Positive Real Estate Professionals

Over my years in the mortgage industry I have seen a lot of things that I question. A lot of those questions are based on what the title of this article states. Typically, if you have a fixed interest rate, what sense does it make to refinance that rate to attempt to get it lower. Going from a 5% to 4.5% really is not going to make it enough difference to offset the cost of the loan.

Fred Chamberlin makes a good post out of this topic and if you have yet to read his, you need to.

Via Fred Chamberlin – Eugene/Springfield’s #1 Experienced FHA Mortgage Consultant:

I have been thinking for sometime about refinances. I have been hoping that rates would drop enough that it made sense for some of my clients to refinance both so it would increase my business but also so it would put them into a better financial situation. To be real honest and boastful, I did such a good job the first time, fewer people needed a lower rate because they were already in a darn good interest rate. So, what I did was put together a couple of scenarios of different type of refinances. I originally posted this on MyFHAMortgageBlog. I hope it answers some questions for you.

Posted by Fred Chamberlin

January 14, 2009

Mortgage interest rates have dropped dramatically and are current at or near a 27 year low. That means you can save money on your mortgage payment every month, right? Well, the definitive answer to that is, MAYBE! Just because you can get a lower interest rate, doesn’t mean it is in your best interest to do so. Whether it is a conventional refinance or an FHA or VA refinance, a lot depends on what you have now and what you expect to accomplish.

The easiest way to show this is to give a couple of fictional examples. (These are conventional loan examples) First of all, let’s consider that your have a high interest rate on a small loan. For this example, assume you owe $60,000 on a home worth $200,000 and are paying 7.5% on a 30 year loan and are 7 years into the loan. Would a refinance at 5%*** be worthwhile? Conventional wisdom is that if you are saving 2% or more, it is a good move. Let’s take a look:

Current Payment—-Proposed Pmnt Hard—- Cls Costs*

$457————– $341/$388** —————$3,500

Recovery of costs in approx. 69 months.

So, if you are going to be in your home for at almost 6 more years, this makes sense. If you are going to be there less time, it doesn’t and if you are not sure, it probably is a bad move for you.

Now, how about a different scenario? Assume you have a mortgage of $350,000 at 6.5% with 26 years remaining on a home value of $450,000.

Current Payment—–Proposed Pmnt——Hard Cls Costs*

$2,327——— $1,911/$2,041** ———-$6,000

Recovery of costs in approx. 21 months.

So here, you can see that a 1.5% change can more than pay for itself in less than two years. The interesting thing is that the 2% rule really doesn’t apply in either case. In one case 2.5% is not enough and in another 1.5% is.

* Cost associated with loan, doesn’t include prepaid expenses.

** New 30 Year mortgage payment/Payment to maintain current pay off schedule

***Used only for comparison purposes, not an offer.

These are just two examples. Every loan is different. There are no hard and fast rules. An FHA cash out refinance might be the best thing for you. If you use your home to pay off credit cards, what are your plans? Not doing anything might be the best thing for you. If you have a second on your home currently and it wasn’t used to purchase the home, to pay it off would make it a cash out refinance. They are priced differently.

There are a lot of other things to consider when thinking about a refinance. Are you looking to pay other items off? What is my loan to value? What is my credit score? The way to find out if a refinance is the right thing to do is to talk to a professional in the business. I am always available to answer your questions regarding refinancing or purchase. Rates are great, but that isn’t the only thing to be concerned with when considering a mortgage loan. Is it right for you? Should I put more down or borrow more? FHA/VA/USDA loans may be the way to go instead of conventional. FHA allows cash out refinancing up to 95% loan to value. VA cash out refinances are available up to 100%. USDA doesn’t do refinances but has purchase money available up to the appraised value even if it is over the purchase price. Check with someone you trust for up to date and good information for YOU! FHA Streamline Refinances and VA IRRRLs are almost always a good move.

It never surprises me when I hear people talk about FHA that they have some myths and misconceptions about these types of loans. It was not too long ago that it would take a loan officer a long time and a lot of headaches to get people approved with an FHA. You had to walk just right, hold your tongue out to the left side at just the right angle and….. Well, I think you get the picture. Well, that was then and this is now. So, I will hush and let Fred Chamberlin explain it as only he can.

Via Fred Chamberlin – Eugene/Springfield’s #1 Experienced FHA Mortgage Consultant:

There are a lot of common misconceptions about FHA mortgage loans that have been around for a long time. Anyone that got an FHA loan in the 80s or 90s had to go through a lot more paperwork and inspections than are required currently. One of the things that was required on an FHA loan was a compliance inspection by a certified FHA inspector, that is no longer required. This is from an August post of mine on Active Rain about myths about FHA loans.

Dispelling Common Myths About Participating with FHA (edit/delete)

I know there are Realtors out there that remember the bad old days of FHA financing. I still remember having to have and FHA certified inspector check over the house and make the sellers sweep up the basement or clean a spot on the carpet. Anyone remember the VC sheet (that hasn’t been that long ago)?

Well, that isn’t the case anymore. FHA loans are nearly the same as conventional loans, except in some (many) cases better. Take a look at these common myths about FHA:

1. Myth: Takes more time processing.
   Truth:
   • Takes no more time than a conventional loan.
   • Adds no additional or special requirements.
   • Uses TOTAL Scorecard/AUS approval allowing you to complete a loan in the amount of time it takes to get the appraisal.
2. Myth: More paperwork is involved.
   Truth: Requires only limited additional documents signed by the borrower.
3. Myth: Higher costs are inevitable.
   Truth:
   • Rates are competitive with the best in the industry.
   • Lender insurance programs eliminate shipping and reshipping costs.
   • Streamlined loan process.
4. Myth: The borrower can’t pay certain loan costs or fees.
   Truth:
   • FHA eliminated non-allowable closing cost fee schedule (ML 06-04, 06-07) .
   • The borrower, or any interested party to the loan, may pay all reasonable and customary charges.
5. Myth: FHA is too restrictive.
   Truth:
   • FHA provides guidelines for underwriting; same as industry investors.
   • FHA allows for manual underwriting for all loan programs; some in the industry will not approve a mortgage loan without an automated approval.
   • Automated Underwriting Systems approval is not required – allows for hands-on, common sense judgments.

So, if you remember the bad old days when it took an act of God to get an FHA loan funded, welcome to the good new days. At Alpine, we have in-house FHA certified underwriters. We don’t require any additional inspections and we draw our own documents and fund our own loans. What more could you ask for?

Additionally, if you are purchasing a manufactured home/land loans with less than 20% down, in nearly every case, FHA is better, easier and more cost effective. No more restrictive than a conventional loan on foundation and tie downs, FHA loans are the preferred method of financing factory built units.

FHA is the new mortgage option. There are even ways to get through the down payment requirements with a little help from your family, credit union or 401k. Call me so we can discuss your options and marketing strategies.

Additionally, with the change in conventional financing requiring risk based pricing for lower credit scores and higher loan to value in conjunction with private mortgage insurance (PMI) charges for the same things, FHA mortgage loans are often, if not better, at least competitive with conventional financing.

“What is holding you back” is a question that i have been asking a many a client over the last 2 years. In that time, the market has done a complete nose dive. As I look back over some of those loans that the customers never moved forward on, I wonder where they would be at today. In each and every loan, there was a savings great than $200 a month.

For some of you, that does not seem like a lot. With that said, walk into your bosses office tomorrow and ask for a $200 a month raise. I would bet 99% of them are going to say “NO” and some of them might do it with a really red face. So, if you call to refinance your loan and you can get approved in today’s market, do you turned down a $200 or more savings over a month?