Refinancing Your Home Loan
What is "refinancing"?
Refinancing is one of two things. Either you can do what's called a "rate and term" refinance, or you can do a "cash-out" refinance. For example: your house is worth a million dollars, your first mortgage is $500,000, you've got a 6 1/2 rate, and the going rate today is at 5 1/2. You want to lower your monthly payment to get it to 5 1/2, and you're going to keep your mortgage balance at $500,000. That's called the "rate and term" refinance. Cash out refinance is where if your current mortgage is at $500,000, and your new loan that you want is $600,000, you're now pulling $100, 000 of cash out of your home.
Generally how far do interest rates need to drop to make it worthwhile for me to refinance?
It varies on your loan balance and what your rate is right now. Nowadays we do a lot of what's called "no-cost" refinancing. So if you've got a million-dollar loan at 6% and I can come in and get you a no-cost refinance at 5.875, that eighth in rate could be a couple hundred bucks on a million-dollar loan, and it's well worth it. Normally the higher the loan size, the quicker you are able to refinance for free.
What is an "appraisal" and how is it used to calculate the value of my home?
An appraisal is carried out by a third-party individual who's really there to protect the bank. If the bank is going to lend you money, the appraiser is the lender's eyes that are going to go out there to your home and see what other properties in your area are selling for. It's called comparable sales. With that, they're going to go in, take pictures of your property, and measure the property. Then, they'll go back to their office and look at the comparables that have sold in the area. Based on the comparables, and whether your property has a view, a pool; whether it's upgraded, whether you've added square footage; they take all that into consideration and come up with a value for your property.
What can I do if I disagree with the banks appraisal of my home?
We can do one of two things. We can actually go to an appraisal review committee with that lending institution, or we can simply order another appraisal with a different appraiser. It's definitely an art; it's not a science.
When getting my home appraisal what are comps or comparables?
Comps or comparables are the following: let's say you have a 3,000 square foot home, four bed, two bath, your lot size is 6,000, you have a pool, you have a view. We're going to go out in close proximity and find another home that has your same characteristics. Hopefully there are other homes in the area that have sold recently that are just like yours, and that is your comparable.
Does the process for refinancing differ from the normal mortgage process?
Well it's either a refinance process or a process to purchase a new home. The only change really is timing. For a refinance, we can kind of close whenever. But with a purchase there's a close of escrow date that needs to be met. And that's the biggest change.
What is a "cash out option"?
A cash out refinance option is, in its simplest terms, taking equity out of your home. If you currently have a first mortgage of $500,000 and you need to pull out $100,000 of equity, cash, from your home, then once that's done, instead of a $500,000 mortgage, you will now have a $600,000 mortgage.
What are the refinancing scams to look out for?
The refinance scams to look out for involve paying points and also pre-payment penalties. Sometimes people think they are saving a lot of money, but once they really pencil it out they have to pay three or four thousand dollars in fees. Or, if someone is trying to charge a lot of points, a lot of times it might not make financial sense for you to refinance. It's something that I would break down for you on paper and if it makes financial sense, we do it now. If not, we wait for financial rates to fall.
Are too good to be true loan offers usually too good to be true?
9 times out of 10 those types of loans are too good to be true. I have a client that I closed a loan for not too long ago, and every time I met him or spoke with him, he always either gave me a newspaper article or sent over some type of bait-and-switch type of advertising on the internet. I would break it down for him and show him that first of all, if you read the fine print, this is really at this 2% fixed rate, it's not really a fixed rate, it's an adjustable, so he was going to be paying three points to get that particular rate. There's a lot of scams out there so you do have to be very careful, and that's why it's important to go to someone such as myself, a professional mortgage broker, who is not there to just deal with you for the next 3 days. I'm here for mortgage planning - for life.
