Chicago Area Mortgage Refinance – Take Advantage of the Lowest Rates Ever
16th August 2011
** This is a re-post of a previous article, but it is applicable now.
We live in interesting times. Over the last several years we have seen a series of refinance booms as rates dropped to what had previously been unthinkable rates. Each time rates dropped we were sure 
they couldn’t go any lower. But here we are again, and mortgage rates are the lowest they have been since they’ve been keeping track of mortgage rates. The reason for the drop in rates is due to fear of softness in the economy, and this isn’t good news. But when you , if you can save money by refinancing your mortgage this could help by lowering your monthly payment or cutting years off your loan and paying your house off early.
Why should you consider refinancing?
- You can lower your interest rate and payments.
- You can shorten your loan term and pay your mortgage off early.
- You can take cash out for home improvements, college expenses, investments, or whatever your needs may be.
- You can restructure your debts with a refinance to get rid of your high interest credit card balances and save hundreds of dollars per month.
- If you bought with a low down payment, you can often refinance to get rid of mortgage insurance or your higher rate second mortgage.
-
You can get rid of an adjustable mortgage and lock in to a fixed rate.
These are just a few reasons you may want to take on a new mortgage. It is important, though, to make sure you know why you are refinancing and that it is really in your best interest. Refinancing isn’t the slam dunk easy transaction it was a few years ago. With home prices down this makes it harder for some homes to appraise out where they need to be, and mortgage guidelines are tighter than they were before, too. But there are programs which make it easier to refinance even if you don’t have a lot of equity (or even no equity) in your home.
The FHA Streamline Refinance -This is available only if you already have an FHA mortgage. This is still the easiest and most inexpensive mortgage around, but it won’t help many of the people who need it most. The problem is that you may be able to lower your rate and your mortgage payment, but you will take on the new mortgage insurance rate, which is about twice as high as it used to be. But for those who fit in, it can lower your rate an payment you can refinance without a new appraisal and roll some of your costs into the new loan.
Fannie Mae and Freddie Mac Home Affordable (Obama Refinance) – With these programs you can lower your mortgage rate even if your home value has gone down, and mortgage insurance will be based on what it was when you originally took on the loan (so if you didn’t have it then, you won’t have it now).
And of course, if you have been in your home for a while and have equity built up, you will have a lot of options to refinance in a way that best meets your long term needs. The big question then, is when does it make sense to refinance your mortgage? Refinancing can make a lot of sense if you are lowering your rate and payment without having to pay a lot up front. The more you have to pay to close the loan, the longer it will take for the lower mortgage payments to pay off the higher cost of getting the loan. This can still make sense if you are sure that you will be in the home for a long time, and you want to lock in the lowest rates. But too often the lowest rate isn’t the best value.
Mortgage pay Back – When does it make sense to refinance?
If you are thinking of refinancing your mortgage, you should always do a break even or pay back calculation. For this you need to know 3 things:
- How much will you save by refinancing?
- How much will it cost to refinance?
- How long do you think you will stay in the home, and with this mortgage?
The first step is to determine how much you will save. For an example, if you now have a mortgage with a $200,000 balance and a 5.00% interest rate., your mortgage payment is about $1,073 per month. Now, if current rates are at 4.25% (this is only an example. Call me if you want a personal quote) the new mortgage payment would be $984 per month. The lower rate means a savings of almost $91 each month. This is a great savings, especially when you look at it over the life of the loan, But does it make sense to refinance? Maybe. We still need to know more, though.
The next step is to find out how much it will cost to refinance. This is where it can get confusing. If you have spent any time on the Internet, you’ve seen lots of ads for mortgage companies claiming they offer the lowest rates. But low rates don’t mean a thing if you don’t look at the closing costs too. I’ve seen closing costs differ by as much as $6,000, so this is something that can make a huge difference. Closing costs include title fees, the cost of the appraisal and bank charges as well as points – which are upfront financing charges.
The difference in closing costs can make a big difference in whether the loan makes sense, or not. If you are paying $1,800 in total closing costs, it will take you about 19 months to payback the closing costs with the $91 savings from your new rate. After that, every payment you make will be a true savings. But if that same loan cost $6,000 to close, then it would take over 5 years before you would get any benefit at all from refinancing. So the lowest rate isn’t always the best deal.
The last question, is how long you do you expect to be in your home and in the mortgage. If you plan to stay in the home for at least 10 years, then paying more to get a better rate might be the best strategy, especially if you think (like I do) that rates are about as low as they will ever go. But most people don’t stay in their home forever. If you aren’t sure how long you will stay in your home, you might be better served by getting a loan with lower closing costs. Even though the rate and payment may be a little higher, your savings will come much quicker.
