Refinancing your home loan can be one of the easiest ways in which to reduce your monthly outgoings. Getting even a slightly lower rate of interest on your loan can translate into substantial financial breathing space. As with any other financial transaction you should however make sure that you go into it with your eyes wide open. One very important thing to take into account is the fees and charges that you will likely be charged.
Some companies advertise refinancing rates that may seem very attractive on the surface but that makes a lot of money for them in ‘below the radar’ costs. Of course we all know who will be ‘out of pocket’ from having to pay these costs! It may also be the case that you current lender has systems in place to lock you into your existing loan, making it very difficult for you to refinance without taking a substantial financial hit.
Here are some costs that you should look out for:
- Exit Fees: Many loan agreements have clauses which penalises the borrower for early payment. In the ‘worst’ cases this is defined as a percentage of the loan amount which can translate into a substantial expense.
- Establishment Fees: Some loan providers charge hefty fees for setting up new loans. In some cases these fees can, in the short term, seriously diminish the savings gained by refinancing.
- Other Costs: In some cases there may be legal and statutory costs involved in refinancing e.g. stamp duty, property valuation, mortgage insurance (for loans covering a substantial percentage of a property’s value) etc. Make sure that you find out what these costs are and how much it will amount to.
The above is not intended to put you off from refinancing. Far from it, there are some great deals out there and you could save a lot of money by switching lenders. The important thing, however, is to do your homework and to make sure that you are not so mesmerised by a seemingly good interest rate that you are blind to hidden costs that could cause you to pass up on a better overall deal.
When considering your refinancing options it is very important not to just go with the first lender that crosses your path. You should, instead, do your best to compare and contrast the offerings of different companies in order to be able to make an informed decision. This is the last in a series of three posts designed to help you to do just that. Its focus is on trying to make sure that your potential relationship with a new lender is not unnecessarily stressful and difficult.
It is no use finding a company with a good reputation and reasonable costs that you find impossible to work with. You should therefore make sure that the local branch of the institution (or their phone or web support service) is able to offer excellent levels of customer service.
Bad customer service can add a lot of unnecessary stress to the whole experience of refinancing. It can, of course, also add costs as you use up your precious time trying to communicate with the company. Some of the things that you should look out for are:
- Companies treating customers with courtesy and respect: If you as a prospective customer feel that you are just a number to a company then the situation is unlikely to improve after you have actually taken out a loan with them. If your initial impressions are negative you should therefore perhaps keep looking.
- Companies that are approachable and responsive: Very few things is as frustrating as having to being kept on hold for ages or waiting days for a response to an email. You should therefore, again, use your initial experiences in communicating with the company as a barometer of how things will be after you have ‘singed on the dotted line’.
- Companies not engaging in ‘high pressure’ sales tactics: If you feel that a company is placing undue pressure on you to sign a contract as soon as possible, or if you are in any other way uncomfortable with the way in which you are treated, you should walk away as soon as possible. Companies who regularly use ‘hard sell’, or even unethical, sales techniques are unlikely to be ideal in terms of forming long term business relationships with.
The bottom line is that refinancing your loan is likely to be extremely important to you. You should therefore entrust your business to a company that treats you with a great deal of seriousness and respect.
When considering your refinancing options it is very important not to just go with the first lender that crosses your path. You should, instead, do your best to compare and contrast the offerings of different companies in order to be able to make an informed decision. This is the second in a series of three posts designed to help you to do just that. Its focus is on determining exactly what refinancing with different providers will cost you.
The next step after doing ‘due diligence’ on different providers is to ask the companies that you are interested in to give you a full breakdown of all their costs and fees. Most companies will have no problem whatsoever with providing this. If, however, a company stalls and acts evasively this should of course set the alarm bells ringing right away!
Having a full list of fees and charges in front of you will help you to avoid the trap of not looking further than a relatively low interest rate. The fact is that high rates and charges can very easily wipe out savings generated by lower rates if you are not careful. You should therefore keep a make sure that, in addition to interest rates, you also compare all the different costs associated with setting up and servicing the new loan agreement.
