Pros and cons of an adjustable rate mortgage

Many people have heard bad things about ARM, or adjustable rate mortgages, but there are just as many advantages to refinancing your home with an ARM as there are disadvantages. If you are considering refinancing your current home loan, and have a fixed rate home loan at the moment, an ARM loan is definitely worth looking at, as far as saving money on your repayments, and getting a better interest rate goes.

What Is An Adjustable Rate Mortgage?

An adjustable rate mortgage is a home loan that has significantly lower interest rates than any offered fixed rate mortgage at any given time. These adjustable rates on an ARM can change over the life of the loan in accordance with current markets and trends, unlike a fixed rate mortgage where the rates are never subject to change over the life of the loan.

What Are The Benefits?

By far the greatest benefit of refinancing, using the adjustable rate mortgage option is the savings gained by having a lower interest rate. It is hard to believe, but a small difference in interest rates, such as half a percent, over the course of a year can equate thousands of dollars.

What Are The Risks?

There are risks involved when you refinance with an adjustable rate mortgage loan. The riskiest type of ARM loan is the type that has no fixed term attached to it. Although the interest rates will be even lower than the average rates offered on a fixed term ARM loan, the rates on an ARM loan that isn't fixed are subject to change monthly, or yearly. An ARM loan that is fixed for a particular period, such as 5 years, is much safer, because you are getting a very low interest rate, locked in over a period of five years.

Who Will Benefit From An Adjustable Rate Mortgage?

Almost anyone can benefit from a fixed rate ARM mortgage. According to financial statistics many American families either sell their homes, or refinance after four years. If you are like many others, having a 5-year fixed ARM loan there is very little risk, with a much lower interest rate on offer.

The only risk is that after the 5 years is over on a fixed rate, if you can't refinance, or choose not to sell, and interest rates do get higher, you will have to pay more on your repayments. The ARM rate is especially helpful to lower income bracket families, or for those who want to pay their home off quicker than they are already.
By keeping your monthly repayments the same, and refinancing to an adjustable rate mortgage with a much lower interest rate, the money that you are saving because of the lowered interest rates can be coming directly off your principal each month. This can mean you are shaving years off your mortgage, without paying anything more than you were before you refinanced.

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Tax Benefits of Refinancing

The tax benefits of home ownership can potentially save you hundreds of dollars every month. With a little planning you can make sure the dollars you save in refinancing your mortgage stay in your pocket. You might just discover previously unknown tax deductions along the way.

Itemized Deductions
In the early years of the life of a loan, payments are mostly on the interest owed rather than on the principle. If you itemize your deductions instead of using the standard deduction, you might stand to benefit . If you and your spouse file jointly, you can deduct interest payments to a maximum of $1 million. For example, let's say your original mortgage was $300,000. You might take out a new $350,000 refinanced mortgage and pay two points, or $7,000. (A point is an interest charge equal to 1% of the total loan amount that is paid upfront on the close the loan.) As seen by the Internal Revenue Service, the first $300,000 of your new loan is treated as home-acquisition debt. The interest paid on this debt qualifies as an itemized deduction. The $50,000 balance of the new loan is treated as home-equity debt and also qualifies as an itemized deduction. You can amortize the home-acquisition-debt points over the life of the loan. The points related to the home-equity debt can be amortized in the same proportion as the interest, but make sure the home-equity debt is $100,000 or less and the value of the home isn't exceeded by the acquisition debt plus the home-equity debt.

Home Improvement
If your refinanced mortgage is more than your original loan, you can use the difference to improve your home and deduct a dollar amount equal to the percentage of points paid in the first year. Anything within reason that improves your property value, such as improving the back deck or repairing the driveway, can count towards the deductible interest. Interest taken out for expenses not related to home improvement can also be taken as a deduction, but only within certain guidelines. But remember, the maximum deduction in 2007 for the life of the loan is $100,000.

Amortization: Pros and Cons
The points you'll pay when you first purchase your home are deductible in the tax-year in which the property was purchased. For example, if you paid one point on the origination fee of your new $300,000 home, your tax deduction that year will be $3,000. When you refinance your mortgage, the deduction for the amount paid will be amortized over the course of the loan, but the savings will still add up. Returning to the example, if you pay two points on the $350,000 loan when you refinance, the tax deduction of $7,000 would be amortized over 30 years. But, if you decide to refinance again, or you sell the house, you can write-off the unclaimed portion of the deduction. Additionally, i f you have refinanced before, you might have unamortized points that would be allowed in full the year you refinance.

You can learn more about the tax benefits of mortgage refinancing from the IRS Publication 936,Home Mortgage Interest Deduction , and by c ontacting your local tax advisor.

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The 7 Habits of Highly Effective Mortgage Brokers

Honesty is the most important aspect in dealing with mortgage brokers. Unfortunately not all brokers are honest. Being aware of the following good practices will help you pick the best mortgage broker and get the best refinance deal.

Habit 1: Not favoring their own loan product

You need to be aware if the mortgage broker is also a lender, i.e. do they have their own loan products? If they do, and they offer there own product, there needs to be a clear, understandable reason why their product is the best choice for your situation.

Habit 2: Unbiased lender choice

Mortgage brokers get commission from the lender you end up borrowing from. You will need to ask them to be up front about the amount of commission they are receiving from the lender. The best mortgage brokers are honest and won't mind you asking this question. The dishonest ones will think twice about doing the wrong thing by you.

Habit 3: Giving you the real cost of the mortgage

Make sure the broker provides you with the annual percentage rate (APR), when looking at or comparing any home loan products. The annual percentage rate shows you the real cost of a home loan by taking into consideration all the foreseeable fees and charges associated with the loan. This is so you can easily compare home loan products.

Habit 4: Providing all the information

You need to know the whole deal. What is the whole service provided by the broker. Do they provide ongoing service and assistance after you secure your loan? If so, find out for how long. Also, what are the fees involved? Theirs and the lender’s. The best mortgage broker will make this clear before any papers are signed.

Habit 5: Insuring client understanding

You need to understand what the benefits and the drawbacks are for you. The best mortgage brokers will explain this to you in a clear way, so you can understand it. This is so you can weigh it up and decide for yourself if refinancing is actually in your best interest. As stated inDangers of Refinancing there are some bad practices out there, e.g. churning. Making sure you understand the benefits and drawbacks will make it impossible for you to fall victim to this practice.

Habit 6: Being insured

The brokers need to have their own professional indemnity insurance? This protects professionals against liability claims resulting from negligent work. All lenders will have it. However the brokers should not assume they are covered by the insurance of an umbrella organization. The broker needs to know for sure if they are or are not protected.

Habit 7: Being qualified

Is the broker qualified to give you lending advice? All countries have reputable organizations that regulate their mortgage industry and can provide brokers with membership or certificates of credentials, provided they undertake certain courses. Make sure the broker your dealing with has the proper membership or credentials and is qualified to refinance home mortgages. In the United States the American Association of Residential Mortgage Regulators (AARMR) and National Association of Mortgage Brokers (NAMB) are two such companies.

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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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