All About Refinancing
If you need to do a Denver home refinance mortgage loan, here is a quick information guide containing information on Denver home refinance.
Denver home refinance: reasons to refinance your Colorado mortgage loan
Watch out for the bait and switch!
Cash-out Denver home refinance
Denver home refinance to reap maximum tax deduction
Options other than refinancing
Renegotiate terms on your current loan instead of refinancing
How to calculate the refinance break even point
Denver home refinance: reasons to refinance your Colorado mortgage loan
If you are looking to do a Denver home refinance, let's start with the basics of what it means to refinance. Refinancing is simply taking out another mortgage. The first loan is effectively paid off by the new mortgage. You will have to produce the same documents and go through the same income and assets verification process that you did the first time around. It takes time to recoup the costs of refinancing, so taking out a new mortgage isn't for everyone. But if you plan to stay in your home for a few years, refinancing to a lower rate might be the way to go.
Refinancing is a great option for homeowners who want to move from a higher rate to a lower rate. Other homeowners want to move from an adjustable rate mortgage (ARM) to a secure, fixed rate mortgage, enabling them to have the peace of mind that their payment will never change. Some borrowers even refinance from a lower rate adjustable mortgage to a higher rate fixed mortgage in order to get long term rate stability. Some borrowers refinance fixed rate loans to lower rate adjustable loans in order to obtain lower payments, albeit they accept the risk of potential future interest rate increases.
In my opinion, one of the best reasons to refinance is to convert to a shorter term loan, enabling you to build up equity much faster. I love to see people convert from 30 year loans to 20 year loans. The savings is enormous. Does having your home paid off at 60 sound better than having your home paid off at 70? It certainly does, and the added cost isn't as much as you would think. At a sample interest rate of 6.5%, the 30 year payment on a $250,000 loan is $1,580 (not including taxes and insurance). Using the same terms, the 20 year payment is only $1,864. That's an extra $284 per month, but you will pay off your mortgage TEN YEARS EARLIER. Most people wouldn't believe it, but refinancing in order to convert to a shorter term loan is as good a reason to refinance as taking advantage of lower interest rates.
Refinancing to take cash out of your home is another good reason to refinance, particularly if the cash is to be used for a noble purpose such as college education. If you are looking to put your child on the right path by sending them off to get an education, accessing your home's equity is a good way to accomplish that goal. Many borrowers refinance in order to pay off divorce settlements. If your plan is to complete a major home renovation, pay off medical bills or consolidate debt, refinancing is certainly something to look into.
Watch out for the bait and switch!
Be wary of the bait and switch. Lenders often lure in borrowers with low cost offers only to tack on heavy fees at closing. If this happens, remember that you can back out of the deal. Don't be afraid to walk away from the table at closing. If you do sign the closing documents, the government gives you a cooling off period to rethink the deal. It's known as the three-day right of rescission, and it allows you to back out of many home loans.
Federal law allows you to rescind (or cancel) some types of home loans. The rescission period lasts for 3 days, during which time you can cancel most refinances, second mortgages and home equity loans. When you refinance, the funds are held up for three days after closing, allowing the borrower time to change his or her mind. The law is designed to protect the elderly, unsophisticated borrowers and consumers in general. If you sign the papers and later have second thoughts, you can back out of the deal, no questions asked.
The rescission period begins after closing—after you have signed all of the official documents pertaining to your loan. During the 3 day rescission period nothing happens. No changes to your credit are made, the lender doesn't cut any checks—basically, all is quiet. Once the rescission period elapses, the lender transfers the funds and the transaction is completed. There is no backing out of the deal after the rescission period elapses.
Purchase transactions do not have a rescission period, only refinances of owner-occupied properties. Vacation homes, second homes and investment properties are also ineligible for the three day cooling off period. When you build a home there is no rescission period. The rescission period is also not available when you refinance with the same lender.
If you do a cash-out refi with the same lender, only the cash out portion is eligible for rescission. If you do a cash-out refi with a different lender, the entire amount can be rescinded.
The rescission (or think it over) period begins the day after closing. If you close on a Wednesday, your three days would be Thursday, Friday and Saturday. Sundays are excluded as well as federal holidays. If you close on Thursday, your rescission period is Friday, Saturday and Monday (Sundays excluded). If you decide to back out during the three day window, notify your lender and title company immediately, in writing. Make sure that you follow the written procedures for cancellation; don't just call the lender or visit your mortgage broker.
The rescission period is a great time to review all of those documents that you might have signed at closing without reading scrupulously. During the 3 day timeframe, you can review those documents in detail in the comfort of your own home. If something isn't right, you can simply call the deal off before receiving the money from the lender. In return, the lender is required to return any fees paid within 20 days. It doesn't matter if your home is a single family, condo or mobile home, the law is applicable as long as the property is your principal residence.
