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Refinancing Terms

Thursday, May 18th, 2017

Refinancing Terms

If you are in the market looking for refinancing options on your home mortgage, it is important to familiarize yourself with the terms commonly used. Poring over boring mortgage textbooks is not required. Here’s a look at the basic refinancing lingo to get you started.

APR:

Different lenders calculate the APR or the Annual Percentage Rate in different ways. Essentially the APR is the true calculation of the yearly interest rate that is chargeable to the homeowners after taking into account all the lender’s closing costs.

ARM or Adjustable-rate mortgage:

An ARM is a mortgage whose interest rate changes periodically. The interest rate in such a mortgage is tied in to an index or benchmark using treasury bills or any other such economic indicators. ARMs typically offer varied terms and very low initial interest rates so that the offer is attractive.

FRM or Fixed-rate mortgage:

A Fixed-rate mortgage is a mortgage whose interest rate remains constant throughout the duration of the loan. The interest rate is “locked-in” at the time of the agreement between the lender and the home-owner and does not fluctuate with the market rates. This usually provides security and predictability to the home owner.

Good Faith Estimate:

A Good Faith Estimate is a detailed document that the lender must provide the homeowner listing all the closing costs chargeable on your loan. This is a mandatory requirement from lenders.

LTV Ratio or Loan-to-value ratio:

LTV is the ratio of the loan amount on your home to the home’s appraised value, expressed in terms of percentage. “LTV ratio = Percentage of (Loan amount/appraised value)”. If your LTV is high you will run the risk of attracting a higher interest rate or may need a private insurance on the mortgage.

Points:

A mortgage point is one percent of your total mortgage value. For instance, if you have a $100,000 mortgage, a point would be one percent of $100,000 which is $1,000.

Term:

Term refers to the duration of your mortgage or the period over which you have agreed to repay your loan. The typical mortgage term is between 15 and 30 years.

Third party fees:

Vendors like title companies and appraisers, charge fees for evaluating the quality of your loan, so that the lender can use this assessment in making an offer.

These are the basic, most commonly used terms in the context of mortgage loans. Study these basics and you are equipped to understand the lender’s offer better and take the right refinancing decision that suits your requirements.

 

Mortgage Refinance Tax Implication

Thursday, May 18th, 2017

Mortgage Refinance and Taxes

When you own your home, you get large income tax deduction for mortgage interest. However, when you refinance your mortgage loan into a lower interest rate, you’ll pay less interest but more income tax.

HAD vs. HED

HAD stands for Home Acquisition Debt and HED stands for Home Equity Debt. HAD is the term used by the IRS for the first or second mortgages that are used to buy, build, or improve your home. You accumulate HAD if you refinance to get either better rates or more favorable terms. On the other hand, if you do a cash-out refinance, the money that is not used for home improvements is considered Home Equity Debt (HED).

Acquisition Debt is fully tax deductible, up to $500,000 for individuals, and $1,000,000 for married couples who file joint returns. The tax deduction limit for Equity Debt is $100,000 more than the existing debt at the time of your refinancing. If you have a mortgage with a balance of $200,000, you can refinance into a $300,000 loan (assuming your home appraises for at least that much now), and still deduct the full interest payments from your taxes. The interest paid on any balance higher than $300,000 is not deductible at all.

You can take out points on your mortgage in order to push down the interest rate even further. Points are generally tax-deductible, like interest payments, except when you’re refinancing.

Some points are charged for lender services and are not tax deductible while others for prepaid interest are deductible. In general, the points are prorated throughout the life of the loan; so if you paid $4,000 in points for your 30-year loan, but $1,000 of that was for services, you can deduct 1/30th of $3,000, which is $100 a year.

However, if you have used part of the refinancing funds for home improvements, you can deduct a portion of the points immediately. For example, if you took a $100,000 mortgage loan, you could pay off an existing $80,000 mortgage and use the rest for home improvements. In this case, you can deduct 20 percent of the points the first year, and spread the remainder throughout the next 29 years.

But, if you refinance again, all points that have not yet been deducted are applied in that one year, regardless of whether the new loan carries any points.

