When does it pay to refinance a mortgage?

Refinancing your mortgage can be an excellent opportunity to save money and get better terms on your home loan. But while refinancing can mean big savings in the medium to long term, it does carry a number of upfront costs.

To help you decide on the right time to refinance, you need to determine your break-even point. In other words, you need to know how long it will take for the money you save with your new mortgage to exceed the costs of acquiring it.

Simple formula for calculating your break-even point:

Step 1: Subtract your new monthly payment from your old monthly payment to calculate the savings each month.

For example:
Say you have $170,000 of principal remaining on a 30-year fixed-rate mortgage you took out 5 years ago at 8 percent:
Your current monthly payment is $1,312.

If you refinanced to a new 30-year mortgage at 6.5 percent:

Your new monthly payment would be $1,075.
$1,312 (Old monthly payment)
- $1,075 (New monthly payment)
= $237 (Savings per month)

Step 2: Divide the closing costs of your new loan by the monthly savings to calculate your break-even point.

For example:
If the closing costs are $4,800:
$4,800 ÷ $237 = 20.25 months

So, according to this formula, you start to save on your mortgage refinancing in less than 21 months.

Other factors to consider:

1. The effect of extending your term
The problem with the above calculation is that it ignores an important factor. Your new monthly payment isn’t just reduced because of a lower interest rate; it’s also lower because you’ve effectively extended the term of your loan. If you’ve had a 30-year mortgage for five years, then you have 25 years left to pay it off completely. But if you refinance to a new 30-year loan, you’ll face five extra years of monthly payments, which the formula ignores.

If your new mortgage had a term of 25 years instead of 30, allowing you to pay down that $170,000 in the same amount of time, your monthly payment at 6.5 percent would be $1,148, making your break-even point more than 29 months. Refinancing still makes sense if you plan to stay in your home for several years -- over the life of the loan, you would still pay less interest with the new mortgage -- but the savings would take longer to realize than the simplified formula suggests.

2. If you choose a shorter-term loan
Now imagine you’re in the same situation as above, but this time after five years you decide to refinance to a 15-year mortgage in order to pay off your home more quickly. The new monthly payment at 6.5 percent would be $169 higher, so the old break-even formula doesn’t apply. Over the life of the loan, however, the new loan will save you a whopping $127,000 in interest, since more of your money is going to pay down the principal, and you will own your home 10 years sooner!

In short, the rule of thumb for calculating your break-even point is only accurate when the term of your new loan is very close to the term remaining on your old one -- and that’s often not the case.

There are other things to consider when you refinance, too, including taxes and private mortgage insurance. For a break-even estimate that takes many of these factors into account, use the LendingTree refinancing calculator.

Cash-out mortgage refinancing

Your house is a potential source of money if you are willing to sacrifice some of your equity in return for liquidity. Cash-out mortgage refinancing is one way to access this cash.

What is cash-out mortgage refinancing?
Cash-out refinancing involves refinancing your mortgage for more than you currently owe and pocketing the difference. If you have been paying down your mortgage for some time, then the principal is likely to be substantially lower than what it was when you first took out your mortgage. That build-up of equity will allow you to take out a loan that covers what you currently owe -- and then some.

For example, say you owe $90,000 on a $180,000 house and want $30,000 to add a family room. You could refinance your mortgage for $120,000, and the bank will then hand over a check for the difference of $30,000.

You can take the difference and use it for home renovations, second-property purchases, tuition, debt repayment or anything else that needs a significant amount of cash. What’s more, you may be able to get a more favorable interest rate for your refinanced mortgage.

However, if the interest rate offered for your refinanced mortgage is significantly higher than your current rate, this may not be a sensible choice. A home equity loan or line of credit (HELOC) might be a better option in this instance.

Typically, homeowners are allowed to refinance up to 80 percent of their property’s value. Certain lenders may allow you to borrow more than 80 percent of your home’s value, but you may have to pay private mortgage insurance, or pay a higher interest rate.

Cash-out refinancing versus home equity loans
Homeowners sometimes confuse these two pools of home-financed cash. Cash-out refinancing and home equity loans are quite different. Cash-out refinancing is a replacement of your first mortgage; HELOCs are separate loans on top of your existing mortgage. In other words, with refinancing you get a new mortgage, not a second loan against the equity in your home.

Refinancing usually makes sense only when there has been a drop in interest rates and you want to lock in a new mortgage at a lower rate for a longer term than your existing mortgage. It can also benefit those who want to refinance their mortgages for a longer term to lower their monthly payments.

Loan Modification Plan Announced

New mortgage loan modification program promises borrowers help with keeping up with their mortgage payments.

By Marcie Geffner – LendingTree.com

The U.S. Treasury has announced important details of President Obama’s new housing rescue plan, which includes both a loan modification program to help homeowners who can’t afford their mortgage payments and a refinancing program to help homeowners who have little or no equity in their home. (Read more about the refinancing program.)

