Saving on interest

If you refinance your residential mortgage loan to a lower rate, you can save thousands of dollars on interest alone. If you have a high rate, you can refinance to a lower rate. If you have an adjustable rate mortgage (ARM), you can refinance to a fixed rate. Changing your terms so that you pay less in interest is one of the most basic ways that people can save money on their home loans. Additionally, in most cases, the interest from your residential mortgage loan refinance is tax-deductible, meaning that you save money when it comes to paying Uncle Sam as well.

Getting a shorter term

One thing you can do to save quite a bit of money in the long run is to refinance your residential mortgage loan and change the term length so that it is shorter. The shorter the loan term, the less you pay in interest. You will, however, likely pay more money each month on your payment, since you are not spreading the loan payments out over 30 years. Many people, however, find that’s a small price to pay to save thousands by refinancing their mortgages to be paid off in 15 years.

Money in your pocket

If you refinance your residential mortgage loan to a lower rate, you will probably find that you have a lower monthly payment. This can be very beneficial in that it frees up some money each month for you to use on other things. So, not only do you save thousands in interest over the course of many years, but you also experience more money in your pocket in the here and now.

Getting rid of debt

If you have too much debt for an unsecured loan consolidation, you can still get a debt consolidation loan if you refinance your residential mortgage loan. Most people, when they refinance, have enough equity that after the old mortgage is paid off with the refi, there is money left over to pay off the bills and try to be in great shape.

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The lower payment that you will see when only needing to pay the interest on your loan is great, but there are a few tradeoffs. First, as was previously stated, you are only making interest payments. This means that your monthly payments will not build actual home equity.

People who use interest only mortgage options typically have the option to make extra payments each month which will go towards their principal balance, however, most find that they never do. If you are thinking of taking on an interest only mortgage loan, mandate that you make extra payments every month or two. If you want to really build equity in your home, this is a must.

Many brokers will offer discounted rates for an interest only mortgage loan. Be sure to check with the broker you are working with to find out what they can offer you. Interest only mortgage loans remain interest only for a set number of years. So, don’t forget that when that time runs out, you will start making interest and principal payments. Only now you have far less time in which to pay off the same amount that you started with.

Prepayment Penalties on Adjustable Rate Mortgages

An adjustable rate mortgage is a great way to get a very low rate, fixed, for the beginning of your life as a homeowner. These are especially great when you can refinance before your rate begins to adjust heavily. When you are looking at an adjustable rate mortgage, be sure to ask about the “prepayment” penalty that is associated with it.

A prepayment penalty usually prevents a homeowner from selling or refinancing their adjustable rate mortgage before it is too late. These prepayment penalties typically equal between 1 and 5 percent of your principle balance if you sell or refinance too early. Many people assume these clauses due to the fact that you can often get a reduced rate for such a penalty clause. In an adjustable rate mortgage, because of the potential for high adjustments, it is extra important to avoid a restrictive prepayment penalty.

Adjustable Mortgages – Risk vs. Reward

Many people today are keeping their mortgage payments lower by getting adjustable rate mortgages. Adjustable mortgages are often fixed at a very low interest rate for anywhere from 6 months to 5 years. These very low rates can keep your payments low for a while, but what will happen once they begin to adjust? This is where the risk comes in.

Nobody knows how mortgages will be affected by future interest rate changes. If you are in an adjustable rate mortgage, you should keep your eyes peeled for changes to the interest rates. If you see a pattern of rate changes that may be bad for your adjustable mortgage, think about getting the loan refinanced before it begins to adjust.

The risks involved in adjustable mortgages can be high if you are not prepared. However, if you are prepared to quickly get your loan refinanced before it begins to adjust, you can move it into a fixed rate or into a longer adjustable period. Either way, don’t let your mortgages adjust to the point where you are paying a high premium just to have a roof over your head.

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But in Massachusetts, where foreclosure filings have nearly doubled during the past year, the governor is asking lenders to give homeowners more time.

The move follows a recent protest at Gov. Deval Patrick’s office by homeowners who said their loan officers and mortgage brokers lied to them about the interest rates they would pay on their subprime loans.

“I have a 4-year-old son. I work hard. I’m a single parent. I have a good job. I’m doing what I’m supposed to do. I cry every night because I don’t know what’s going to happen the next day,” said protester Raymona Bowen, who stood to lose her home in a matter of days.

Advocates singled out Patrick, in part, because before his election he served on the board of Ameriquest Mortgage Co., one of the nation’s biggest subprime lenders.

As a result of the meeting, state officials have made calls on homeowners’ behalf. In most cases, they’ve gotten the lenders to agree to delay the foreclosures.

The goal is to help both sides work out a solution.

“In many cases, lenders don’t want to be in the home-ownership business. They’d rather have the loan repaid,” Patrick said.

The state’s Division of Banks, which supervises more than 270 state-chartered banks and credit unions with about $240 billion total assets, is seeking a two-month reprieve for those who are about to go into foreclosure.

Borrowers will first have to file a complaint. Then they will be put in touch with nonprofit groups that advise on refinancing options.

Lenders are also being urged to modify the terms of unaffordable adjustable-rate loans.

