Complete Guide To Refinancing Your Home by Fairway Tacoma North

GUIDE TO REFINANCING

TABLE OF CONTENTS WHY REFINANCE? .................................... 3 Rate and Term Refinancing .................................... 4 Cash Out Refinancing ............................................ 6

IS REFINANCING RIGHT FOR YOU? ......... 7 REFINANCING COSTS & THE BREAK-EVEN POINT ......................... 8 What Does it Cost to Refinance? ............................. 8 When Will You Reach the Break-Even Point? ...........10

CHOOSING THE RIGHT MORTGAGE.... 11

GUIDE TO REFINANCING

2013

WHY REFINANCE? Has the hype about today’s low rates got you thinking about refinancing? Do you want to pay off your mortgage before your retirement years? Or do you need some extra cash to pay for your child's tuition? There are many reasons why a homeowner might want to refinance, so it’s important to understand the different types of refinance opportunities available.

GUIDE TO REFINANCING

2013

RATE AND TERM REFINANCING Most often a homeowner will refinance to change the way they are currently paying off their mortgage, also called a rate and term refinance. In this case the homeowner doesn’t want to change their loan amount, but rather lower their payment, build equity in their home faster, or switch from an Adjustable Rate Mortgage(ARM) to a Fixed Rate Mortgage.

1. Lower your payment If you’re a homeowner looking to lower your monthly mortgage payment, there are a few different ways you can go about achieving this.

One method would be to refinance to get a loan with a lower interest rate. You may be able to find a loan with a lower interest rate because of market conditions or a lender may offer you a better deal if your credit score or other financials have improved. For example, if you lower the interest rate on a $200,000, 30 year fixed rate mortgage from 7% to 5%, your monthly payment goes from $1330.60 to $1073.64.

Another method would be to refinance to get a loan with a longer term (i.e. the length of time for which you make mortgage payments). For example, if you refinance from a 15 year fixed rate mortgage to a 30 year fixed rate mortgage, your interest rate may increase, as longer-term mortgages generally have higher interest rates, but the result will be an overall decrease in your monthly payments. For example, if you increase the term from 15 years to 30 years on a $200,000 mortgage, and your interest rate goes from 5% to 7%, you still end up with a lower monthly payment, decreasing from $1581.59 to $1330.60. However keep in mind that you end up paying more interest on the life of the loan when you increase the loan term.

GUIDE TO REFINANCING

2013

2. Build equity in your home faster. Pay off your loan sooner. Save money on interest costs. All of these goals are grouped together because the method to go about achieving one goal refinancing into a shorter-term mortgage, results in achieving these other goals as well. When you refinance into a shorter-term mortgage, for example from a 30 year fixed rate mortgage to a 15 year fixed rate mortgage, you reduce your total interest costs, because you are putting more of your monthly mortgage payment towards the principal. The resulting effect is that you build equity in your home faster, and pay off your loan sooner. Although shorter-term mortgages generally have lower interest rates, because you are putting more towards your principal, the monthly mortgage payment tends to be higher. It’s important to note, that you do not necessarily need to refinance to achieve these goals. You could always just pay a little extra on principal each month. Check to make sure there are no pre-payment penalties before you start doing this.

3. Switch from an Adjustable Rate Mortgage to a Fixed Rate Mortgage Adjustable Rate Mortgages (ARM) offer a very low initial interest rate that lasts for a fixed period of time, for example 5 years. After the fixed period expires, the interest rate will start to “adjust” to market interest rate changes. If you don’t like the idea of a changing monthly mortgage payment, you may want to refinance into a fixed rate mortgage. Especially if you think rates will begin to increase in the future, this may be a good option for you. A fixed rate mortgage offers a monthly payment that will never change. However, if your monthly payment includes escrow amounts for taxes and insurance, your payments may fluctuate due to changes in property taxes, insurance, etc. They also tend to have higher rates than ARMs, because with an ARM comes the age-old adage, high risk, high reward. High reward equals a lower initial interest rate, high risk equals the interest rate fluctuating after the initial fixed-rate period is over.

Read on to learn about Cash Out Refinancing and decide which of the two options is best for you!

GUIDE TO REFINANCING

2013

CASH-OUT REFINANCING Sometimes a homeowner will want to take out a new mortgage with a larger principal than what they are currently carrying, and receive the difference in a cash payment. This is termed cash-out refinancing. It’s basically taking the equity out of your home and turning it into cash.

So why might a homeowner need cash? Obviously there are many reasons, but here are the most common instances:

To pay for a major expense such as a child’s tuition, a new car, or to make home improvements.

2. To consolidate debt, i.e. pay off your credit card that has a high interest rate and consolidate it with your mortgage that hopefully has a lower, more stable rate.

3. To combine first and second mortgages It’s important to understand that when you take equity out of your home for cash, the loan is secured by your home. You also technically own less of your home than before. Be sure that you can afford the payments from your new loan, as you would not want to take the risk losing your home should anything happen.