The loan modification plan, now called Making Home Affordable, is intended to help borrowers who are at risk of default or foreclosure because they’ve suffered a loss of income or a rise in household expenses such that they can no longer afford their mortgage payments.

Who may qualify for loan modification plan
The loan modification plan is intended to help homeowners who can demonstrate that they are at risk of being unable to make their mortgage payments due to a financial hardship. This applies to both borrowers who have already missed a mortgage payment and those who are not yet delinquent.

The plan is open to borrowers who obtained their mortgage before Jan. 1, 2009, occupy their home as their principal residence and can provide paycheck stubs and tax returns to document their income.

How loan modification plan can help
The loan modification plan offers incentives to encourage lenders and loan servicers to help borrowers by modifying their loans. A loan modification is not a refinance, but rather a change to the terms of the loan.

Here’s how the loan modification plan works:

• The borrower contacts his or her lender or loan servicer to find out whether he or she qualifies for a loan modification.
• If the borrower is qualified, the lender will reduce the interest rate on the borrower’s mortgage so the monthly payments will be less than 38 percent of his or her income.
• The lender then cuts the interest rate further so the monthly payments will fall to only 31 percent of the borrower’s income. The cost of this second rate reduction is shared between the lender and the federal government.
• The lender also may lower the borrower’s payments by reducing the amount the borrower owes, extending the loan term to 40 years or restructuring the loan so no interest is charged on part of the loan balance.
• The government may reward borrowers with an additional $1,000 per year applied to their mortgage if they keep up their payments after their loan is modified.

The lower interest rate typically will last five years, after which the rate can be increased. Other modifications may last five years or be made permanent, depending on the borrower’s situation.

To find out whether you can take advantage of this program, call your loan servicer or use the self-assessment guide on FinancialStability.gov, a new government-run website about these programs. Your loan servicer’s name and telephone number should be on your monthly mortgage statement or payment coupon.

Homeowners may have other options
If you don’t qualify for the loan modification plan, you may be able to take advantage of the new refinancing program. This program is open to homeowners who have a solid mortgage payment history and whose mortgage is owned or guaranteed by Fannie Mae or Freddie Mac. The program lets these homeowners refinance up to 105 percent of their home’s current value.

If your situation doesn’t fit either the loan modification program or the refinancing program, you may still be able to lower your monthly mortgage payments by refinancing to take advantage of today’s low mortgage interest rates. Home buyers who haven’t owned a home in the last three years may be able to qualify for an affordable fixed-rate mortgage and an $8,000 federal tax credit.

How to compare mortgage loans

Comparing mortgage loans is one of the most important things you can do when you’re buying a home. The decisions you make will determine the size of your monthly payments, how much you pay upfront, and how much interest you’ll pay over the life of the loan.

You might find it simpler to compare loans if you ask each lender a series of questions, including:

• What is the loan’s interest rate?
• Will I be charged points?
• What are the closing costs and all other fees?
• What is the annual percentage rate, or APR – the rate you’ll pay per year for all the costs associated with the loan?
• Is there a pre-payment penalty?
• How is the loan amortized, meaning how quickly is the principal paid off?

Find out the answers to these questions no matter what type of loan you’re considering. Each can affect the overall cost of your loan.

If you are considering an adjustable-rate mortgage, or ARM, you can compare loans by asking:

• When does the rate adjust?
• How often does the rate adjust?
• Is there a cap limiting the amount by which the rate can adjust? What would my monthly payments be if my interest rate hit that cap?
• What is the index and margin that will determine my rate? How has the index changed over time?

ARMs are inherently more risky than fixed-rate mortgages because you’re gambling on whether interest rates will go up or go down before your rate adjusts. Understanding the best- and worst-case scenarios can help you weigh the pros and cons as you compare loans.

But there’s one other big question to consider before you get an ARM:

• How does the discount introductory rate compare with rates for 30-year fixed-rate loans?

If there’s not much difference when you compare the two, the fixed-rate loan might be a safer bet. You won’t save much in the short-term, and could save a lot over the long term. Plus, you reduce your risk if interest rates shoot up and you can’t refinance before the rate adjustment.

Finally, to truly compare loans, you have to ask yourself some questions:

• How long do I expect to stay in my home?
• Are my job and income secure over the long term?
• Will I be able to afford higher payments in the future?
• How comfortable am I with risk?

In the end, the best loan is the one that works for your needs.

Interest-only mortgages

Make sure you understand the terms of an interst-only mortgage before you sign.

How interest-only mortgages work
When you take out a traditional mortgage, you pay the lender a monthly amount that’s a blend of principal plus interest. The principal goes to repayment of the money you borrowed. The interest is what the financial institution charges for the use of the money.

