Refinance > Frequently Asked Questions
Refinance

Refinance Mortgage FAQs

by Nancy Osborne, COO of ERATE®

Do I need the services of a loan agent/officer when applying for a loan?
The answer depends upon the experience level of a borrower as well as how complicated his or her mortgage transaction may be (i.e. an applicant with blemished credit or one who cannot document their income). An experienced borrower with solid credit who is looking to refinance is probably able to fly solo whereas a first time buyer or someone who is looking to close a transaction very quickly, may require the assistance and advice of an active mortgage agent/officer.

How do I know if it makes sense for me to refinance?
First determine your financial mortgage related goals: i.e. are you looking to improve your monthly cash flow, reduce your mortgage term, do you need to take out cash utilizing the equity from your home? Obtaining the right mortgage for your particular needs could make sense even when rates are not at their lowest levels. First identify your goal and contact a mortgage professional for suggestions on mortgage programs that would best help you meet your objectives. Then shop for rates after you have selected the appropriate mortgage program.

I've always heard about the 2% rule when refinancing, is it important?
This rule is somewhat obsolete due to the variety of closing cost options that exist today. With the proliferation of no cost and zero point mortgages, a potential refinancier can recoup the costs of refinancing very rapidly if not immediately. The 2% rule may be a helpful tool when paying both points and closing costs in order to refinance.

What is the difference between a conforming and non-conforming (or jumbo) loan?

Effective February 13, 2008 and until December 31, 2008 the difference between a conforming and non-conforming (or jumbo) loan is now defined as follows: as part of the federal government's 2008 economic stimulus plan, the conforming loan limit which was previously capped at $417,000 for a single family home has now been temporarily increased to 125% of a metropolitan area or region's median home price as defined by HUD*.  The maximum allowable loan limit is $729,750 for homes at the highest end of the median price spectrum and at the lowest end not less than $417,000.  This temporary increase applies to both purchase and refinance loans.  Therefore any loan amount which exceeds 125% of a region's median home price would be classified as a non-conforming (or jumbo) loan.  Please refer to the Department of Housing and Urban Development* (HUD) website for more information on the median home price in your region or area: http://www.hud.gov/

What is a super jumbo mortgage and how much higher (than the average jumbo mortgage) is the interest rate typically?
A super jumbo mortgage is a mortgage request exceeding $650,000. A super jumbo mortgage typically has a rate 1/4% higher than your average jumbo mortgage.

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When refinancing investment or rental property, what is the difference in rate for non-owner occupied vs. owner occupied financing?
Conforming non-owner occupied rates are typically 3/8% higher than owner occupied interest rates. The equity requirement is usually higher for non-owner occupied mortgages as well, typically 20-30%+.


What is the best way to shop for a mortgage?
It is a good idea to contact at least three to five lenders for input on mortgage programs and rates. You can do all of your shopping on-line or by phone. If there are any usual twists to your mortgage scenario, it is best to disclose as much information up front as possible to be certain you are making an "apples to apples" mortgage comparison amongst lenders. When making mortgage comparisons, you must be sure you are comparing mortgages of similar terms, i.e. a 30 year vs. a 5 year, paying points vs. zero points, do the mortgages you are comparing have prepayment penalties and do they have similar rate lock duration's?





What is the most important consideration when selecting a mortgage?
Please see Guidelines for Selecting a Loan on our website.
How do I determine which mortgage program is best suited for my personal situation?
Please see Guidelines for Selecting a Loan on our website.


How do I find a qualified, reputable CPA?
There are always the "big five" accounting firms to rely on and referrals from family and friends are also advisable. Another helpful on-line resource for finding qualified professional service providers in your area is www.valuestar.com.

What documentation will the lender typically require to process my mortgage?
The answer depends upon the quality of your credit and the amount of equity you have in your property. On a typical fully documented mortgage application (where an applicant is seeking to qualify based on an employee's salary), the lender will require: one month's current pay stubs, W-2's for the prior two years and bank and investment account statements for the prior 2-3 months. If an applicant is self-employed (has a 25% or greater ownership in a business) then additional documentation could be required (i.e. 1040's, 1165's, 1120's, P & L statement).