Some of the costs that are very often ‘loaded’ in favour of the lender are document preparation fees, legal fees, survey fees, miscellaneous ‘closing costs’ etc.
Another cost, that may perhaps not be immediately relevant but that should certainly be researched, is the kind of early payment penalties that a company charges. It is sometimes part of the strategy of some companies to offer enticing initial packages as a prelude to using high early repayment penalties as a means of ‘locking in’ borrowers for a number of years.
In the end having a full picture of the short and long term financial implications of all possible deals will be your best protection against merely responding to the hype generated by an excellent marketing campaign. You should therefore make sure that you diligently ‘crunch the numbers’ before putting pen to paper.
When considering your refinancing options it is very important not to just go with the first lender that crosses your path. You should, instead, do your best to compare and contrast the offerings of different companies in order to be able to make an informed decision. This is the first in a series of three posts designed to help you to do just that. Its focus is on something that is perhaps slightly intangible but still vitally important: Reputation.
There are a lot ‘fly by night’ operators in the financial services sector and people sometimes get burned quite badly through doing business with them. You should therefore make sure that the company that you eventually go with has an excellent track record of providing good deals coupled with excellent service.
There are several ways in which you can do this:
- Look up the Company’s entry on the Better Business Review website: This will tell you how long they have been in business and will also flag up any issues that there might be in terms of misleading marketing, product delivery and customer service.
- Do a search of consumer protection websites: There are several organisations dedicated to consumer protection. Their websites are often the first places where potential problems with companies and institutions are discussed. Do an internet search to find the name, and website, for consumer watchdogs operating in your local area.
- Monitor media reports: If a company is not delivering on its promises (and perhaps even if it exceeds expectations) the story is bound to end up in a media report somewhere. A simple Google search using a company name will often be enough so unearth such archived media reports.
- Pay attention to ‘word of mouth’: People who had bad (and good!) experiences with services providers tend to talk about it. You should therefore try to gauge the opinions of people who have done business with any providers you are considering in the past. If it is difficult to do so ‘in person’ it might be a good idea to check out one of the many online forums where financial products are discussed by end users.
I am not suggesting that you should become a modern-day Sherlock Holmes and investigate every company that you are thinking of dealing with down to the last paper clip. I am suggesting however that just doing a little bit of homework can save you a great deal of trouble later on!
Online Peer to Peer Lending (also sometimes called ‘P2P Lending’ or ‘Social Lending’) is one of the best examples of the how the internet can serve as an agent of ‘disintermediation’ (‘cutting out the middle man’ in plain old English!). Online peer to peer lending services use technology to bring people with a bit of spare cash together with prospective borrowers. Potential lenders then bid on possible loans with the peer to peer website offering transfer, administration and debt collection services. The peer to peer ‘industry’ is still is in its infancy but it is already being touted in some circles at the future of personal finance.
It is also speculated that home loans will be the next big frontier for peer to peer lending (currently most loans are personal loans and therefore relatively small) with some services already taking small steps in that direction. In this model a home loan would be split into several parts, each funded by a different lender. The peer to peer service will then act as a central point, paying over the loan and making sure that every lender get his/her money at the end of the month.
On paper peer to peer home loans may seem like an attractive proposition. You may get lower rates and avoid the banks altogether (possibly a bit of an incentive for some!). There is, however, several good reasons why I believe that you should, at the moment at least, steer clear of the tentative peer to peer home loan experiments that are currently popping up all over the internet:
- For most of us taking out a home loan will be the biggest financial commitment that we will ever make. Entrusting it to services that are basically totally ignorant of offering financial services at this level (facilitating small scale personal loans is one thing, home loans worth hundreds of thousands of dollars quite another!) may perhaps be a risk too far.
- There is a huge question about how the activities of peer to peer networks should be interpreted by regulatory bodies like the Securities and Exchange Commission (SEC). On the one hand peer to peer networks are demonstrably not banks since their core business is ‘facilitating’, rather than giving, loans. On the other hand, it can be argued that they perform certain ‘bank like’ functions (i.e. credit scoring, initiating legal financial agreements and acting as conduits for the flow of funds from one individual to another). This question has not been resolved yet and will almost certainly be tested in court over the next few years. I would, again, be very reluctant to place such an important transaction as a home loan with a system of uncertain legal status.
