Home Refinancing Basics

In today’s world of tight credit standards, government confusion, and record-low interest rates, it is beneficial to every homeowner, regardless of status, wealth, or property type, to know the home refinancing basics.

Homeowners all across America as well as many other countries are clamoring to take advantage of these low interest rates, and in order for them to be successful, they should consider three factors:

  1. Refinancing only makes sense if the long term savings outweigh the cost of refinancing.
  2. Homeowners should be very thorough in researching and selecting the best loan option.
  3. The choice of financial institution is important.

Refinancing a home involves certain costs, also called “points,” “origination fees,” or “discount fees.” When considering whether to refinance, it is vital that points and fees be taken into consideration. The short term cost (or long term if a “zero point loan” that builds the cost into the new loan,) must be balanced with the anticipated savings, eventually leading to a calculation of how long one must own the house to make up for the costs and realize a savings.

If, for example, a refinance would lower the monthly mortgage payment by $100 and the points on the loan amount to $3,000, the homeowner would need to keep the home for 30 months before the refinance would start netting a savings.

After the mortgage crisis and mass defaults on sub-prime mortgages, it is more important than ever to research what type of loan to refinance into, specifically the term of the loan and the type of interest rate. Mortgages over a shorter term for example 15 years versus 30 years, have a much higher monthly payment but result in a substantially lower total cost of borrowing (interest.) Long-term mortgages have the reverse effect.

Loan variability means choosing between a fixed interest rate that is unchanging for the life of the loan or a variable rate, of which there are many varieties, with rates that change at certain points during the life of the loan. Each type has its own pros and cons.

As far as choosing which financial institution to utilize, the most important factor is to shop around. The holder of your current mortgage may offer a great savings of time in that they already have much of the necessary information and potentially also a monetary savings as a reward for loyal customers. Another option is to ask for referrals from your trusted real estate agent ~ they work with lenders every day… it’s more important to have a trusted adviser than to have an offer of ¼ point less from an “unknown” in another state.

There are nearly infinite banks and mortgage companies worth exploring, and only after researching the institutions as well as the above enumerated considerations of total savings and mortgage type can a truly informed decision be made.

Author Jeff Hammerberg is the Founding CEO of www.GayRealEstate.com ~ The Nation’s Largest Free Directory of Gay, Lesbian and Gay Friendly Realtors offering Free Buyers Representation, Free Sellers Competitive Market Analysis and Free Relocation Kits to Any City, USA.

White House may unveil mortgage plan next week

The Obama administration is considering unveiling new plans next week to revive the ailing housing market and reduce foreclosures, including an effort to help troubled borrowers refinance their mortgages.

The administration has been working for weeks on how to implement a mortgage relief program. President Barack Obama could include a nod to the plan in a speech on job creation next week, sources familiar with the administration’s plans said.

The refinancing initiative would allow certain borrowers to refinance loans that are backed by government-owned Fannie Mae and Freddie Mac or the Federal Housing Administration, the sources said.

A broad-based effort to automatically refinance millions of mortgages is not in the works, yet the administration is looking to take targeted changes to an existing program that would allow more borrowers to take advantage of low mortgage rates, including allowing borrowers to refinance even if they owe a significant amount above their property’s current value.

The idea is to help struggling borrowers refinance at current low interest rates, which would cut their monthly payments and free up cash for other spending. The hope is that this could drum up overall business activity.

The average rate on a 30-year fixed loan was 4.22 percent last week, close to the lowest level in more than 50 years, according to Freddie Mac.

Fannie Mae, Freddie Mac and the FHA, which together account for 90 percent of the U.S. residential mortgage market, would be given permission to begin refinancing plans for borrowers that are current on their mortgage payments and not considered seriously delinquent, according to the sources.

While the administration is under pressure to firm up the details, it is not yet clear whether borrowers seeking to take out a loan that is more than 80 percent of the value of the home would qualify for refinancing. The White House has kept the specifics of the refinancing plan closely guarded as it attempts to work out the details.

White House officials had long been wary of trying aggressive new programs to revive the housing market. The prevailing view at the White House over much of the last two years was that any remedies would cause at least as many problems as they solved.

A mainstay of the administration’s housing initiative, rolled out in April 2009, has fallen short of expectations. Known as the Home Affordable Refinance Program, it was originally intended to help 4 million to 5 million homeowners avoid foreclosure. As of May it had helped only about 810,000 homeowners refinance into loans with lower rates, according to the Federal Housing Finance Agency.

But Democrats close to the White House said the weakness in the economy and the drop in mortgage rates have led officials to take a second look at ideas that could bolster the housing market and ease the strain on household budgets.

Analysts who favor action say housing is at the heart of the economy’s woes and that its moribund state is creating a risk of a Japanese-style “lost decade” of economic stagnation.

“We can either spend the better part of a decade allowing households to gradually work off their debt burden,” said William Galston, a scholar at the Brookings Institution think tank. “Option number two is that we try to jump-start the process.”

“I think it’s time to go back to the drawing board,” he added.

Chicken or the egg
Some economists, however, believe the strain the housing market is putting on the rest of the economy can be addressed in other ways, such as using infrastructure spending and tax credits to encourage hiring in order to reinvigorate growth.

Christina Romer, a former top economic adviser to Obama, said that compared to other measures to address the economy’s woes, a housing-specific program could be expensive. She noted that homeowners tend to be wealthier than the general population so such programs would not be targeted to people most in need.

“A bold jobs program might be just as effective and better targeted to those who need help the most. Also, healing the economy is as likely to heal the housing market as programs aimed directly at housing,” said Romer, a professor at the University of California, Berkeley.

And while refinancing has accounted for the majority of mortgage applications for many months now, according to weekly data from the Mortgage Bankers Association, there is no evidence that the refinancings are providing a spur to consumer spending.

The refinancing initiative under consideration by the Obama administration mirrors a plan contained in legislation co-authored by Senator Barbara Boxer, a California Democrat, and Senator Johnny Isakson, a Republican from Georgia.

In a letter on Monday to Edward DeMarco, acting head of the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, Boxer argued that the plan would provide a “dual benefit.”

She said it would help Fannie and Freddie avoid losses, since fewer borrowers would fall delinquent, while providing a boost to the economy.

Bondholders on the losing end
The loudest objections are being registered by holders of mortgage bonds, who would take a hit if loans are paid off early.

Some fund managers have loaded up on agency mortgage-backed securities, those bonds backed by mortgages guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association, because they offer higher yields than U.S. Treasuries.

Last week, the $5.4 trillion agency MBS market recorded one of its worst weeks in a year as traders dumped mortgage bonds out of concern the White House would put forward a plan that would shoulder them with losses.

While mortgage rates have been hovering around record low levels, banks remain stingy with lending although they are sitting on more than $1 trillion in excess reserves. Homeowners without a job or good credit histories have been essentially shut out of the refinancing process.

Some investors say the economic benefit of a government-encouraged refinancing wave would be minimal.

“It’s a political hail Mary. It’s unclear why they want to throw a monkey wrench into a $5 trillion market,” said John Kerschner, head of securitized products at Janus Capital Group in Denver. He said the net benefits for the economy are negligible, perhaps adding $20 billion to $30 billion “at best” to the U.S. economy.

The aurthor of this article is Thomson Ruters

See the original post at: http://www.msnbc.msn.com/id/44340713/ns/business-real_estate/

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