something that you did on purpose or fraudulently then I think it will eat at you and screw up your karma. 

I seriously don’t believe that there are very many people out there (maybe a few) that intentionally buy a house and plan to lose it to the bank.  Lets face it.  It is always some type of circumstance that changes that affect income and ability to repay the loan.  To me, it doesn’t really matter who’s fault it is.  Because in reality,  if the homeowner doesn’t pay, the bank or investors lose.  The late-paying homeowner loses with a big sledge hammer ding on their credit report.  Should it go through to foreclosure they both lose even more.  The bank has a REO and foreclosed homeowner loses their home and is punished more by not being able to buy again for at least 7 years.    Plus the homeowner can either get forgiveness of debt phantom income or a deficiency judgement.

Is a SHORT SALE the Answer?

The short sale is one answer that is kind of a compromise, because it means:

The seller is going to lose their home and get nothing for it. 

They have typically already made the decision to stop making payments because of circumstances that have changed. But they know it is inevitable that they will sell for no profit or abandon their house eventually.  In this circumstance it seems to me, that the payments to the bank kind of don’t matter.  

At this point the homeowner should consider trying to get enough money scraped together to move into an apartment or in with a family or whatever, rather than trying to pay the Bank or lender any more money. 

Realize a short sale is a bit of a gamble though.  You have to find the buyer, you have to qualify with your lenders requirements, both in documentation, situation and in price based on their BPO and their ratios.

But the worst case of trying to do a short sale and failing is that the bank goes through with the foreclosure.  So if it fails, all it really costs is the time to put together the information and trying to sell your home (showings and yours or the realtor’s time.)