GUIDE TO REFINANCING

2013

IS REFINANCING RIGHT FOR YOU? Refinancing your home mortgage can really save you money and ease the stress of loan payments on your monthly budget. You may be able to pay less interest, lower your monthly payment, switch from an adjustable rate to a fixed-rate mortgage, or convert from a 30-year loan to a 15-year loan (and build your equity faster!). But before you run off and take action, be sure that refinancing is right for you!

Key points to consider when determining if refinancing is right for you: 1. The length of time you will be staying in the house. To really take advantage of the benefits of a refinance, it is vital to time it correctly. The benefits of refinancing your home will take time to accrue so you need to make sure you are staying there long enough to break even on the cost of refinancing. Determining how long it will take to break even will come in handy, especially if you don’t plan on staying in your house for that long. For example, if the break-even point on your refinance is 5 years, and you only plan to live there for another 4 years, then it’s not beneficial to refinance because you will not be recouping your costs prior to selling the home. The costs associated with refinancing include closing costs, or miscellaneous fees the lender charges the borrower to cover the costs of processing the loan application. These fees vary and may include: loan origination fee, application fee, discount points, appraisal fee, etc.

2. Possible pre-payment penalties from your existing mortgage. To deter a borrower from selling or refinancing their loan as soon as rates drop, sometimes lenders will throw a prepayment penalty into the mortgage loan if the borrower pays back the loan earlier than the original terms called for. It’s important to know that there are two types of prepayment penalties: soft prepayment penalties and hard prepayment penalties. A soft prepayment penalty is given only in the event that a house is refinanced before the time period is up. The home could be sold at any time after the close of the first loan without incurring the extra fees. On the other hand, a hard prepayment penalty, which is more common, is given regardless of whether the note is paid off as a result of a sale or refinance before the set time has lapsed. In most cases, prepayment penalties won’t hurt you because it’s unlikely that you’ll pay off your $200,000 home loan in three to five years. However, refinancing a mortgage from one with a higher to a lower interest rate technically counts as paying off your loan. To refinance from one loan to another, you are paying off the original mortgage. If you do this within the penalty period, you’ll have to pay the prepayment charges.

GUIDE TO REFINANCING

2013

REFINANCING COSTS AND THE BREAK-EVEN POINT For many homeowners, refinancing their home mortgage is looking mighty tempting with the market’s low rates. However, it’s important to understand that a lower monthly mortgage payment and a lower interest rate does not automatically mean you are saving money right away. Why? Because it costs to refinance and these upfront costs must be recovered over time before you actually start to incur real savings.

WHAT DOES IT COST TO REFINANCE? Remember what you went through to get your first mortgage? Well a refinance isn’t all that different; much of the process is the same, as well as the types of costs. Refinancing costs vary by state and of course by lender, but they typically range from about 2% to 6% of the mortgage amount.

Some of the typical fees include: Loan Origination Fee: This is the fee charged by the lender to evaluate and prepare the loan. Loan Discount Points: A point is equal to 1% of the loan amount. A borrower can choose to pay a point(s) to reduce the interest rate of the loan.

Appraisal Fee: This will cover the appraisal of your home and is required by the lender to ensure that the home is worth at least as much as the loan amount. These fees are often non-refundable, even if the loan does not go through.

Inspection Fee: A home inspection is not required everywhere, but many lenders do require them to secure the structural condition of the property. Some states require specific inspections.

Homeowners Insurance: Most lenders require that a homeowners insurance policy be in place at the time of settlement. Most homeowners already have a policy, so when refinancing the lender will only need proof of the policy.

List continued on page 9 >>

GUIDE TO REFINANCING

2013

Title search and title insurance: A search must be done to ensure that you are the rightful owner of the property, and therefore have the right to refinance. Title insurance will protect the lender’s investment in your mortgage should any problems arise due to errors in the title search. If it hasn’t been that long since you first purchased your home, ask the title company that is currently carrying your title insurance policy about reissue rates, or the discounted rate on title insurance. This may reduce your cost on title insurance.

Survey fee: Lenders will require a survey fee to verify the official boundaries of the property, improvements on the land, and to ensure that your lot has not been infringed upon by other structures. Prepayment penalty: Some lenders will charge a fee should you refinance and pay off your existing mortgage early. To get a good look at all of the costs associated with refinancing your mortgage, ask your lender for a Good Faith Estimate. You can also ask for the HUD-1, or final settlement papers, one day before your loan closes, so you can review all of the costs and verify the terms.

Read on to learn how to calculate your break-even point and find out when you’ll begin to incur real savings through refinancing.

GUIDE TO REFINANCING

2013

WHEN WILL YOU REACH THE BREAK-EVEN POINT? When you refinance, one of the most common goals is to save money. So at what point do you begin to incur real savings? This is your break-even point, and it’s all uphill from here.

