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If you are a first time homebuyer considering a new mortgage loan the process of refinancing can be an intimidating proposition. No one wants to be taken advantage of by a greedy mortgage broker or pay more than they have to for the loan. Doing your homework before refinancing will help you avoid expensive refinancing pitfalls; here are several tips geared for first time homebuyers who are considering mortgage refinancing.

Mortgage Refinancing Terminology

Before you begin shopping for a new mortgage loan it is important to brush up on basic mortgage terminology. Here are several common terms you are likely to encounter and key concepts you need to know.

Mortgage Amortization – The process of paying down your loan balance over the loan’s term length; mortgage loans are front loaded with interest so in the beginning most of the payment is applied to interest. Over time more of your payment amount is applied to paying down the loan principle.

Term Length – The amount of time you have to repay your loan along with the mortgage interest rate determines your payment amount and amortization schedule. Common term lengths are 15 or 30 years; however, there are now 40 and 50 year mortgage terms available. Most homeowners considering refinancing would benefit most from a 15 year term length.

Mortgage Rate – Your interest rate represents the finance charge you are paying expressed as a percentage of your total loan amount. The mortgage rate along with term length is responsible for determining your monthly payment amount. Most homeowners don’t realize that mortgage loans are retail products and that “retail” mortgage rates include markup intended to give the loan originator a commission.

Mortgage Banker – Loan originators that close mortgage loans in their own name are considered banks and broker banks. These lenders are exempt from the Real Estate Settlement Procedures Act thanks to the Banking Lobby and are not required to disclose their profit margins or how much they’ve marked up your loan. You should never refinance your mortgage with a mortgage banker for this reason.

Mortgage Broker – These loan originators sell loans from wholesale lenders for a commission; mortgage brokers are compensated for the work they do in two ways. Your mortgage broker charges an origination fee for their service, also called origination points, and marks up your interest rate for a bonus from the lender. This markup of your mortgage rate is called Yield Spread Premium and is completely unnecessary.

Part two of this series, mortgage refinancing for first time homebuyers, will cover advanced mortgage terminology including Service Release Premium, Yield Spread Premium, and points. You can learn more about refinancing your mortgage without paying too much with my free mortgage toolkit; register today by clicking the DVD image found at the top of this page. The toolkit is free and you’re under no obligation now or in the future.

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• Mortgage Interest Rates Decline

For many homeowners Adjustable Rate Mortgages have a bad name and are overlooked completely when refinancing. While it’s true that Adjustable Rate Mortgages are riskier than their Fixed Rate counterparts, when used properly they can save you thousands of dollars. Here are several tips about the pros and cons of Adjustable Rate Mortgages to help you decide if a variable rate mortgage is right from you.

What Are The Risks of Adjustable Rate Mortgage Refinancing?

The risk with this type of mortgage refinancing comes from the potential of experiencing payment shock. Payment shock occurs when the lender adjusts your payment amount or recasts the loan and you can no longer afford to make your mortgage payment. This typically happens with Adjustable Rate Mortgages that do not have their caps structured properly or with homeowners that abuse the so called “Payment Option” loans.

When Use Properly Adjustable Rate Mortgages Have Very Little Risk

Adjustable Rate Mortgages typically come with a low, fixed introductory interest rate. This rate is often much lower than the actual contract rate, and in the case of Hybrid Adjustable Rate mortgages this introductory period can last as long as five to seven years. If you plan on selling home within five to seven years you could take advantage of this introductory period to lower your payment amount with little or no risk.

Adjustable Rate Mortgages Come With Safety Features

Caps protect homeowners from abrupt changes in their adjustable mortgage rate and payment amounts. There are two types of caps you need to be concerned with; periodic caps that limit the amount your interest rate can go up or down and payment caps that limit how much your mortgage payment can change. Both have the option of lifetime caps which limits the change over the duration of your loan. When you refinance your mortgage with an Adjustable Rate Mortgage make sure your loan has both payment and periodic caps. Loans that have only payment caps are prone to negative amortization when the cap prevents the payment going up enough to cover an increase in the mortgage interest rate.

Be Careful Refinancing With Payment Option Mortgage Loans

Option Adjustable Rate Mortgages have become extremely popular due to their flexibility and the “optional” minimum payment amount. The option mortgage gives you the choice of making a payment based on a 15 or 30 year amortization schedule, an interest only payment, or the “optional” minimum payment.

When you make the minimum payment you are not paying enough to cover the mortgage interest due that month and the outstanding amount is added to your loan balance. This is called “negative amortization” and it means your loan is actually growing over time. Homeowners who abuse the minimum payment will find that the lender automatically recasts the loan when they reach a certain threshold of what they owe. When this happens the loan is converted to a standard Adjustable Rate Mortgage amortized for the time remaining on the contract.

Many homeowners who abuse Option Adjustable Rate Mortgage loans can barely afford the minimum payment; when the lender recasts their loans they are one step away from foreclosure and frequently lose their homes. You can learn more about your Adjustable Rate Mortgage refinancing options, including expensive pitfalls to avoid with my free mortgage toolkit. You can register for the free toolkit with no obligation now or ever using the links at the top of this page.

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