Refinancing Jumbo Mortgages Made Easier

Are you sick of all the advertisements proclaiming that interest rates are under 5%, when you can’t get anything lower than 6.5%? Jumbo lenders feel your pain, and there may be a way around it.

Your Big Fat Mortgage Refinance

What can you do to get a lower interest rate today on a jumbo mortgage?

First, look up conforming and FHA loan limits in your area. You might be pleasantly surprised.Depending on where you live, you may be able to get a jumbo conforming loan from Fannie or Freddie or an FHA mortgage with a better interest rate. Conforming mortgage limits in higher cost areas range from $721,050 in Honolulu, HI to loans from $426,650 in Providence, RI.

But you should also consider FHA. FHA limits may be higher than conforming limits in some locations. If you live in Alameda County, CA, you can get an FHA loan up to $729,750, but only $625,500 with Fannie Mae. And if you have a duplex, triplex, or fourplex, your limits go way up.

Supersize a Jumbo Hybrid ARM

Jumbo 30-year mortgage rates are so much higher than comparable hybrid ARMs, which may be fixed for three, five, seven, or ten years. On a $625,000 mortgage, you may find a 30-year fixed jumbo interest rate at 6.5%, but a 5/1 hybrid is at only 5.25%. The 5/1 payment is only $3,451, $499 less than the 30-year payment of $3,950. Over a five-year period, you’d save almost $30,000. Or you could put your savings toward principal reduction and lower your mortgage balance by an additional $33,000 over 5 years.

Mortgage Refinancing: Two Loans Are Better than One?

Refinancing one loan with two loans?! Why? You might get a better deal by combining a conforming first mortgage with a second mortgage. Do some calculations to see if this makes sense, for example: a homeowner has a $525,000 jumbo mortgage and lives in Baltimore, where the conforming loan limit is $494,500. With a $494,500 first mortgage at 5% and a second mortgage of $30,500 at 8%, the blended rate is 5.17%.

In addition, home equity lines are typically much cheaper to process than traditional refinances. So if you save a couple of points on $30,500, that’s another $261 for you.

Watch Out for Fees When You Refinance

If you last shopped for a mortgage a couple of years ago, there have been changes. The advertised conforming interest rates you see aren’t always what you get. Fannie Mae and Freddie Mac add risk-based pricing adjustments, and unless you have a lovely credit score and a low loan-to-value ratio, a conforming mortgage rate might not be any better than refinancing a mortgage with a jumbo lender.

Mortgage Modification Might Help

Making Home Affordable modifications are available up to $729,750. If your jumbo mortgage is causing you hardship, you could qualify for a modification. Check your eligibility and then contact your lender.

Jumbo mortgage refinancing can be slightly more complicated, but the payoff is bigger too. A small improvement in your refinance rate equals greater dollar savings on larger loans.

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Your Adjustable Rate Mortgage: Blessing or Bomb?

As a loan officer I used to plot several graphs for my clients considering adjustable rate mortgages (ARMs). I’d routinely show them the best case, worst case, and most likely scenarios, and let them decide if they wanted the savings of the ARM or the safety of the fixed loan. If you’re trying to decide whether to keep your ARM today or refinance it, you can perform the same kind of analysis yourself.

First, Look at the Terms of Your ARM

Your paperwork should contain an ARM rider that should give you these pieces of information: Your start rate, your index, your margin, and any rate or adjustment caps and floors. For example, you might have a 3/1 ARM with a start rate of 4%, based on the 1-year LIBOR index, with a margin of 2%, annual adjustments capped at 2%, a lifetime cap of 10%, and a floor of 3%. Your 4% mortgage is set to adjust in a month; what will it do?

Check Your Index

You can find index data on most financial Web sites. The 1-year LIBOR index as of February 2010 is .85158. If your mortgage were adjusting today, you’d add your margin of 2% and get a rate of 2.852%!

Check Your Caps and Floors

But wait, there’s more. Your loan has a floor of 3%, which means that your rate can’t drop below 3% no matter what the LIBOR does. So you’d be at 3%, which isn’t bad. And that 3% is your best case scenario. So what’s your worst-case scenario? Check your caps–your rate can’t increase more than 2% per year. So, if you adjusted to a 3% rate next month, in a year the highest your rate could be go would be to 5%, then the following year to 7%, then 9%, then it would top out at 10% and stay there. So much for worst case.