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One participant during a recent online discussion asked me a question that some might dismiss as naive. But it was a question that many people should have asked before they bought their homes. After all, in a recent survey commissioned by bankrate.com, 34 percent of homeowners with mortgages didn’t have a clue as to what type of loan they had.

“There have been many stories in the news about subprime loans,” the reader wrote. “What exactly is a subprime loan? And what exactly is the problem with defaulting on a subprime loan versus a prime loan? Are there signs to watch out for when you are discussing mortgages with a bank or a lender?”

You need to know that there are three lending worlds out there. One world is for borrowers who are ready for prime time loans — they easily qualify for a lender’s best interest rates. Depending on the lender, scores in the low 700s and above put you in prime territory.

In the current interest rate environment, if you’re a creditworthy customer also known as a “prime” borrower, you should qualify for a mortgage interest rate that is less than the prime rate, which is currently 8.25 percent.

In the middle is not-so-prime-time lending — or the “Alternative-A” mortgage world. These loans are made to people who are considered less risky than a subprime borrower but aren’t as creditworthy as someone in the prime category. Alt-A borrowers, as they are also called, can have high credit scores but may not be able to verify their income. Generally, the rate these borrowers pay is lower than a subprime loan. This sector is also having payment trouble.

The furthest from the prime world is the subprime market. Subprime loans are typically made to borrowers who have spotty credit records. The interest rates on these loans are usually at the prime rate or higher.

Subprime loans include nontraditional products with terms allowing borrowers to pay interest only or offering adjustable rates that are subject to sudden spikes after a certain time.

Generally you enter subprime territory when you have a credit score in the low 600s. Each lender sets its own benchmark for subprime customers.

One lender may set the bar at a credit score of 650 or below, another might set the bar at 620.

But a low credit score isn’t the only factor that may push you into a subprime loan. You might only qualify for such a loan if you have a low downpayment or you can’t accurately document your income.

In the case of home loans, the subprime borrowers you’re hearing about these days are defaulting because market conditions have made their mortgages more expensive. Many people with adjustable-rate loans have seen their rates jump as other short-term interest rates have risen, pushing up their monthly payments. Others took out loans with teaser rates hoping they could refinance into better loans. When they couldn’t because their income fell or their home’s value declined, they got stuck with mortgage payments they couldn’t afford.

By the end of the year, as many as 2 million subprime borrowers could lose their homes to foreclosure, according to the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization.

There is no difference between defaulting on a subprime loan and a prime loan. Although the news has focused on subprime borrowers, even homeowners with favorable mortgage terms are having trouble. The delinquency rate for all major types of loans — prime, subprime, FHA, and VA — increased in the fourth quarter of 2006, as did the foreclosure rate, according to the Mortgage Bankers Association.

The last question — what to watch out for in a mortgage loan — is one all borrowers should be asking. The Center for Responsible Lending, which has been highly critical of subprime lenders, lists some of the things to look for and avoid in a mortgage loan:

-  Excessive fees. Don’t be so quick to get a home loan that you ignore the fees. Mortgage lenders often disguise or play down fees because they are often rolled into a loan.

-  Prepayment penalty. A mortgage with a prepayment penalty option requires you to pay a penalty or fee if all or most of loan amount is repaid within a certain time period (generally ranging from two to five years from the start of the loan).

-  Loan flipping. Despite the rise in foreclosures, the offers to refinance are still plentiful.

But crunch the numbers. Some refinance deals generate lots of fee income to the lender but provide little financial relief to the borrower.

Like this chat participant, I wonder how many people reading all the news stories couldn’t really explain the current subprime mortgage meltdown. It’s certainly true that many prime and subprime borrowers who are facing foreclosure didn’t understand the language and terms in the loans they got.

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Homeowners who anticipate higher payments on a Washington Mutual adjustable-rate subprime mortgage can apply for assistance, the Seattle-based thrift said Wednesday in a statement.

One of the options is a 30-year, fixed-rate loan that charges half a percentage point of interest less than borrowers would otherwise pay.

Washington Mutual has about $20.4 billion in subprime loans on its books, or about 9 percent of the $217 billion loan portfolio. Late payments on subprime loans industrywide reached a four-year high in 2006, according to the Mortgage Bankers Association, and foreclosure filings jumped 47 percent last month from a year earlier, RealtyTrac Inc. reported Wednesday.

“Customers who work with us to develop a payment plan are more likely to succeed in avoiding foreclosure and balancing other household financial obligations,” David Schneider, president of Washington Mutual’s home loans group, said in the statement.

The program is available only to subprime-mortgage customers whose payments are up-to-date. The company said it also has a group focused on helping borrowers who are behind on payments to keep their homes.

Shares of the thrift gained the most since May 2004, rising $2.04, or 5.1 percent, to $42.17. The stock has fallen about 5.1 percent in the past year, trailing the KBW Bank index’s 7.4 percent gain.

Washington Mutual reported after the markets closed Tuesday that first-quarter profit declined 20 percent as losses mounted on subprime mortgages.

At the same time, the company reported a better net interest margin, the difference between what it pays for deposits and what it charges for loans.

Chief Executive Officer Kerry Killinger said Washington Mutual was hurt during the first quarter by “unprecedented deterioration in the subprime mortgage business,” according to remarks prepared for a conference call Tuesday.

Found here.