In the final analysis, what you save in terms of interest you pay as taxes when you go in for refinancing your mortgage. Thus, you might want to do a tax code cram session before deciding how to refinance. It is better to know the nitty-gritty of it before you get caught unawares when you file your next tax return.

 

Second Mortgage vs PMI

Wednesday, May 17th, 2017

Second Mortgage to offset PMI

Many homeowners find it difficult to find the funds for a 20 percent down payment on their homes. Without the down payment, it becomes mandatory for home buyers to go in for PMI (Private Mortgage Insurance). The PMI has to stay in effect until such time that the value of the home appreciates to a loan-to-value ratio of 80 percent. Once that happens, the homeowner can look at refinancing options.

The other option to avoid PMI is to go for a piggyback loan which combines first and second mortgages to take care of the down payment portion also.

Will a Second Mortgage to offset the PMI requirement make sense for you? Consider the following factors before you decide how to finance your home:

Interest Rates

Piggyback loans make sense if the interest rates on the second mortgage are comparable to the rate on the first mortgage. Paying high rates on the second mortgage will give you no discernible benefit compared to the PMI option.

Term of Second Mortgage

Second mortgages usually attract a higher interest rate so it makes sense to pay them off as quickly as possible. Opt for a shorter term to make best use of the piggyback maneuver.

Closing costs

Second mortgages usually come with negligible or in some cases even zero closing costs. Thus, they may make an attractive financing option compared to PMIs.

Appreciation of home values

If homes in your neighborhood appreciate quickly enough, a PMI may make more sense. This will mean that as soon as your home value reaches the target 80 percent loan-to-value mark, you can refinance instead of being stuck with a second mortgage for a longer time frame. Do some number crunching and figure out which option makes better sense for you.

Tax deductions

Do you belong to a high tax bracket? Then take advantage of the tax deductible interest payments on both your primary and second mortgages. Finance your home and reduce your IRS obligations at the same time.

The above guidelines can give you a better picture of the comparative benefits of PMI or piggyback mortgages for financing your new home. Your ultimate decision should be guided by your particular financial situation.

 

Refinancing for Self Employed

Wednesday, May 17th, 2017

Self-employed people and refinancing

While in all other ways, America encourages entrepreneurs, borrowing is one area that most self-employed people face difficulties. Be it a conventional loan or a mortgage on the home, bankers have a problem offering money to the self-employed. This is because the self-employed often show less income than their counterparts in corporate jobs and also have more complicated tax forms that prevent them from qualifying for these loans. However, even the most difficult lenders would have to agree that there are some compelling reasons why the self-employed should tap into their home equity. If you are self-employed, keep the following issues in mind while refinancing.

The sea of documentation

A non-salaried worker is at a disadvantage qualifying for a mortgage loan because of the complicated tax returns that need to be filed and also the other documentation required. We have moved from times of “no-doc” or “lo-doc” options for the self-employed to the stricter IRS guidelines that operate today. The self-employed have a much harder time getting a mortgage or any other type of loan these days because of the stricter documentation requirements.

Before applying for a home loan, get a clearer picture from your lender about the documents required. These may include your current profit and loss statement, bank statements, and commonly two years of tax returns. For refinancing, you may also require to provide details about your current lender and the pay-off balance.

Choosing shorter terms and a Fixed-rate mortgage

It is advisable for the self-employed to choose a fixed-rate loan that allows for easier planning. On the other hand, especially in the scenario where interest rates are increasing, an adjustable-rate mortgage can have you scrambling if your mortgage rate adjusts higher. You can also benefit if you pay off the mortgage earlier by choosing a shorter term for your mortgage. This will allow you to invest your spare cash back into your business sooner.

Tax deductions on mortgages

Mortgages offer valuable tax deductions that can be especially beneficial to the self-employed. As compared to company employees, non-salaried workers often have to pay almost double the Medicare and Social Security taxes. Mortgages offer two very important write-offs: property taxes and the mortgage interest. These tax-deductible components can surely help the tax burdened self-employed person.

Mortgage refinancing is not easy, especially so for the self-employed. But if you are an ambitious entrepreneur, you will discover that the hurdles of refinancing are well worth the effort in terms of the financial benefits to you and your business.