No/Cost Illinois Mortgage Refinance
We can take this idea one step further. When rates are down, the biggest obstacle to homeowners lowering their payments and taking advantage of the low rates is the cost of refinancing. The more that the loan costs, the longer you will need to be in the new loan before refinancing makes sense. So if a loan costs a lot up-front, it takes a big improvement in the rates before it is worth doing. On the other hand, if there are no costs at all, a small reduction in the rates can save you a lot of money over time.
With a no-cost refinance we use the yield spread premium (the money that the wholesale or end lenders pay us to bring them the loan) to pay for the closing costs. When I price loans I have several different options. Every day the lenders we deal with send us new price sheets. These sheets have matrices which allow us (the mortgage banker or broker) to price the loan in different ways. It is common in the Chicago area to price a loan to show no points or origination fees, but with the customer paying the normal costs at closing. If someone wants a lower rate, I can price it so that they pay more money up-front (points) and get a lower interest rate. We can also do it the other way, offering you a slightly higher interest rate (where the lender pays us a higher premium) and we can use part of this premium to cover all your closing costs.
Here is how it works. If you have a mortgage with a balance of $250,000 and an interest rate of 5.75%, your loan would have a monthly payment of $1,458 for principal and interest. If rates drop. and you are able to refinance at 4.50%, your new payment will be $1,267, for a savings of $191 per month.
In order to do the loan with no closing costs, we raise the rate a little to cover the costs. How much the rate increases depends on the size of the loan, but in most cases the loan will be just an 1/8 or 1/4 point higher. So with our example, if you could refinance at 4.50% with closing costs, the rate would be 4.625% with no closing costs. So the payment now goes up to $1,285 per month, or $17 per month higher. The monthly savings are lower, but with no closing costs , you have no investment in the mortgage at all. This works especially well for people who don’t plan on being in their home or their mortgage forever.
No-cost refinances work best when the loan amount is higher. In many cases we can do a no-cost refinance for the same rate as other companies are doing full cost loans. Smaller loans, those under $150,000 are harder to do without any cost. The smaller the loan the higher the interest rate would need to be in order to cover all the closing costs. This won’t be the best route for everyone, but, depending on your situation, it could be a great option.
Things to watch out for
A true no/cost refinance means that you are not paying any fees or costs to get the loan. This is different than adding the fees and costs back into the loan. This means that your mortgage will be larger, and you will be paying the costs of refinance over the years you have the loan. There is no money coming out of your pocket at closing but you are still investing extra money. If you sold the home or decided to refinance again later, the money you paid will be gone. In some situations this could be the right way to go, but it is not a no-cost refinance. You need to know exactly what it is you are signing up for.
Peter Thompson 630-479-6424
Illinois Mortgage Rates First time home buyer loans
Chicago Mortgage Refinance
Posted in Refinancing, Shopping for a Mortgage | Comments Off
downgrade of US debt . So as investors sold out of stocks, where did the money go? Right into the now lower rated US debt. The markets have spoken, and as dysfunctional and debt ridden as we are, the United States is still the benchmark, and still considered the safest port in the storm. The European Union is trying to hold itself together as the ground is crumbling. The big news there last week was that France, after Germany the second strongest economy in Europe, was about to get a downgrade of its own. The hope has been that Germany and France will join together to back a new Euro-bond which will bail out the weaker countries, but as the crisis deepens, the stronger countries are looking at what is best for them. The result has been extreme volatility in all markets. The Dow lost 600 points on Monday, rebounded 400 points on Tuesday and was close to where it started by the end of the week. Mortgage bonds, which are the basis for 
stock market plunging , a ray of hope for the weakening economy with the monthly jobs report, and ended with a bang, after the markets closed, with Standard and Poors (one of 3 private rating agencies) downgrading the credit rating of the United States. This all has the feeling of August 2008. Strap on your belts, this roller coaster is going to be a crazy ride.
to pay their bills. Initially, the bottleneck was with the most conservative Republicans in the House of Representatives. These Tea Party backed congressman, mostly freshman elected last year, wanted cuts over and above what the Republican leadership sought, and only agreed to a deal with a balanced budget amendment added in (which has no chance of ever passing). A Democratic bill in the Senate designed to meet the Republican demands (no new revenue sources, deep cuts in spending) stalled quickly as most of the Republican delegation signed a letter stating that they wouldn’t support it, meaning the bill would be filibustered and never brought up for a vote. So it was back to the drawing board with the clock ticking down. Sunday night a new agreement was reached, one that was acceptable to both Republican and Democratic leadership, and that the President will sign off on. This still isn’t a done deal, though. Many Republicans are angry at triggers in the bill that could slash defense spending, and many Democrats think their leadership gave away the store and are threatening to try and kill the bill. It is still likely that this, or something close will go through and we will avoid a default. But this whole charade is an example of pure politics and government at its worst, and the uncertainty this debate has raised can’t be good for confidence in the economy going forward.