I am convinced that peer to peer lending has its place and it can also be shown that it has helped many people, who would perhaps have been refused by banks, obtain credit. I am just as convinced, however, that the sector will have to grow up a bit more before I would start recommending that people use it for taking out, or refinancing, home loans!
Most of what I have hitherto written on this blog had to do with the choice of refinancing your mortgage. There are however instances in which the possibility of refinancing do not represent a choice as much as an absolute necessity. Sadly such cases are becoming much more common, with the Credit Crunch currently biting ever deeper into the housing market.
Emergency refinancing can sometimes be a lifeline in efforts to prevent foreclosure. The first thing that needs to be said is that you should contact your bank as soon as you realise that you are going to run into trouble in terms of keeping up your payments. You may find this hard to believe but the bank would much rather work with you in preventing the loss of your home than work against you by starting foreclosure proceedings. This is not altogether due to selfless altruism on their part. The cold, hard, fact is that they would be taking much more of a hit by trying to sell a foreclosed property in the current market conditions than they would by coming to some kind of accommodation with you.
One of the things that your bank manager would likely suggest would be to restructure your mortgage or that you pursue other refinancing options. There are several ways in which this can help you. They include the following:
- If you are lucky enough to have some equity in the property you can look at ‘Cash Out Refinancing’ This option allows you to withdraw some cash from the property and repay any arrears on the mortgage in the form of a lump sum.
- It could perhaps be the case that the bank would be willing refinance the loan, and move you to a better interest deal than the one that you are currently paying. This perhaps not very common in cases where borrowers are facing financial difficulties but some lenders would go to great lengths to prevent yet another property going to auction.
- If you can just about meet your outgoings at the moment but you realise that you are going to run into trouble in the near future, refinancing can be a way of proactively preventing a major crisis. You can do this by using refinancing as a form of debt consolidation by refinancing the property for a large enough amount to repay the balance on your mortgage as well as any other unsecured personal debt that you may have (e.g. store cards, credit cards, personal loans). These kinds of debt often attract very high interest rates and by ‘bundling’ all your debt into your mortgage (where you will be paying a lower rate of interest) can significantly reduce your monthly spending on credit.
It is perhaps never a good thing to feel that you are forced to do something. However, emergency refinancing can sometimes mean the difference between losing and keeping your home. You should therefore ensure that you do not discount it as an option from the start.
We are all currently inundated by several different streams of marketing egging us on to take the plunge and refinance our mortgages. While I am certainly very excited about the benefits of refinancing I think that it is sometimes necessary to inject a bit of realism into the discussion. It is not an easy time to be a mortgage lender at the moment, especially since the ‘Credit Crunch’ is making it ever harder to obtain ‘wholesale credit’ on the international market. Banks and other mortgage lenders are therefore frantically searching for strategies to survive the current ‘lean years’.
One obvious way in which banks are trying to stay afloat is through being much more circumspect in terms of who lend to as this is a means to protect their ‘books’ from further liabilities (not that it does anything for the massive liabilities already on their books of course). If you have a low credit score you’ve probably long since cottoned on to the reality that it is becoming ever more difficult to obtain credit (although not impossible, more on that in a later post) and that the credit you are being offered is quite expensive.
Another way that banks are trying to cope is by returning to some of the fundamentals of extending credit (talk about shutting the door after the horse have bolted!) by diligently trying to court ‘good’ customers (i.e. people with excellent credit histories). This means that a lot of the current marketing frenzy has more to do with some of the banks needing help (“Come over and help us to shore up our flagging fortunes!”) than with them really offering best value.
It could be of course that you are particularly altruistic and ready to help, if that is the case you are more than welcome to just respond to the first heartfelt appeal! I suspect however that most of us would prefer to make decisions on the basis of what is best for us and for the banks to sort out their own mess. I want to reiterate therefore what I have said many times on this blog. Make sure that you do your homework before taking the plunge. There are indeed some excellent deals out there on the market but you may have to search around for them a bit (this blog is of course a good place to start!).