Fixed versus Adjustable Mortgage

Thursday, May 4th, 2017

Choosing the Right Mortgage Refinance Option

Mortgage loans offer two options: a FRM (fixed-rate mortgage) or an ARM (adjustable-rate mortgage). Fixed rate mortgages provide security and predictability. On the other hand, adjustable rate mortgages can offer the potential for savings, especially if interest rates go down. How do you decide which of these options is best for you? A coin toss may not be the way to take such an important decision. Read this article to dispel the uncertainty about ARMs and FRMs so you can take an informed decision and streamline your financial outlook.

Fixed rate mortgages vs. Adjustable rate loans

Fixed rate mortgages have the same fixed interest rate for the entire duration of the loan. Whether the interest rates go up or down, you don’t have to worry because your rate will remain the same throughout the tenure of your loan and you can plan your cash flows better.

On the other hand, adjustable rate mortgages are tied to a benchmark index. As the market rates fluctuate, the benchmark changes and if affects the rate you have to pay every month. There are many ways in which ARMs can vary, but the most important variables are:

The tenure of the initial rate

The frequency and range of adjustment of the interest rate

Predictability vs. savings

Adjustable rate mortgages often offer a low opening rate that can remain in place for three to seven years. On the other hand, fixed rates offer you the security of knowing that your monthly outflow will never change, whatever happens to the market interest rates. In order to decide which option works best for you, consider the following factors:

Your risk-taking appetite

Your planned duration for owning your home

Here’s how it works. If you are buying a home for the long haul, fixed rate may be better for you. For someone planning to sell their home in lets day five years, the adjustable rate option can offer a low opening rate and they can sell before the rate is revised. It is possible to calculate what your ARM and FRM refinance rates and payments will be by using an online calculator.

However, the factor that will ultimately outweigh any other considerations if your appetite for risk. Even if you are fairly certain that you intend to sell or refinance in a few years, there is a risk involved in the ARM option. You may prefer to pay a little more in the FRM option for the predictability, security and peace of mind it affords.

Bottom-line, you don’t need to flip a coin to decide which option suits you best! While FRM and ARM offer their own set of advantages, you probably know which is the clear winning option for you!

Fix and Flip Mortgage Deals

Thursday, May 4th, 2017

“Fix and Flip” Deals

Investors in real estate make mega bucks by using the “Fix and flip” routine. Quite simply “fix and flip” refers to a three step procedure in handling real estate deals. Buy—renovate—sell for profit. In the basic “fix and flip” scenario, you buy a house, fix it up, and then sell it immediately for profit. Profit means your selling price must be higher than your buying price and the cost of renovation put together.

So, what happens to the investment if there’s a slump in the market? Some investors can lose out on the “flip” in a slowing market. However, with some smart thinking, there are always ways to make money with “fix and flip” in any kind of real estate market.

Estimate “Fixing” costs accurately

One of the key elements of your “fix and flip” profit will depend on an accurate estimation of what it will cost you to renovate the house. Renovation projects typically run over the schedules and over the budget. So keep a generous margin of safety while budgeting.

Estimate “Flip” time accurately

The other key element to assess is the condition of the real estate market. You can make money by “fix and flip” even in a slowing market as long as you can hold on to the property for a while. Remember not to set yourself very restrictive timelines for selling the house. If you can hold on long enough, you will end up with a profit.

Lease with option to buy

In this case, you’ll amend the typical “fix and flip” so you lease the property with an option to buy. Obviously, it’s important to ensure that your monthly mortgage payment is being covered by the rent accrual. At the time of selling, you don’t have to pay any brokerage fees to a real estate agent since your renter is your automatic buyer also.

Many lenders will be able to help you finance a “fix and flip” property. These offers typically finance both the buying price and the funds required for renovations. But making money on the deal is your baby. If you have accurate cost and time estimates, the returns can be well worth the effort!

 

 

 

Hidden Costs of Mortgage Refinancing

Tuesday, May 2nd, 2017

Hidden Costs of Mortgage Refinancing

There is much more about mortgage refinance than meets the eye. While you rejoice the prospect of saving a lot of money, you should also be prepared for hidden costs that may take you by surprise. It is always better to do your homework before you take the plunge. Make sure you do the math properly taking everything into account to see how much you’d really save.

