My Way Lending

If you’re in the process of refinancing your home mortgage there are a number of expensive pitfalls you’re likely to encounter along the way. Doing your homework before refinancing will not only help you avoid refinancing headaches but save you thousands of dollars in the process. Here are several tips to help you avoid common mortgage refinancing headaches.

The biggest headache you’ll need to avoid when refinancing your mortgage is overpaying. Most homeowners never know that mortgage brokers mark up the interest rate wholesale lenders approved them to get a commission. Wholesale mortgage lenders reward brokers for closing loans with above market interest rates. The difference between the interest rate you were approved and the mortgage rate your broker closes with is called Yield Spread Premium.

Here’s an example to illustrate Yield Spread Premium in a typical refinancing transaction. Suppose you’re refinancing your home with a $250,000 thirty year fixed mortgage. Your mortgage broker quotes you an interest rate of 6.75% and charges you one point for the origination. Remember that one point is always one percent of your loan amount due at closing. While one point is a reasonable fee to pay for loan origination, what the broker isn’t telling you is that the wholesale lender approved you for a 6.0% mortgage rate. Your mortgage broker marked the interest rate up to 6.75%, without telling you of course, because the lender pays a bonus of one percent of your loan amount for every .25% you agree to overpay.

In this example your mortgage broker pockets the $2,500 you pay for loan origination AND $7,500 from the lender for overcharging you. For a couple hours work your mortgage broker walks away with $10,000 and you get stuck paying an above market mortgage rate for the entire time you keep this loan. There is good news for homeowners who do their homework can avoid this refinancing headache; you can avoid paying the unnecessary markup know as Yield Spread Premium by learning to recognize the markup and negotiating with a mortgage broker to pay an upfront fee when refinancing.

Watch out for Prepayment Penalties

Another source of refinancing headaches for many homeowners is the dreaded prepayment penalty. Before setting out to refinance your existing mortgage make sure your existing loan does not include a penalty for early repayment. Your loan originator might try to slip this penalty past you to get an incentive from the lender; however, unless you have poor credit and no other option, there is no reason whatsoever to accept a mortgage when refinancing that includes a prepayment penalty. Shrewd negotiating and cutthroat competition in the industry will ensure this is one refinancing headache you don’t have to face; don’t be afraid to remind your broker just how competitive it is out there.

Tell Your Mortgage Broker to Take Out the Trash

The final source of refinancing headaches we’ll discuss today are garbage fee. Chances are more likely than not, your Good Faith Estimate is littered with junk fees you don’t have to pay. If you find anything on your Good Faith Estimate that resembles an application fee, lock fee, broker courier fee, or computerized loan origination fee, these are garbage fees you should not be paying. Again, reminding your loan originator how much competition there is for your loan and telling them to take the trash out of your Good Faith Estimate will help you avoid many common refinancing headaches. You can learn more about your refinancing options and other headaches to avoid with my free refinancing toolkit. You can access the video toolkit by clicking the DVD image at the top of this page.

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If you are in the market to refinance your mortgage the type of interest rate you should choose depends on your situation. If you can afford a higher monthly payment and plan on keeping your home for at least seven years or if you have little tolerance for financial risk, consider a fixed interest rate mortgage.

If you cannot afford your mortgage payments for now but expect your income to increase in the near future consider an Adjustable Rate Mortgage as a short-term solution. Many homeowners get themselves into trouble because they do not foresee their income going up and purchase more home than they can afford. It’s better to have a solid plan in place today and save yourself the sleepless nights and financial hardship of losing a home you never should have purchased in the first place.

If you expect to be moving within seven years you could save yourself some money with an Adjustable Rate Mortgage or even a hybrid ARM. You could structure the Adjustable Rate Mortgage so it will not reset until after you’ve sold your home. This essentially eliminates all of the risk associated with Adjustable Rate Mortgages. If you take this approach when refinancing make sure the points you’re required to pay do not offset your savings; also, make sure the loan does not include a prepayment penalty that will be enforced when you are ready to sell your home.

When evaluating Adjustable Rate Mortgages for a home you plan on keeping for longer than seven years there are several factors you need to consider before refinancing. The index, margin, and caps all affect your payment and the amount of risk associated with your loan. The index your Adjustable Rate Mortgage is tied to plus the lender’s margin determines what your interest rate will be when the lender makes adjustments.

Caps are safety features that protect you from sudden increases in your interest rate and payment amount. Periodic caps limit how much your mortgage rate can go up or down during an adjustment or over the lifetime of your loan. Payment caps limit how much your monthly payment can go up or down during any single adjustment or over the lifetime of your loan. It is important to structure your loan with both periodic and payment caps; improperly structured Adjustable Rate Mortgages are prone to negative amortization (a loan that grows over time) when the change in your payment amount does not allow for all of the interest due in a given month.

The risks associated with Adjustable Rate Mortgages come from the possibility of experiencing payment shock. When the lender stars adjusting your loan you could wake up with a double digit interest rate and a payment you can no longer afford. You can learn more about your mortgage refinancing options, including costly pitfalls to avoid with my free mortgage toolkit. Register today by clicking the DVD at the top of this page.

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Here’s an example of how not to refinance your mortgage; a typical refinancing transaction gone wrong. Our homeowner in this is example is called Jackie. Jackie purchased her home in Germantown Maryland, and owes $330,000 on an existing thirty year mortgage at 9% interest. Jackie decides she’d like to refinance her fixed rate mortgage and take cash back to pay off the bills she racked up during her family’s summer vacation.

How does Jackie go about refinancing her mortgage? She calls a mortgage broker recommended by one of her girlfriends. We’ll call the mortgage broker Terry. Jackie’s friend has never used this broker, she only knew him as a casual acquaintance. Jackie calls up Terry who immediately goes into his sales mode pitching Jackie with a hybrid Adjustable Rate Mortgage. On the surface it’s an attractive offer: Terry tells Jackie that she qualifies for a 7.75 percent interest rate that’s fixed for 5 years. He’s only charging her 1.5 points for the origination fee and she’ll get $25,000 back at closing.

Jackie thinks she got a fantastic deal and thanks her friend for referring her to Terry. Think Jackie got a good deal refinancing her mortgage? Well, since the title of this article is how not to refinance your mortgage, you’re probably thinking Jackie got taken to the cleaners, and you’re right. Here’s where Jackie went wrong with her new mortgage loan.

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