What’s More Likely?

Best and worst case scenarios are extremes and unlikely to resemble the progress of your actual loan, especially over the long term. But you can predict a more likely and reasonable course for your mortgage. Here’s how: a search of “historical average 1 year LIBOR” online gets me the data I want. I dump it into a spreadsheet and I discover that the average of the 1-year LIBOR since its inception in 1990 is 4.623%. So we can add that to your margin of 2% for a total of 6.623%.

Yes, I could be a statistical stinker and make you calculate the expected value, but an average is a fairly good substitute and no one ever committed suicide trying to calculate an average. It’s a fairly safe bet, then, that your loan will adjust to 3% next month, 5% the following year, and then it may fluctuate around that 6.623% rate over the years–there’s no guaranty, but the longer you have your loan, the more likely it is that your rate will behave itself.

So, Should You Fix Your Interest Rate or Not?

That depends. Fixed rates today are about 5% if you have good credit–less than the average LIBOR ARM rate of 6.623%. You’d probably save money in the long run by refinancing. But what if you’re not in it for the long haul? If this house is a starter, or you have job transfers every five years or so, leaving your ARM alone is probably a safe bet. You know your rate won’t exceed 7% for at least three years.

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Refinance or Reamortize Your Mortgage?

When you’re just starting out, the best mortgage is often one that lets you make lower payments in the early years and bump them up them as your career takes off and your earnings increase. And there are many interest-only and ARM products available to meet this need. But what about as you near retirement? Is there a product for you, too?

Not really. The best mortgage for somewhat at the end of a career would let you pay more at the beginning, when you are in your peak earning years, and taper off to a lower payment when the pension kicks in. And there’s no such animal. Unless you create it yourself.

Prepaying Your Mortgage Now Gives You a Cushion Later

Once your retirement is fully funded, concentrate on prepaying your mortgage as much as you can afford. If you can refinance to a 15-year loan, by all means do so. If not, make whatever principal reduction payments you can. Say for example that you refinance today to a 30-year loan at 5.25%, and you plan on retiring in ten years. Your balance is $300,000. Using a mortgage amortization calculator, you can see that your payment is $1,657 per month and in ten years your balance would be $245,845. But you’re earning enough to pay $2,500 a month without causing yourself undue pain. So you add $843 to your payment. In ten years, your balance is only $113,176.

Now, here’s the good part. You don’t want to pay $2,500 when you’re retired. You don’t want to pay $1,657 either. By having your lender re-amortize your loan (many will do it for a $250 fee), you get a payment obligation of only $763 per month. This is because your prepaid balance is stretched out over the remaining 20-year term of your home loan, allowing you to pay more when you have it and less when you don’t.

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Bad Credit Refinance - Is it Possible?

With the current state of the economy, many people wonder about bad credit refinance - is it possible? Is it even desirable? Here to help sort out fact from fiction are a few tips on the pros and cons about bad credit refinance.

Tips on Bad Credit Refinance

Fiction: It's impossible to refinance today because banks aren't lending.
Fact: Bad credit refinance is still possible even in a difficult economy. Just keep in mind, without good credit you may not qualify for the best rates. However, that doesn't mean you won't save money. Many people with bad credit still save money or reduce their monthly bills by refinancing.

Fiction: Refinancing always makes sense.
Fact: Not everyone benefits from refinancing; in fact, for some people it can cost much more to refinance rather than pay down the terms of the original loan. Always calculate the full cost of refinancing, including closing costs and fees, and not just the monthly savings.

Fiction: Bad credit refinance ends up costing more in closing costs and other fees than it is worth.
Fact: Shop around for the best terms and rates to find a loan that fits your needs. Many people find they are able to recoup the cost of refinancing the loan within 1-3 years or even less.

Fiction: Bad credit refinance isn't a good idea because the government might not be willing to help once funds become available.
Fact: Following the mortgage crisis of 2009, the government made special funding available. As of 2010, only a few hundred people have taken advantage of the HOPE loans and other government sponsored initiatives. Currently there isn't any way of knowing what qualifications and criteria will be necessary in order to obtain assistance at a later date; on the other hand, locking in a solid fixed interest rate today assures your financial obligation is stable no matter what takes place in the future.

