See also the Articles of Interest at the bottom of this page for a variety of other information that may be useful to you..
You have put a lot into your home, and may be able to reduce your debt payment, or even get something out of the equity in your home when the need arises. If you have owned your home for at least 3–5 years, you may be among those who will benefit most from looking further into the information on this page.
Every real estate agent should track the following trends for their home buyers, and keep them informed about the advantages that may accrue to them when the time is right. Most real estate agents don't though, so it's up to you to make the effort necessary to determine whether you may benefit from changes in the market over time.
This page will be updated periodically to address factors which may affect refinancing options as conditions change. More in-depth and timely information is available on the Current Mortgage Rates and San Antonio Real Estate Market pages.
The topics in this section are: Avoiding Foreclosure, Caveat Emptor (cautions related to refinancing), Refinancing, Equity Financing, You May Be Able To Stop Paying PMI and Short Sales
The information on this page is not provided as financial advice to take any particular action. It is intended only to illustrate the factors that could affect your finances, and encourage and guide you through further research into your options. As in any major financial decision, visitors to this site should consult with a professional financial advisor prior to acting on the information herein provided.
No matter the circumstances, foreclosure is avoidable. For the lucky few who simply over-extended their debt by using an adjustable rate mortgage to finance a home up to their borrowing limit, but whose home value has not declined. Restructuring their debt is often a do-able alternative. If the financial problem is not calamitous, many another credit problem is curable as well.
The information on this page and the financial calculators available on this site may prove useful to those whose finances are not in total disrepair. For others whose fate befell cruel fortune's harsher calamities, the article "Loss Mitigation: Take Action Now to Avoid Foreclosure" will outline the available alternatives, including what a seller may need to know about short-sales.
If you have an adjustable rate mortgage (ARM), and the spector of an upward adjustment in your interest rate looms, do your homework before reacting to those TV and print media commercials and ads that promise low fixed rate loans. There are costs associated with refinancing that the advertisers do not mention which can make the effective rate you pay much higher, and you owe it to yourself to shop around for your best rate.
Use the mortgage calculators on the Financial Calculators page on this site to compare rates and loans, and see how the cost of refinancing affects the effective rate you pay.
If you bought your home or refinanced it within the five (5) years prior to 2007, the current interest rates may offer little advantage for you. This would be especially true if you own a home in one of the regional markets wherein property values have been stagnant or have declined over the last several years. You may however want to bookmark this page and read through the information in this section for its value to you in the future.
There are only four very brief "windows" over the past five years during which interest rates were below 5.25% which may have made it worthwhile to refinance. If you secured an ARM during one of these windows, and expect to remain in your home indefinitely, further research and consideration of your refinancing options may be worth your while.
There are differences in the rates charged for different kinds of loans (fixed rate vs. adjustable rate), and keep in mind that points and loan origination fees for a new loan will make a difference in the extent of any advantage that refinancing may have for you. Another possible fee is a prepayment penalty on your current loan, especially if you financed through an option adjustable rate mortgage during the past few years.
At this juncture, you need invest only your time to compare rates—the rate you are paying vs. the current rates—and find out what those lender fees may be. The information on the Current Mortgage Rates page and the mortgage loan calculators on this site may be a good place to start.
You should also read carefully the terms of your current mortgage financing. Is there a prepayment penalty that is applicable to your situation? If so, how putative is it, and what effect will it have on the effective rate you pay.
Remember too that there is another side to that coin that the lender dot coms would rather you did not see. If you refinance using one of their "low fixed rate" plans at the wrong time, you risk losing out on any reduction that may be available to you at some future adjustment in your rate if the rates go down—and you can find better rates and terms on the Current Mortgage Rates page.
If you do take the risk, shop around for your best rate and terms.
The motivations for converting the equity in a home are somewhat different than those for refinancing. Regardless of the current mortgage rates, the rates for equity financing will likely beat the rates for other forms of financing or the lost revenue from cashing in on high yield investments for such things as college tuition,* your daughter's lavish wedding, a "dream" vacation, the downpayment for a second home in the Poconos (or elsewhere). If you want to retire credit card debt, equity financing will almost certainly afford among your best alternatives.
There are three basic ways you can cash in on the equity in your home: a Home Equity Loan; a Home Equity Line of Credit (HELOC); and a Federally insured Home Equity Conversion Mortgage (HECM—also known as a reverse mortgage). The Home Equity Loan and HELOC are loans with repayment schedules. The HECM is available only to home owners who are at lease 62 years of age, and which is repaid out of the proceeds of the sale of the home. Click here for more information about the Federally insured HECM.
Home equity loans and HELOCs are generally available for amounts up to the difference between the remaining mortgage debt and 80% of the current market value of your home at the most competative rate. In example, the owner of a home that appraises for $200,000 with a remaining mortgage balance of $100,000 will be able to borrow up to $60,000: ($200,000 x 80%) - $100,000=$60,000. Higher loan to value ratio (LTV) loans are available, but usually at higher rates and the additional expense of Private Mortgage Insurance (PMI).
HELOCs are typically used to pay off other high interest rate debt, like credit cards, or major expenses, like college tuition. They carry higher rates than home equity loans, often up to 1.5% higher, but the payment on a HELOC is only on the funds that are actually withdrawn. Moreover, the interest paid on the withdrawals are tax deductable. Discuss your alternatives with a professional financial advisor.