Comparison is the name of the game. Never settle for the first offer. Always compare rates from at least four lenders for refinance

Generally, the cost of home refinancing will be lower than your original loan, but the fact remains that refinancing a mortgage loan involves closing costs. There are some fees that don’t apply to refinancing; but the closing costs can still be substantial. So, it is prudent to confirm the fees that your lender will charge this time around.

You may want to consider the roll-in financing option that some mortgage lenders offer. This gives you the freedom to roll the refinancing closing costs into the loan itself. Thus, you won’t be required to pay any up-front costs, but, remember, this will result in somewhat higher monthly payments, because your loan balance is higher.

You will obviously want to know how much you can save by lowering the interest rates. After all, that is the primary reason why go in for refinance in the first place. You can use the amortization calculator to see how much you can save through better rates alone. All you have to do is just enter the loan amount, interest rate, and the length of the loan to see how much interest and principal you’ll be paying each month.

You must know that even a couple of percentage points can make a big difference and swing the percentage any which way. For example, you can save $300 a month by switching your $180,000, 30-year loan from a rate of 9 percent to 7 percent. That’s quite a lot, isn’t it?

On the other hand, if you take a home loan mortgage refinancing for a lower rate, it will cut down tax deduction, which means you will have to pay higher income taxes. Now, this is something you were totally unaware of. But, it is a big factor in considering the cost of refinancing. You know your tax bracket. So, you can figure out the impact it will have on your tax return. For instance, if you’re in the 25 percent tax bracket, and a mortgage refinance will lower your monthly interest payment by $200, taxes will claim $50 of that savings. As a result, your true savings will be $150 a month.

If the value of your home increases over time, then you will regret your decision of refinancing, because you will lose those pesky PMI payments. However, you have the freedom to end your PMI payments as long as the new loan amount is lower than 80 percent of the property value. In order to find out how much PMI is costing you, you need to check your current mortgage statement.

In the ultimate analysis, refinancing is a welcome option when you’re stuck in a high-interest loan. It can considerably lower your rate even if it is less by just a couple of percentage points. You can recoup the closing costs in a matter of months. However, you must look at the numbers before you leap. That will help you save a lot and you need not worry about unanticipated surprises.

 

Mortgage Refinance Reduce Term

Tuesday, May 2nd, 2017

Reduce the Term with Mortgage Refinance

Generally, all home owners go for a conventional fixed rate 30-year mortgage, especially those who purchase their first one. If you are one of this vast majority, you too must have opted for the longest payout schedule possible, in order to take advantage of lower monthly payments. However, if you are in the process of buying a home, you need to look at the other option of shorter loans, because they can represent huge savings over the life of a mortgage.

Let us get down to the brass tacks. The fact of the matter is that bulk of the money you spend for your monthly mortgage payment is dedicated to paying interest. A house that sells for $200,000 today may wind up costing more than twice that price, once all the interest payments are calculated during the course of three decades. If you decide to shorten the life of the loan, you can dramatically increase your savings, often by hundreds of thousands of dollars. No wonder, more and more people are going for this option. All you need to do is a bit of the math and it becomes clear as daylight that by refinancing and shortening the term and reducing interest payments you can make dramatic mortgage loan savings

You need to organize your finances before you take on the commitment of your own home and a 30-year period of loan repayment. Again, if you go in for mortgage refinance and change your mortgage loan’s term, you can organize your financial plans.

For instance, if you’re 50 years old and plan to retire at the age of 65, you should think of paying off your mortgage in 15 years so that you have no liability when you stop working. It is both financially and personally rewarding to have all loans out of the way when retirement arrives.

If you are a younger parent with children, you will be planning for their college education in 10 to 15 years. In that case, too, you would want to do a home refinancing to shorten the term and pay off the mortgage before the tuition bills begin to arrive in the mail.

This is the best way to avoid making payments of tuition and mortgage at the same time. It can otherwise be terribly difficult to combine the two. If you explore all the possibilities of mortgage refinance, you can even save enough to offset the cost of your child’s education by not paying an extra 15 years of mortgage interest. This is the time to take advantage of this double-barreled bargain, because the interest rates are near their all-time lows. However, there are loud signs that they will reach double digits within the next few years.