Example of a 30 Year Fixed Rate Mortgage To calculate your break-even point, let’s say you have a 30 Year Fixed Rate mortgage:

t Principal: $400,000 t Interest Rate: 6% t Monthly Mortgage: $2,398.20 Say five years have gone by, and now your principal is $372,217.43, and you’re looking to refinance into another 30 Year Fixed Rate Mortgage.

t t t t

Principal: $372,217.43 Interest Rate: 4% Monthly Mortgage: $1,777.02 Savings per month: $2,398.20 - $1,777.02 = $621.18

And say your total cost to refinance is about $9,500 (paying 2 points, closing costs of about $2,500). Obviously this is just an estimate, and many other factors may affect this number such as taxes, closing costs, etc.

Your break-even point would be $9,500 divided by $621.18 = about 15 months.

After you refinance, it will take about a year and some change before you start to incur real savings. If you plan on moving out before then, refinancing may not be your best bet. To get a good look at detailed numbers as it pertains to your current situation, consult a Loan Officer.

GUIDE TO REFINANCING

2013

CHOOSING THE RIGHT MORTGAGE Loan officers are the go-to for help when examining your different home loan options. While you might not know everything about mortgages, there are some are some questions you can ask yourself that will help point you in the right direction.

Providing the “answers” to these questions to your loan officer will help them identify your goals, and ensure that you choose the best mortgage for your needs: 1. How long do you plan to stay in your home? 2. Where are interest rates heading? 3. Is your goal to build equity in your home? 4. Do you see your financial situation changing in the next couple of years? 5. Do you mind taking on a bit of risk and change, or prefer predictability?

How long do you plan to stay in your home, how do you feel about risk, and where do you see yourself in the future? If you plan on staying in your home seven years or less, then an Adjustable Rate Mortgage (ARM), also known as a flexible or variable rate loan, may be a viable option for you. ARMs often offer an extremely low introductory interest rate that lasts for a fixed amount of time, commonly 3, 5 or 7 years, and then the interest rate “adjusts” to market rates. The main benefit for many when choosing to go with an ARM, is the low initial interest rate and monthly payment. If you expect to earn more money in the future, but are not yet where you would like to be, this takes some pressure off until you reach your financial goals, and still allows you to buy a home. Or maybe you’ve been hit with hard-times; a low payment might be very beneficial until you get back on your feet. Questions continued on page 12 >>

GUIDE TO REFINANCING

2013

However, practice some caution as one drawback is that more than likely the interest rate will fluctuate and adjust to market rates after the fixed introductory period has ended. This means your rate could increase dramatically, thereby increasing your monthly mortgage payment. The potential positive of the interest rate adjusting, is that you might get an even lower rate should market rates decrease. If you’re the committed kind and plan on staying for 10 years or more, a 10 Year ARM or a 15, or 30 Year Fixed Rate Mortgage may be worthy options. With Fixed Rate Mortgages, you can rest assured that regardless of the financial market, you will be paying your agreed upon interest rate and mortgage payment specified in your contract. Most of the time with Fixed Rate Mortgages, you have a higher interest rate relative to market interest rates, as the lender must offset the fact that market interest rates might increase. However the reverse does apply to you, if interest rates drop you will still be locked in at the higher rate. In this case, you may consider refinancing to get the lower rate. If you like predictability when it comes to money, I’m right there with you! I’m not much of a risk taker and I am more comfortable knowing that my interest rate will not fluctuate with the financial market. Choosing a Fixed Rate Mortgage may be your best bet.

What would be a good option to build equity in your home? To build equity in your home, some good choices would be a 10, 15 or 20 Year Fixed Rate Mortgage. You’d pick this type of mortgage because it allows you to build the equity in your home faster than other mortgage products available. Every month as you make your payments you increase your equity. As you owe a little less, you own a little more. When you build equity, you are increasing the net value of your asset (equity) and are increasing your net worth.

Do you expect interest rates to dramatically change in the near future? Do a little bit of research, and depending on what you find, this may help when choosing a loan. Also talk to your mortgage professional about the market and get their insight. If you think rates will increase, it might be a good time to get in a 30, 15 or 10 Year Fixed Rate Mortgage before this happens. If you think interest rates are going to fall, you might consider a short term ARM for now, and then try taking advantage of the lower rates down the road.

GUIDE TO REFINANCING

2013

ABOUT NEW AMERICAN FUNDING New American Funding is a Government-Approved Direct Lender that has been in business for over a decade. We successfully fund $400 million in home loans every month and have an A+ Rating from the Better Business Bureau. We ranked number 916 on the Inc. 500|5000 list of fastest growing private companies in America for 2013 and were voted Best Places to Work in Orange County 2012 by the OC Business Journal. Please call us today to find out how we can help you refinance into today’s low rates!

Ryan Chrstian

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Loan Consultant

NMLS #506719 Cell: 360.908.1112 Toll Free: 800.450.2010 Fax: 949.313.0329 Ryan.Christian@nafinc.com www.newamericanagent.com/ryanchristian

Licensed by the California Department of Business Oversight under the Residential Mortgage Lending Act - License #4131117.

HOMEBUYER’S GUIDE

2012