Recently, open-ended HELOCs have become available, but not in Texas. The amendment to the state constitution in 2003 that made them and other equity loans available limits the amount borrowed on a HELOC, prohibits the use of debit cards and checks for withdrawals, and mandates withdrawals of no less than $4,000.00, making the loans unavailable.
Open-ended HELOCs are however available in most other locales, and have the unique advantage of allowing for rapid repayment of the mortgage. What is termed a Money Merge Account, introcuded in 2002 by United First Financial, in Utah, the accounts use what they term an Advanced Equity Line of Credit (ALOC). It is essentially an home equity line if credit (HELOC) that operates similarly to a primary checking account. The open-end interest calculation allows for multiple adjustments to the principal balance each month, both up and down.
The open ended feature of the ALOC allows any deposit made to a MMA to generate an interest offset on the mortgage principal each time income is deposited into the account. The deposits register as a decrease to the mortgage balance, and adjust up and down through the month as funds are deposited and withdrawn. The total offset for the next month's payment is the average deposit over the preceeding month.
The effect of this is that the interest that accrues against the principal is reduced by the average deposit, allowing a larger portion of the next month's payment to apply against the principal balance. Additionally, any money that is not spent remains against the balance of the mortgage loan in successive months. When added to the deposits made each month, interest charges are further offset.
At the least, borrowing on your home's equity will entail paying for an appraisal to determine its value, and various fees that may be charged by the lender for processing the loan. Rates, terms and fees vary widely, and differ between the two types of loans.
If you are considering an equity financing alternative to meet some financial need, knowing the equity in your home is an essential starting point for your research. Before hiring an appraiser, ask the real estate agent who sold you your home to do a comparative market analysis (CMA) for you as a favor, and consult with a professional financial advisor to determine your best alternative. The information on the Current Mortgage Rates page and the calculators on the Financial Calculators page of this site may be helpful as well.
* College tuition is often cited as a reason for getting an equity loan. A little research should be done though to determine whether student loan rates may currently be competative with the rates for equity financing. As of this writing (01/28/07), the US Congress is considering an initiative to make them more affordable. Consult with a professional financial advisor prior to taking out equity financing.
If you financed using an FHA insured loan or put less than 20% down on a conventional loan for the purchase of your home, it is important to understand that appreciation in your home's value can potentially build equity in your home far more quickly than amortization—and they work together to reduce your loan to value ratio (LTV)! You may be able to take proactive action to stop paying the Mortgage Insurance Premium (MIP—FHA loans) or Private Mortgage Insurance (PMI—conventional loans) sooner, often much sooner.
MIP on FHA loans is generally considered to be due each month, regardless of the loan to value ratio (LTV), and is not subject to the same legal requirement for PMI. It can however be canceled, but requires the cooperation of the lender. See Discontinuing Monthly Mortgage Insurance Premium Payments on the HUD Web site for more information. While you are at it, see FHA Refunds & Distributive Shares to determine whether you may be due a refund from HUD.
PMI is based on the loan to value ratio (LTV), and the purchase price of a home rarely reflects its value years after its purchase. Since lenders are required by law to automatically terminate PMI only after the LTV of an amortized loan reaches 78:100 (78% & equity=22%), you could wait as much as 11 years (+/-) for it to happen. In a healthy real estate market, wherein real property values are appreciating, it may be possible to cut that time in half—or less.
In example, assume that you financed a 0% down mortgage loan of $100,000 at 6%. Your PMI would be $41.67 per month over the 11½ years it takes for the LTV to amortize down to 80%. But, if property values in your neighborhood are appreciating at as little as 5% per year, the LTV will reach 80% in about 3½ years! The value of improvements on the property can also affect the LTV if they are not part of your debt structure. If you would like to see for yourself how this works, click here to download a spreadsheet (Microsoft Excel 97 format) that will demonstrate how appreciation works together with amortization to decrease your mortgage LTV.
How and when you may be able to terminate the MIP/PMI will depend on the terms of your loan. You will also need to pay for an appraisal to verify the present value of your home, and your lender may also charge a fee (or fees) for early retirement of the PMI requirement.
There are two things you should do before going to your lender and requesting that the MIP/PMI requirement be retired. First, review the terms of your mortgage loan to see whether the terms of the loan explicitly exclude the possibility of early retirement of the PMI requirement. Your loan papers are legal documents, so be sure to consult with an attorney if the terms are not clear to you.
Next, if the real estate agent who sold you your home is not already on top of this, and providing you with the information you need, ask him/her to provide you with a comparative market analysis (CMA) as a favor—before you hire an appraiser. Explain the reason for your request, and remember the service he/she provided when you are ready to sell. Your agent will appreciate the repeat business.
If you can't locate the agent who sold you your home, contact me and I will be happy to help. Please make it clear that you are following up on the information on this page, and that you are not currently in the market.
Armed with this knowledge, contact your lender and ask whether you may retire the MIP/PMI requirement. It's worth a shot.
Though not the best of all outcomes, short sales are sometimes the best outcome available to home owners who have fallen into financial difficulty. This is not just an option for those who obtained adjustable-rate loans diring the sub-prime lending fiasco. Anyone experiencing a sudden loss of income due to injury, bad health or loss of income for other uncontrollable circumstance can use this option. Instead of reinventing the wheel, I recommend referring to the About.com Article on Short Sales.