The law allows the 3 day right of rescission period to be waived in cases of emergency, but impatience doesn't count as an emergency, so make sure that your emergency is bona fide if you want to waive the rescission period. Most lenders are reluctant to allow the borrower to waive the rescission period—and understandably so. The cooling off period is a good thing for lenders as well as consumers. Mortgages are big transactions, and lenders want to make sure that borrowers don't have regrets. The reality is that very few borrowers exercise their right of rescission. It's a rarity, although it does happen.
There are a lot of dishonest companies that are glad to help you refinance your home in order to put a few extra thousand dollars in your pocket. You could use a few thousand, right? I'm sure that you could, but what you don't need is to get that money at the cost of excessive fees, prepayment penalties, or a balloon payment at the end of the new mortgage. At best, a loan flipping mortgage broker will put some money in your pocket that will be offset by equal or greater transaction fees. At worst, there could be a balloon payment inserted into the fine print, resulting in the need to refinance the house again in two, three or five years.
Also remember that lenders charge a higher rate if you take cash out when refinancing. You could wind up paying a higher rate on your entire mortgage just to get access to a few thousand dollars. It happens every day. A naïve borrower needs access to cash, so they turn to a mortgage broker to refinance their mortgage. They wind up with the cash but with much less favorable mortgage terms. Be careful when refinancing. If you really need cash, an honest mortgage broker will let you know if refinancing would be disadvantageous. A good mortgage broker will help you come up with a more sensible plan for getting the cash that you need, even if the broker doesn't make a dime. An honest broker knows that if he steers you in the right direction, you'll come back when you need to do a legitimate refinance down the road or when you purchase your next home.
Also beware that it could be your current lender who tries to suck you in on a loan flipping scam. Lenders call up their customers all the time with offers for fast cash. Borrowers often have a false sense of trust with their current lender, so they many times fall for bad deals. Beware of refinancing offers. Don't refinance on a whim just to get a few bucks in your pocket. Refinance only when absolutely necessary (when you have to have the cash and can get it no other way) or when refinancing makes good economic sense.
Cash-out Denver home refinance
When a borrower refinances in order to obtain a better rate or different loan term (switching from a 30 year term to a 20 year term, for example), the loan is known as a rate and term refinance. However, when the borrower is looking to take home cash at the closing table, the transaction is called a cash-out refinance (or cash-out refi). Refinancing to raise cash means that your new mortgage will be for a greater amount than your old mortgage. Let's say that you have a home worth $350,000 on which you owe $250,000. You also owe $25,000 on high interest rate credit cards. You decide to refinance in order to reduce your credit card debt to zero. The amount owed on the old loan was $250,000. The amount owed after the loan is refinanced will be $275,000, but credit card debt will be reduced to zero. More importantly, interest on credit card debt is NOT tax deductible, whereas the interest on the new home loan IS tax deductible.
Realize that cash-out refinances typically carry a slightly higher rate than standard rate and term refinances. The reason is that default rates are statistically higher on cash-out refinances. However, if the loan to value of the first mortgage remains at or below 70%, the rate may remain the same as a typical rate and term refinance. One way to avoid the bump in interest rates caused by taking cash out is to do a piggyback loan. Secure a first mortgage followed by either a second mortgage or home equity loan. Take the cash that you need out of the second mortgage or home equity loan. This tactic will allow you to get a better rate on your first mortgage.
The majority of refinance transactions are cash-out refinances. In the second quarter of 2007, 83% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least five percent higher than the original mortgage balances.
Some lenders require that you stay within certain loan to value guidelines in order to take cash out. That ratio could be 75%, 80%, 85% or 90% loan to value (depending upon the lender and program), but it could go as high as 100% if you have good credit.
Remember that cash-out refinances are subject to the federally mandated 3 day right of rescission period. That means that you will not have access to your cash until a full 3 days after closing.
Some lenders also limit the amount of total cash that can be taken out on a cash-out refi. That limit might be $100,000 to $250,000, for example. Sometimes cash-out caps are subject to credit score and documentation. Fortunately, there are specialty lenders who offer unlimited cash-out refinances as long as their loan to value guidelines are met.
Some lenders have restrictions on cash-out refinances when the homeowner wants to use a new appraised value. If you move into a cozy home in a Denver suburb and want to take cash out after 4 months, for example, you will have to use the appraised value of the property at the time of purchase. This is particularly relevant for homeowners doing renovations when the market value of a property increases dramatically over a short period of time. Even if your home has increased $100K or more in value due to your own grit and sweat, you will not be able to pull that equity out until the title "seasons." Often the lender will require that the title "season" for 12 months before a new appraisal can be used. If the borrower is happy to use the original appraised value at the time of purchase, the seasoning requirement may not apply. If you have completely renovated a property, you will likely have to wait 12 months before you can have the property re-appraised and pull cash out via a cash-out refinance. You can sell the property or even refinance the original note, but most lenders require the title to season before acquiescing to a cash-out refinance.
