Understanding the Basics About a Mortgage Refinance
Thanks to the historically low rates that have prevailed for the past few years, lots of people have either purchased a home or refinanced an existing mortgage. Unfortunately, many people are not clear on some of the fundamentals of a home loan. Listed below are some of the basic items people should understand prior to refinancing their current loan.
How does the APR work?
A survey that was published by Zillow.com showed that as many as 34 percent of potential homeowners is unsure about the APR. Put in simple terms, the APR provides you with the cost of the loan over time. Two lenders may offer the same 30 year fixed rate. But if one lender has fees and points that cost an extra $2,000 then that amount will be financed over the life of the loan, driving up your overall costs. Make sure to compare the APR between competing loans
Refinancing without Equity
One of the biggest misconceptions people have about refinancing concerns there lack of equity. For years the standard rule was that people could finance up to 85%-90% of the home’s value for a conventional loan. For people that have seen their home value drop, this rule would seem to prevent them refinancing.
However, in an effort to help the struggling economy, Fannie Mae and Freddie Mac introduced the Home Affordable Refinance Program, also called HARP. First offered in 2009, this program allows people to refinance from 105%-150% of the home’s appraised worth. Borrowers will have to pay mortgage insurance premium on the new loan, but if you are currently paying 6%-7% or higher on your mortgage, the savings in interest could outweigh the MIP amounts.
To Pay or Not to Pay
Another misconception concerns the closing costs. Some people think that when they refinance the loan must include closing costs. Other people think that the borrower is responsible for paying the costs up front. Neither is true.
If the home has enough value that the closing costs can be added to the loan, the borrower can choose to do so. However, if the borrower would like to pay the costs out of pocket, they have that option as well. Some people choose to pay the costs upfront in order to make the APR lower over time and save interest.
- Important Disclosure
If your mortgage is owned or guaranteed by either Freddie Mac or Fannie Mae, you may be eligible to refinance your mortgage under the enhanced and expanded provisions of HARP. You can determine whether your mortgage is owned by either Freddie mac or Fannie Mae by checking the following websites:
www.freddiemac.com/mymortgage or https://www.fanniemae.com/loanlookup/.Home Possible® is a registered trademark of Freddie Mac.