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Are there limited documentation (a.k.a. EZ doc, no income qualifier) mortgages available?
Yes there are many. They come in a variety of programs; some have self-employment, credit, equity or asset requirements so it may be advisable to have a mortgage consultant direct you to the appropriate product for your needs. There are also mortgages available to individuals who cannot verify either their income or assets (referred to as NINA mortgages). Keep in mind that these products can carry higher interest rates than that of a mortgage that is fully documented. A good rule to remember, the more documentation a borrower can provide for a lender, the lower the rate they will typically get.


How can I avoid having to get mortgage insurance on my mortgage?
Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a piggyback mortgage) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% equity).


How much Homeowner's insurance coverage will I need to close the new mortgage?
A safe bet is to buy a guaranteed-replacement-cost policy that will generally pay out 20-50% more than the face value of the policy to rebuild your home (this is also the preferred policy of lenders). A replacement-cost policy typically adjusts the amount of insurance each year to keep pace with rising construction costs in your area. It is important to note that local building codes require structures to be built to specific standards which could vary over time, if your home is severely damaged, you may be required to rebuild it to current codes. Even guaranteed-replacement-cost polices do not always cover this expense. However, many insurers offer an endorsement that will pay for the upgrading cost, it is a good idea to consider adding such an endorsement to your replacement-cost policy.


Will I need to get earthquake insurance coverage to close the new mortgage?
The lender should not ask you to add quake coverage to your standard policy unless your property is located in an earthquake hazard zone.


Will I need to get flood insurance coverage to close the new mortgage?
The lender should not ask you to obtain a flood policy unless your property is located in a flood hazard zone.


Why do I need to pay for another policy of title insurance when we already own the property and purchased title insurance when we bought the house?
Before closing your new mortgage, your new lender must be certain that the title to the property will be free and clear, free of prior defects and indebtedness. A new policy is needed to protect the new lender and subsequent investor of your new mortgage. Both a homeowner and prospective lender need to be certain that what is available on the property is what is referred to as a "marketable title". A title company researches the legal history of the property that entails searching public records in the offices of the county recorder. Problems with the title could threaten the mortgage, limit ones use and enjoyment of the property and could result in financial loss. A policy of title insurance protects a homeowner's title and the insurer covers the cost of any legal challenges.


What is the best way to shop for insurance?
A reliable method of shopping for both homeowner's and earthquake insurance is to get estimates from at least three high-rated companies. Be prepared to discuss the type of policy you want as well as the coverage limits you require You may check insurance company ratings at the following websites: www.ambest.com and www.insure.com. If you find you are in need of flood insurance, you may contact the National Flood Insurance Program at (800) 638-6620 for a quote.


I am refinancing a condo (or townhouse or PUD) and am aware that our HOA is currently in litigation with the developer. Will I be able to refinance my mortgage?
A Homeowner's Association could leave itself open for legal action if it doesn't act on legitimate building defects and disclose these defects to all unit owners. However the fact that an association is suing a developer can impact an owners ability to obtain financing. It is vital to let your lender know up front if the development or project you live in is in litigation. It is usually possible to obtain financing in such situations, but it will limit the number of lenders who might be able to finance your mortgage. In some cases the lender may require a higher percentage of equity in the property and the interest rate could exceed that of standard financing programs.


Should I lock my interest rate at mortgage application or float the rate until closing?
The answer depends on one's outlook for interest rates, whether you are satisfied with the current rate being offered (and would not be deterred from proceeding if rates declined), when you need to close and whether or not a rate increase could effect your ability to qualify for the mortgage. With a purchase, there is a contractual obligation to close on a specified date. With a refinance transaction, there is no such obligation to close and therefore a refinance applicant could postpone closing for a more favorable rate. Some lenders take the guesswork out of the process by allowing borrowers to lock and then float the rate down one time during the mortgage process. Typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.