I suppose all of the above illustrate again what I meant with the title of this blog. Refinancing is sometimes a great idea, but is has to be done in the right way. And by that I mean right for you and not necessarily only for the bank!
Most of you will be aware that I am convinced of the benefits of improving your financial position by refinancing your mortgage (I suppose the title of this blog is dead giveaway as well). You will however have to do a bit of homework before you can even start to consider this step. What you need to do can be summed up in a few short words: Research the terms of your current mortgage.
The reason behind this bit of research is that it may just be the case that you will be so heavily penalised for changing your mortgage that it would perhaps not be worth your while. Mortgage lenders are of course aware of the fact that they will lose a tidy sum of money if you switch providers and they therefore sometimes build mechanisms, to make you think twice about leaving them, into their products.
You should, in light of this, scrutinise your current mortgage documents to see if they include mention of any kind of pre-payment penalty or any kind of early payoff fees. Pre-payment penalties were basically designed to lock you into a specific mortgage product for a certain period as it penalises you for paying of a loan before a certain date. Most pre-payment penalties will disappear after about five years. If you had your mortgage for longer than this then you should perhaps not be too worried. If you have been paying off your current mortgage for shorter than five year you should certainly investigate.
The pre-payment penalty amount that mortgage lender charge varies a great deal. You should however (if your current mortgage deal includes these penalties) expect to pay, on average, an amount roughly equivalent to six months’ mortgage interest. This is clearly a significant amount and you will have to do thoroughly crunch the numbers in order to calculate whether refinancing would be a good idea, even with the penalty. In some cases having to pay a penalty could mean that you have to wait a bit, until enough time has passed for the penalties to be dropped. Having to pay a penalty should however not be seen as the last word on any refinancing deal. If you have been offered a particularly bad initial deal it may still be worth your while to move your business elsewhere. As with so many things in personal finance it comes down to your own particular circumstances and I urge you to seriously investigate what would be best for you.
In an unprecedented move the US Government recently took over the two mortgage giants Fannie Mae and Freddie Mac. Between them the two companies own or guarantee over half of the home loans in the United States. Both of them have suffered heavy losses due to the ‘credit crunch’ and the government’s move signalled the fact that allowing them to ‘go under’ would have been catastrophic for the US mortgage market.
It is interesting to speculate what the long term implications of this move will be, especially as it relates to home loan refinancing. I should perhaps just mention, before going on, that what follows is indeed mere speculation. I certainly do not have a crystal ball with which to read the future!
Since the start of the credit crunch both Fannie Mae and Freddie Mac have been steadily increasing the rates and fees that they charge mortgage lenders. They did this in an attempt to protect themselves from the impact of increasing losses from loans owned or guaranteed by them. This move by two of the biggest movers and shakers in the mortgage industry obviously ended up driving up costs across the board as mortgage lenders simply passed on higher costs to borrowers (both in terms of increased interest rates and higher upfront fees).
Interest rates are obviously determined by the wider market but it is hoped that the government will drastically reduce some of the extra fees and charges that Fannie and Freddie have charged mortgage lenders in recent times. The logic behind this is that the companies used fees and charges as a form of ‘Mortgage Protection Insurance’. The fact that they have been taken over mean that they are much better insulated against losses thus reducing the need for high charges.
It remains to be seen whether government-controlled Fannie and Freddie will indeed lower fees and charges but the initial signs look positive. A concerted effort is underway to get more funding to mortgage lenders and to help them to assist borrowers with restructuring. If this is followed up with lower charges it is quite likely that some of the cost savings will be passed on to customers, leading to lower up-front costs and a more positive refinancing environment. One can only hope that this will indeed be the case.
In an unprecedented move the US Government recently took over the two mortgage giants Fannie Mae and Freddie Mac. Between them the two companies own or guarantee over half of the home loans in the United States. Both of them have suffered heavy losses due to the ‘credit crunch’ and the government’s move signaled the fact that allowing them to ‘go under’ would have been catastrophic for the US mortgage market.