When you take out an interest-only mortgage, you pay only interest every month for a fixed period of time -- usually the first five to 10 years. Then, depending on the term of your mortgage loan, you have 20 to 25 years to repay all of the principal, plus interest. You can pay money toward the principal during the interest-only period, but make sure your interest is recalculated on the new balance.

An interest-only loan could be ideal for you if you want to keep your monthly payments low and are not concerned about falling home values. Refinancing with an interest-only mortgage is an idea you might want to consider if you are experiencing a temporary financial squeeze -- if, for instance, you or your spouse has chosen to go back to school, or one of you has decided to take a few years off with your children. Paying only interest for a few years could help you to stay in your current home, even though you can’t make your conventional mortgage payments for the time being. Of course, remember that you will only be paying interest during that time and not paying down the principal of the loan.

Your payments rise later
When you take out an interest-only mortgage, whether it’s for the purchase of a new home or to refinance your current home, you must bear in mind that when the five- or 10-year interest-only period expires, your payments will increase. In fact, they will be much higher than if you had taken out a conventional mortgage. This is because you must now pay off the principal in a much shorter period of time.

So before you opt for an interest-only mortgage, make sure that you will be able to afford the higher payments you will face in five to 10 years, or you will face refinancing -- possibly at a higher interest rate -- or selling your home.

Government offers mortgage help

New government programs may be good news for homeowners who want to refinance or obtain a loan modification.

By Marcie Geffner - LendingTree.com

Homeowners who want to refinance their mortgage or need help to obtain a loan modification may be cheered by several recent federal government announcements.

The Federal Reserve said it will keep the benchmark federal funds rate at zero to 0.25 percent. The low target rate is good news for borrowers who have an adjustable-rate mortgage (ARM) or want to refinance, even though the Fed doesn't directly control the interest rates that borrowers pay on their loans.

These low interest rates may not be fleeting. The Fed said it expects "exceptionally low" rates to continue for "an extended period" due to current economic conditions. That's good news for buyers who need time to shop for a home and a loan.

The Fed also reiterated its plans to buy up to $1.25 trillion of mortgage-backed securities, $300 billion of Treasury securities and $200 billion of other debt instruments this year. These purchases are intended to "support to mortgage lending and housing markets," among other objectives, the Fed said in its statement.

Second loans to be modified
Meanwhile, the U.S. Treasury announced a new Second Lien Program that will lower the payment on some homeowners' second mortgages. This program is intended to help homeowners who are in danger of foreclosure qualify for a loan modification through the Making Home Affordable program. Second mortgages can create significant challenges in these situations.

The Making Home Affordable program also has a refinance component that's open to borrowers whose loan is owned or guaranteed by Fannie Mae or Freddie Mac. Through this program, homeowners may be able to refinance even if they owe slightly more than their home is worth.

A dozen or so lenders have signed formal agreements to offer the Making Home Affordable programs.

Loan principal may be reduced
The Treasury also announced a program that would require loan servicers to offer the existing Hope for Homeowners program to more borrowers who apply for the Home Affordable Modification program. Hope for Homeowners is a government program that helps to create equity for homeowners, so they can refinance into a new loan that's guaranteed by the Federal Housing Administration (FHA).

Home buyers score tax credit
For home buyers, the federal government offers an $8,000 tax credit. The credit can be taken by taxpayers who purchase a home between Jan. 1, 2009, and Nov. 30, 2009, and have not owned a home in the last three years. The credit does not have to be repaid and can be claimed on the taxpayer's 2008 or 2009 tax return. The credit is subject to income limits and is phased out for higher-income earners.

Getting a Mortgage Without Credit

By Nik Levesque

We all probably know that getting a mortgage with little or even no credit is pretty much next to impossible. Well, actually it isn't really. You just have to know a few key things and keep these things in mind when going to a bank or broker for a mortgage. Who knows, owning your own home may be a definite possibility.

The first thing to know is that nothing really changes with the procedure of applying for a mortgage with bad or no credit. You still go to the same place that you would need to go for any other mortgage.

When you apply for a bad or no credit home loan you will be asked to prove proof of employment (not to mention the fact that you have been at the same job for a reasonable amount of time), your credit history, the amount of debt that you currently have and how much of a down payment on the property that you have available.

Another possible solution can be that you might be able to look at and get is an FHA loan. These are great for many people who are trying to rebuild their credit after various problems and issues with money that they may have had in the past.

Finally, if you can not qualify for either the bad or no credit mortgage and the FHA loan, you can look at finding a friend or relative willing to vouch for you by co signing on the loan. This will make he or she responsible for paying back the loan as well as yourself. So basically, if you default on payments, they can go after the co-signer for the money.

Getting a mortgage can be a very complicated process if you are with a less than perfect credit rating. However, owning a home in the end makes it worth it!

When you are looking for a mortgage and need to know what your payments will be, you can always check a mortgage payment calculator

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