Will the lender require a fee to lock in my interest rate?
For a traditional 30-90 day rate lock, the lender will not require the borrower to pay a lock fee, but for the privilege of locking for a period beyond 90 days they may. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.


If I decide to lock my interest rate and rates go down, will the lender give me the current lower rate?
It depends upon the lender involved and how much of a rate decline has occurred. Some lenders may re-price the mortgage at a rate close to market if there has been a substantial rate decline (i.e. = or >3/8%) and some may prefer that a mortgage is canceled rather than re-price it at a market rate. Some lenders allow borrowers to lock and then float the rate down one time during the mortgage process, typically a borrower is required to bring in a fee of ½-1% of the mortgage amount which is then credited (or refunded) to them at closing. It is a lock fee the lender requires to insure the transaction will in fact close.


What type of closing costs can I expect to pay on my mortgage?
Please see Explaining Your Estimated Closing Costs on our website.

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Which mortgage related closing fees will the lender typically collect from me up front?
Please see Explaining Your Estimated Closing Costs on our website.


Which closing costs associated with my refinance are tax-deductible?
Please see the IRS link on our website where this information is outlined. Also consult with your tax advisor.

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Is it best to pay points up front to reduce the interest rate?
When points are paid on a mortgage, the result is to buy down the interest rate, typically 1 point (or 1%) will buy the rate down .25%. The key to analyzing whether paying points makes financial sense is to determine: 1) How long do you anticipate remaining in the property? 2) When would the breakeven point occur? For example if you pay two points to buy your rate down from 8.00% to 7.50% on a $300,000 mortgage, the payment at 8.00% would be $2,201 and at 7.50%, the payment would be $2,098, with the difference in payment amounting to $103/month. With two points costing $6000, divided by the savings of $103/month equaling 58.25 months or 4.85 years to break even. You would want to hold the mortgage and remain in the property approximately 5 years for this to make sense. Other factors to consider are the tax implications of paying points (see our link to the IRS website) as well as the time value of money (could you put these funds to better use).

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What is the difference between a zero point and a no cost mortgage?
With a zero point mortgage, a borrower has opted not to pay points to buy their interest rate down but will still be paying for their base closing costs (i.e. appraisal, credit report, lender doc fees, title and escrow, etc.). With a no cost mortgage, a borrower has accepted a higher interest rate, (typically .25%- 375% higher than on a zero point mortgage) with the trade off that the lender or broker will pay for all their non-recurring closing costs (all base closing fees except for interest, taxes and insurance due).

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Is it possible to obtain a no cost mortgage when refinancing your mortgage?
Yes. In fact no cost mortgages are extremely popular among refinanciers. Because a borrower pays no non-recurring closing costs, it is easy to analyze how soon money is saved on a monthly mortgage payment by refinancing. Many homeowners will consider refinancing for as little as .25% improvement to their mortgage rate with no-cost mortgage financing.

What is APR and how is it calculated?
APR stands for annual percentage rate and its purpose is to give borrowers a truer representation of the effective interest rate on their mortgage. APR factors in certain closing costs and fees and spreads these costs over the life of the mortgage, along with the note rate, to arrive at a more accurate annualized percentage rate than the note rate alone represents.

Will the lender require an appraisal of the property? If so, will I receive a copy of it?
Yes. The property is the collateral for the mortgage, therefore an appraisal is almost always required and if a borrower pays for the appraisal he or she is definitely entitled to receive a copy of it.


What is a mortgage prepayment penalty and is it generally advisable to get a mortgage that has one?
A prepayment penalty on a mortgage allows the lender to charge a borrower additional interest, typically six months worth, when a mortgage is repaid during the penalty period, which is usually somewhere in the first three to five years of the mortgage. If a mortgage does have a prepayment penalty, this is clearly stated within the mortgage disclosures, mortgage note or prepayment penalty rider to the note. The advantage of taking a mortgage with a prepayment penalty is that it could carry a lower rate of interest or you may be permitted to take a mortgage without paying for non-recurring closing costs.

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Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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