When it comes to your mortgage the first thing people ask is “what is your interest rate?” Many people have the old rule of them embedded in their thought processes that it does not make sense to refinance unless you are lowering your interest rate at least 1%. This may be true in some cases however using this as a strict rule may cost you thousands. If you have the opportunity to lower your interest rate and you chose to pass it up, you may be making a financially painful mistake.
Of course we will take a look at how much you will save on your mortgage by refinancing to a lower interest rate. Everyone wants to save money however another way to analyze your mortgage decision is to examine the cost to not refinance. If you do not take advantage of a lower rate that is made available to you then the amount you would have been saving is what you are paying extra. For example, a homeowner with a $200,000 mortgage at 6.25% will pay $1231.43 per month in principle and interest. If they are able to lower their rate to 5.375% and keep their mortgage at the same amount, their payment will be $1119.94 for a monthly savings of $111.49. Over one year they will have saved $1337.88 and conversely if you do not refinance then you are costing yourself this much each year.
Obviously the monthly savings are nice but for those number crunchers out there, let’s also take a look at the big picture. The savings over the life of your loan is also important. Assume you have had your current mortgage for a full year or 12 payments. On a 30 year mortgage you would have 348 payments remaining. The biggest reason I hear from my clients on why they do not want to refinance is because it will restart their mortgage term over which will cost them money. This is absolutely true however with this example 348 payments at the higher current interest rate will be a total of $428,537.64 paid over the remaining life of the loan ($1231.43 x 348 months) whereas 360 payments at the lower interest rate is a total of $403,178.40 (1119.94 x 360 months). This means that even though you have 12 additional payments, you end up paying $25359.24 extra by not refinancing!
The other reason for not refinancing is because people say they do not want to take longer to pay off their home. That is also an excellent point, however most mortgages these days do not have prepayment penalties so you can pay extra each month and cut down your mortgage term. For this example if you were to refinance to the lower interest rate and continue paying the same payment therefore putting the savings towards the principle each month, you would pay your home off in 289.4 months or just over 24 years compared to the 29 you have remaining. By paying your mortgage off 5 years early you will save $73885.80 in interest! By not refinancing you are choosing to pay $73885.80 extra which makes no financial sense.
Estimate your Refinancing Savings
I thought it may be interesting to share some information on how other countires handle their mortgage markets. Interestingly enough, most countries require much larger down payments to buy a home. Here are a couple of countries I found some information on. In Japan a buyer needs 10% down, in India a buyer needs to put 15% down, in most Asian countries including China that amount grows to 30% down payment, and lastly in Vietnam a buyer needs to put a whopping 40-50% down payment.
Here in the U.S. we still do not even have a down payment requirement in some circumstances. If you are a veteran you can apply for a VA loan which requires no down payment. You also can qualify for no down loan if you decide to live in less densely populated area through a USDA loan providing you meet the income restrictions those loans have in place. If you do not qualify for no down payment you can still get into a house with as little as 3.5% down payment through an FHA loan or 5% with a conventional loan. When you start comparing our down payment requirements in the U.S. with other countries you can really see the benefit of living in the “Good Ole USA”.
After looking more in depth into mortgage markets around the world, I also found that most countries have different kinds of mortgage terms then we do in the States. It seems as if it is more common for homeowners to opt for adjustable rate mortgage (ARM) loans instead of fixed loans in other countries. For example, in Canada and Britian prospective home-buyer’s cannot even get a fixed rate mortgage and instead have to settle for an ARM loan. If an individual does get a fixed rate loan they typically have to set up a meeting every 2,3, or 5, years with their bank to resign and extend their loan. The bank has much less risk with these shorter length terms because it is possible they would not renegotiate your loan especially in the unfortunate circumstance of an unexpected job loss etc. We do have loan terms like these in the U.S. and they are called “Balloon’s”. They are definitely not very popular. For good reason…
Lastly, rates in other countries also vary greatly. In Japan it is possible to get a short term adjustable rate mortgage at an unbelievably rate of .11%. On the other hand, you can also expect an interest rate of 9.5% in Vietnam. If you remember, Vietnam also had the 40-50% down payment requirement…OUCH. Here are some other rates from around the world- Canada 3.5-6.75%, Germany 3.5-4.5%, and finally Australia 7.1-7.9%. Our interest rates here compare favorably or are better then what you can find around the world.