 

FHA – Energy Efficient Mortgage

Sunday, April 30th, 2017

Save Energy, Save Money

Want to qualify for a higher loan amount to fund energy improvements in order to bring down overall living expenses? Talk to the federal government. Its time to consider FHA’s Energy Efficient Mortgage (EEM) Program if you are remodeling your home.

Rising energy prices are pinching everybody and taking the cost of living up and away. Reduce your energy and utility bills by remodeling your house, like replacing leaky pipes and making windows more energy efficient. Making such an investment is easier than you think with the assistance of the Federal Government.

What is EEM or Energy Efficient Mortgage?

Fund energy efficient improvements in all aspect of your home with Energy Efficient Mortgage also known as EEM in short. There are multiple ways of doing this with varying qualification terms. If you choose federal backing, the improvements can be insured by the Federal Housing Authority (FHA). Alternately, approach the Veterans Administration (VA). These improvements could be made using the EPA (Environmental Protection Agency) program called ENERGY STAR or other standard channels.

Qualifying for EEM

Installing energy efficient windows, making the heating and air conditioning system efficient, upgrading water heating system to more efficient ones, upgrading the ducting systems to prevent energy leaks are few of the standard improvements that lead to substantial cost saving in the long run.

The objective of all EEM programs is to save utility costs in the long run. An important criteria of funding improvements is that the overall savings should be higher the amount invested upfront. To help you in determining the viability, the HERS or the Home Energy Rating System carries out a cost benefit analyses by measuring the current energy consumption and the possible savings. If the numbers are favorable, the house qualifies for an EEM.

Advantages of EEM

The key benefit of EEM stems out of the fact that an energy efficient house decreases costs of living and provide for better savings, hence an increased borrowing capacity. In the VA and FHA run programs, you could negotiate betters terms for the mortgage. Energy Efficient systems automatically increase the value of your property besides providing you with a better quality of life.

What Next?

The first step in acquiring an EEM would be to order an HERS survey and report thus ensuring the kind of refinancing scheme that you would qualify for. Shopping for EEM Refinancing scheme is very similar to conventional housing finance. It would do you good to with a lender who is experienced in such refinancing programs. Call for a few proposals and choose the one that suits your best.

Converting your home to a more energy efficient place could be quite an eye opener even prompting you to re-look at your trading in your car for a more efficient hybrid model.

Tax Deductions for Refinancing

Friday, April 28th, 2017

Tax deductions for Refinancing

The major benefit that any mortgage loan will give you as a homeowner is the advantage of tax deductions. Be it a primary mortgage, a second mortgage or a mortgage that you have refinanced, the tax deductions are yours for the taking! As a homeowner, you get three main kinds of tax deductions with your mortgage:

  1. Tax deductible mortgage interest payments
  2. Property Taxes
  3. Points paid on mortgage refinance

These three categories are discussed in detail below.

Tax deductible Mortgage Interest

In most cases, the interest payments on any mortgage are completely tax deductible. The only exceptions occur in cases wherein homeowners want to tap into their home equity to fund other financial needs like college education etc. In these refinancing cases, there is a limit to the interest payments which will be tax deductible i.e., interest on a maximum equity debt of $100,000.

Let’s illustrate the above limitation with an example. Homeowner XYZ had an original mortgage of $125,000. He refinances his mortgage for $300,000. The additional $175,000 is used for buying new cars, vacations and other such discretionary spending. In such a case, the entire interest related to the original $125,000 of the primary mortgage will of course be tax-deductible, and so will $100,000 of the refinanced equity debt. However, there will be no tax deductions on the interest payment of the remaining $75,000 which has been refinanced.

Property Taxes

In the year property taxes are paid to the collector of property tax, they are tax deductible. Future real estate taxes cannot be immediately deducted at the time of mortgage, but are deductible in the same financial year that the property tax becomes liable for payment.

Points Paid on refinance mortgage

Usually the points paid on a mortgage –primary or refinanced, are proportionately deducted over the entire tenure of the loan. However, if the refinance is being used for funding home improvements, all the points might be fully deductible in the first year itself. Your tax advisor will be better able to guide you regarding whether you meet the requirements for such a deduction.

So, consult a qualified tax advisor and discuss the specifics of the deductions that you can avail!