Denver home refinance to reap maximum tax deduction
A mortgage payment is composed of: principal, interest, taxes and insurance. Over the life of the mortgage, the portions of principal and interest will change. If you take out a 30 year home loan, for example, almost the entire payment is tax deductible at the beginning of the loan term. The reason is that payment 1 of 360 is composed almost entirely of interest with very little principal. However, payment 301 of 360, for example, is composed of a substantial amount of principal. In turn, the tax deduction decreases as the mortgage is paid down. Interest is calculated off the outstanding balance of the mortgage. As you pay down your mortgage, the interest calculation grows smaller. If your first mortgage payment is $1,500, very little of that amount is paying down principal. But when you pay your very last mortgage payment of $1,500, almost all of the payment is devoted to principal and almost none to interest.
Essentially, the tax deduction available to the borrower decreases as the mortgage is paid down. In order to maximize the mortgage tax deduction, some borrowers take out interest only loans. This tactic ensures the maximum tax deduction. Interest only loans come with a lower payment because the principal balance is not being paid down. The borrower then takes the amount that would have been devoted to principal on a standard loan and sticks that money into a mutual fund, insurance policy or other investment. When the investment return and tax savings are combined, there is a good chance that you can make 10+% off the money you take out of your home. Generally, the money you pull out of your home is tax free.
Some borrowers refinance in order to pull the equity out of their homes and place that money into a profitable investment while simultaneously reaping the maximum home interest tax deduction. This is a financially clever maneuver, in my opinion. But also in my opinion, this tactic isn't for everyone. This strategy works well for the very disciplined, numbers savvy individual. For most borrowers, I recommend a more standard loan—a 20 year fixed note, for example. If you're not a financial whiz, a fully amortized (principal and interest) loan is probably the way to go, as it allows you to build up equity each month.
Options other than refinancing
Taking out a second mortgage or home equity loan can be a better financial move than refinancing an existing mortgage. People are often scared off by the high rates of home equity loans and second mortgages. They think, "10.5%!!! No way. I'll just refinance instead." But when the numbers shake out, refinancing is not always the best option.
Example:
Jenny is a single mother who has an existing mortgage of $200,000 at 7%. Jenny needs some fast cash—let's say $25,000—so she gets a rate quote for a home equity line of credit. The bank wants 10.5%, a rate that shocks Jenny and sends her scrambling to implementing "plan B." Her "plan B" is to refinance her existing mortgage in order to raise the needed cash. She gets a quote from a mortgage broker to refinance the loan at a rate of 7.5%.
What Jenny fails to notice is that the higher rate of 10.5% for the home equity loan is only on a balance of $25,000. The offer to refinance the entirenote at 7.50% (.50% higher than her existing note) is on the entire loan-balance-to-be of $225,000. If Jenny chooses to take out a second loan instead of refinancing, she will save thousands in fees.
The point to consider is that a home equity loan or second mortgage—even at a significantly higher rate—is sometimes a better overall deal than refinancing an existing mortgage in order to raise cash. Don't be scared off by high interest rates on home equity loans and second mortgages. When combined with an existing first mortgage, the overall deal may paint a better financial picture than refinancing. The only way to know for sure is to have a mortgage professional run the numbers, which I am happy to do anytime at no cost. Call me at 303.800.3648.
Renegotiate terms on your current loan instead of refinancing
Another option to refinancing is to renegotiate your terms with your current lender. Unfortunately, most loans are sold off and the lender you think is your lender is really just your servicing agent. Most loans are sold to Wall Street investors as "mortgage backed securities." Once the loans are sold, the loan terms cannot be changed. If your lender really does own the loan, however, you may be able to renegotiate the terms of your current loan rather than refinancing.
If your income drops, for example, you may turn to your current lender before contacting a mortgage broker. If you have 20 years left on your mortgage, your lender may agree to extend the loan term to 30 years, thereby reducing your monthly payments. Your lender may also agree to reduce the payment to interest only for a few years until you get back on your feet financially. They may also agree to drop the interest rate slightly in order to keep the loan. Don't be surprised if the answer is a resounding, "NO," but remember that it never hurts to ask. Some lenders are very willing to work with their customers in order to retain the loan and will sometimes change the loan terms for a reasonable fee.
How to calculate the refinance break even point
Refinancing costs money, so those costs have to be offset by monthly savings in order for refinancing to be financially advantageous. Does it make sense to refinance? Let's find out.
- Take the total costs to refinance (appraisal, document fees, origination fees, etc.)—let's say $6,000 for our example.
- Calculate the monthly savings (for example, your old payment less your new, lower payment)—let's say $300 per month, for example.
- Divide the total cost by the savings to find out the break even point ($6,000 / $300 = 20 months).
The break even point in the above example is 20 months, meaning that it makes sense to refinance if you plan on living in the house for at least 20 months.