The talking heads have been weighing in on a new report that came out today by the Treasury Dept. This report is called the “White Paper”. The White Paper report is going to be given to your elected officials so that they can figure out how to get the pseudo-government entities of Fannie-Mae and Freddie-Mac out of the mortgage business. The government wants to lower their risk of owning so many mortgages by steadily increasing fees enough to make their mortgage impractical to get by the consumer. This would then encourage the private market to ride in on their white horse and fill in this void. The plan calls for a long term phasing out of the government rather than a rash exit.
This report also suggests that government backed mortgages would have tighter guidelines making them tougher to get. For example they are purposing to lower the conforming loan limits already in place and requiring a higher down payment (likely 10%). The government would still be able to prop up the mortgage marketplace in case of catastrophic financial events similar to that of Sept 2008 collapse.
What does this all mean to you. Short term, probably nothing because the legislation has to be passed by the government and they say that may take 2 years. Long term though, it shows that the government wants you to have more equity in your home so plan for larger down payments in the future and more costly loans. Stay tuned…. Josh
With mortgage rates still low, many families are benefiting by refinancing their homes. As we have been recommending, if your mortgage rates is still above 5% then you should also seek information on what options you have to lock in a lower rate. While shopping for the best mortgage deal it is very important to understand what mortgage insurance your mortgage requires.
First of all understand that not all mortgages are alike. FHA mortgages, for example, have a type of mortgage insurance called MIP or mortgage insurance premiums. This is similar however different from what many conventional mortgages require which is called PMI or Private Mortgage Insurance. They both equate to the same benefit to you which allows you borrow money at a higher loan to value against your home while insuring the bank or lending institution from losses.
Lets take a close look at a couple types of popular mortgages. FHA mortgages are insured by the Federal Housing Administration. To ensure these loans the FHA requires two the lender to impose mortgage insurance. With these loans there are two types of MIP, up front mortgage insurance and annual premiums. These days if you get a new FHA mortgage they all will have a 1% up front fee that is paid to the FHA. On most 30 year mortgage the annual mortgage insurance amount will be .9% which is then divided up into 12 installments paid monthly with your payments.
Once you have mortgage insurance on an FHA loan there are only a couple of ways in which you can get it removed. First off, if your loan to value has lowered down by paying down your principle balance or if your home’s value has risen significantly, you could refinance to a conventional mortgage with no mortgage insurance. The second way is to let the MIP lapse by meeting the following two requirements: 1) Your LTV (loan to value) Must be below 78% 2) A minimum of 60 payments must have been paid on your FHA mortgage. If you believe you have met these requirements then contact your mortgage servicer and request that they remove the MIP.
Moving on to our second mortgage type that is still very popular these days, we will take a look at conventional mortgages. Depending on your LTV you may not be required to have mortgage insurance on this type of loan. Fannie Mae and Freddie Mac, which are the two main government sponsored entities that buy and sell mortgage backed securities, set the guidelines for mortgage insurance requirements. Typically, if your LTV is over 80% you will be required to have PMI or private mortgage insurance.
PMI is generally provided through the contractual relationship your lender has with a company such as RMIC, Radion or MGIC. Each has their own overlays however the mortgage insurance premiums and coverage are similar. The mortgage insurance premium on a conventional mortgage will vary based on several factors including your LTV, credit score, subordinate financing and more. For conventional loans there is no up front mortgage insurance however in some cases the monthly premiums may be higher than a FHA mortgage.
To get rid of mortgage insurance on a conventional loan you must prove that your LTV is under 80%. Typically this request must be in writing to your mortgage services whom will then provide you with their process which will require you to pay for an appraisal on your home to determine value. Some services may also automatically remove your PMI once your LTV falls under 78% of the original appraised value.
Overall there is not one program that is better or worse however each has their benefits. If you are at a higher LTV then most likely a FHA mortgage is your best option however if your mortgage is under 80% of your homes appraised value then a conventional loan without mortgage insurance is the way to go.
To learn more about what mortgage type is best for your situation visit http://riverbankfinance.com/mortgage-programs/ or call a Licensed Mortgage Loan officer at 1-800-555-2098 and explain your situation.
Thank you for stopping by and reading our blog. We were anxious to start an outlet for all our follower’s to read because there are so many changes happening in the world of real estate. This blog will keep you to date on new regulations, rules that govern our profession that may effect you, and interesting articles that you may find useful or humorous. We hope you become entertained and informed at the same time… Josh