Fiction: I will be required to pay a lot of money out of pocket in order to refinance my home.
Fact: It is often possible to refinance with little to no money out of pocket. Closing costs and other expenses are easily rolled into most loan packages making it as affordable as it is easy to start saving money almost immediately. Just keep in mind, while it is simple to roll expenses into the closing cost it isn't always desirable since you will be effectively financing them for the entire term of the loan. If you are able to pay for closing costs and other fees out of pocket it is often preferable to do so when doing a bad credit refinance.

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Refinance Home Loan FAQ's

It is important to know exactly what to expect when applying to refinance home loan or mortgage loans. Here are some FAQ's or frequently asked questions and concern about how to refinance home loan or mortgage loans.

Refinance Home Loan FAQ

Q. What are the benefits when you refinance your home loan?
A. Refinancing allows many homeowners to lower monthly mortgage payments by reducing their interest rate, extending the loan repayment period or a combination of both. It also allows you to lock in a steady mortgage rate that won't go up or down over time if you select a "fixed" interest rate.

Q. Can I obtain additional funds when I refinance my home loan?
A. Yes, if you have extra equity built up in your home it is often possible to obtain a "cash-out refi" that provides cash at closing. The additional cash can be used to pay off high interest credit cards or car loans, put a child through college, remodel your home, take a vacation or almost anything else you desire. A cash out refinance is not available to everyone; in general you will need a substantial amount of equity in your home and above average credit in order to qualify. In some cases you may also need to begin paying PMI if you take too much equity out of your home, so explore your options carefully.

Q. Do I need equity in my home to refinance it?
A. It is possible to refinance a home loan with little to no equity but not all lenders write this type of loan. Much depends upon your individual situation, credit score and the value of the home.

Q. Do I need a new appraisal and survey if I want to refinance my home loan?
A. Yes, in most situations the lender will require a new and up-to-date appraisal and survey on the property prior to writing a new loan. If your existing survey is recent and no improvements have been performed on the property it might be possible to use an existing survey but it depends upon the lender.

Q. Is it better to modify my existing loan or apply for a mortgage refinance?
A. It depends. While some people may benefit from modifying an existing mortgage, most lenders usually extend the repayment period while adding interest without adding additional fees or closing costs associated with mortgage refinance. On the other hand, if you refinance your mortgage, you may be able to get reduced interest rates. Use an online mortgage calculator to compare the costs of each type of refinance home loan procedure.

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Home Refinance Advice

When it comes to a home refinance, things aren't always as easy as they may initially appear; learn how to protect yourself and get a great rate with this easy to use home refinance advice

Home Refinance Advice

1. Work with a solid lender. With the recent banking crisis it can be difficult to know which company is solid and which isn't. Take time to verify the credentials of the refinance lender and follow-up by making copies of all paperwork, communication and other transactions. In the event of a problem, you will have the information required to prove your position.
   
2. Don't fall for scams. Always verify the credentials of any home refinance provider prior to relating sensitive information including social security number, banking or credit scores. It's a good idea to check with the Better Business Bureau or other consumer regulatory agency in your state to confirm the agency is in good standing and eligible to write loans. Never do business with a company that requires large up-front fees to gain information or anyone that makes promises that sound too good to be true. Know what typical closing costs and other refinance fees will be before you sign.
   
3. Speak to a credit counselor. If you are interested in home refinance as a way to reduce monthly debt, it may be advisable to speak with a credit counselor first. Sometimes it is possible to restructure or modify current loans or debts to make them more affordable without having to refinance. Depending upon your specific situation, loan modifications, extended payment plans or other payment options may be less costly in the long run and provide the same relief for a fraction of the cost. Remember, the time to act is before you are in serious financial trouble. Plan ahead in order to keep all your options open and then make the best decision for your situation.
   
4. Get it in writing. Refinancing is a complex transaction where time is of the essence; everything from rate locks to points paid are subject to change so always be sure to get everything in writing. Never rely upon verbal approval only. In the event of a problem you will not have sufficient proof to substantiate your position.
   
5. Make copies of everything. You have probably heard the saying to err is human. Well, it certainly holds true when dealing with any type of paperwork. During the course of a mortgage or home refinance you will be required to submit many types of forms and documentation. Take a few extra minutes to make a copy of everything just in case it is needed later. Not only is it a great way to stay organized but it may help prevent the late submission of paperwork required to get the best rate.

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