The move by the government was widely welcomed and resulted in an immediate reduction of interest rates (on average by 0.3% on September 8, the day after the takeover was announced). It is projected that interest rates will continue to edge lower over the next few weeks as the impact of the takeover filters through to different sectors of the economy.
The big question is whether the takeover of Fannie and Freddie, and the resulting easing in interest rates represent an ideal window of opportunity for refinancing? The answer to this question will, obviously, be down to individual circumstances. In general however, the people who will benefit the most from refinancing in the current climates will be those who took out variable rates mortgages during the height of the housing boom. Most of them have seen a steady rise in their monthly mortgage payments and could perhaps now benefit greatly from switching to a fixed rate loan at current rates.
Those who took out their loans more recently will have to be lot more careful in calculating exactly whether the modest reduction in rates would make it worth their while to switch their loans. In such cases early payment penalties and fees could perhaps wipe out any potential savings.
On a larger scale the takeover of Fannie and Freddie does bring a bit of much needed stability into the home finance market. This should, eventually, be of benefit to the consumer as banks (hopefully!) become a bit more comfortable with extending credit for house purchases.
There is perhaps a debate to be had about the merits of Fannie and Freddie and whether their virtual monopoly of the market is a good thing. For the moment, however, their takeover signals a desire from the government to return to ‘business as usual’ as soon as possible. This will hopefully also extend to the refinancing market!
Researching home refinance options can help you get low refinance rates. Knowing which mortgage terms best suit your needs, and having a good credit history can help expedite the refinancing process.
Home Refinance Rates and the Big Picture
By focusing on reducing mortgage payments, homeowners can overlook additional benefits of refinancing their home loans. If your payments have increased due to a reset of your mortgage rate, you can consider a different type of adjustable rate mortgage (ARM) with limits on how much rates can increase. If home refinance rates are significantly below current market rates, you’ll want to ask prospective lenders to clarify all terms of the refinance transaction.
Don’t Forget Closing Costs
To refinance means replacing your present mortgage with a new one. You’ll be expected to pay closing costs as you did when you bought your home. When calculating potential savings, your closing costs must be considered in addition to low refinance rates. Ask potential lenders to estimate the annual percentage rate (APR) for each refinance option you’re considering. The APR is an estimate of all finance charges associated with a home refinance on an annual basis.
Very Low Refinance Rates: The Whole Story
Lenders may offer refinance options with very low rates. These loans can be structured to defer interest payments, and typically require adding any deferred amounts to the mortgage balance. If you can tolerate the additional risk associated with an increasing mortgage balance, this type of mortgage can provide a low refinance rate for a few years.
Are you stuck with a mortgage with rising rates and exotic terms? Not necessarily! It’s possible to refinance home mortgage loans to improve your mortgage terms, lower your payments, or pay off debts. Here are examples of how home refinance options can help you:
Eliminate adjustable rates and/or “exotic” mortgage terms: You can refinance from an adjustable rate mortgage (ARM) to a fixed rate mortgage (FRM.) A fixed rate mortgage features consistent principle and interest payments (P&I) throughout the life of the loan. It’s important to understand that if your mortgage payment includes amounts for taxes and insurance, these amounts can change.
Refinance to a lower rate (and your monthly payment): Homeowners frequently refinance home mortgages to lower their interest rates and monthly payments. If you’re struggling with increasing payments due to an ARM reset or a bad credit mortgage, you may be able to refinance to a lower rate. If you can’t afford an FRM refinance, lenders offer a variety of ARM loans that can help you achieve an affordable monthly payment.
Home Refinance Options and Debt Consolidation
If you’re struggling with high credit card balances and have enough home equity, you can refinance your home loan for additional funds for paying off debts. This works only if you’re committed to managing debt; you’ll want to avoid increasing your mortgage amount and consumer debt!
When considering refinancing, it’s a good idea to review short and long term financial and life goals, and to consult a financial advisor.