Homeownership is something many view as a quintessential part of the American dream. Demand for affordable homes continues to increase as people try to compete for a chance to own their house. Others are sitting back and enjoying the home they already own, and working to maintain their mortgage payments.
As a kid, we hear the term ‘mortgage’ and it can sound strange, funny, or even aloof. Today, most of us know that a mortgage is a financial tool used to purchase a new home or maybe even update or remodel your existing one. But what really is a mortgage?
Since 1934, the Federal Housing Administration, or FHA, has helped educate and define homeowners on the concept of mortgages. FHA provides affordable financing programs geared to making homeownership possible for consumers and local communities2.
The benefits and costs associated with FHA Streamline loan financing solutions for your next mortgage refinance can vary. If obtaining a lower rate and term are generally the main goal. Refinance costs can generally be built into the loan. There may be potential income tax deductions and time value of money in the refinancing calculations. For this, you may want to seek the advice of a CPA for this.
According to the Consumer Financial Protection Bureau, or CFPB a mortgage is defined as “an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest1.”
To put it more simply, a mortgage is a home loan. The home is used as collateral so that in the event you do not make your loan payments, as the lender has the right to recoup their loss by re-taking the property. In this regard, it is considered a secured loan, as the real estate is the collateral that secures the debt.
A mortgage puts a lien on a property, which is recorded (in most cases) and made part of the public record for that particular property. A lien is essentially a documented legal claim to that particular piece of property you own.
The lender is often referred to as the lien-holder. The lender holds the claim to the property until your loan is paid off and satisfied. At this point, the lien (or claim to the property) is released to you. The property then can be placed in an LLC, or other format if you desire.
In an example of a purchase: when you purchase a home from someone, the seller’s lien is usually paid and satisfied and your lender establishes a new lien on the subject property. In other words, when you refinance a mortgage, the old mortgage is paid off and the lien satisfied, replaced by the new loan, credit, and repayment terms.
A mortgage refinance can be a great tool for homeowners looking to tap into available equity in the home or even obtain more favorable repayment terms.
Benefits to Purchase
For first time home buyers, you may wonder how the home buying process works. How to buy your dream home and be on the right mortgage plan as not all programs are created equal. First, you want to consider your down payment, including bank deposits, liquid securities, gifts and any retirement plans. In a 401k, you may be eligible to withdraw up to $10,000 without being taxed on it. You should first consult your CPA prior to withdrawal just to be safe as this is prudent.
You should consider if it is possible for a seller concession, this means the seller will contribute towards your closing costs. Some mortgage programs will allow up to 3%, others will allow up to 6%.
By obtaining an appraisal, this provides the value of the property to you for the sole purposes of the loan. You may not want. to share this information with the seller as this is something that you paid for.
For investors, purchasing a property can provide real income as the property hopefully appreciates. Investment properties have an inherit risk to them. If the renter fails to pay the rent, you may be stuck with negative cash flow.
Benefits to Refinancing
There are a lot of benefits to refinancing your mortgage. Many borrowers refinance simply to acquire better repayment terms. Examples include going from variable rate to fixed rate, extending the term of the loan to lower your monthly payment, or even to obtain a lower interest rate.
Other reasons why you might want to refinance is to utilize available equity in your home to pay for home improvements, consolidate debt, or even take advantage of other investment opportunities.
Completing Your Refinance Calculation
Regardless of the purpose of your refinance, it’s important to complete a refinance calculation of the tangible benefits of the transaction and the costs (including break even analysis) for obtaining the new loan. Therefore, you may wan to calculate or request the total cost of the loan.
Make sure you are paying special attention to page two of your Loan Estimate (LE), which outlines closing costs details for the loan and summarizes your estimated cash to close. If you have any questions about the process or how to complete your refinance calculation, New Century Mortgage can walk you through the entire mortgage refinance process.
Here are a few cost factors to consider when processing your refinance calculation:
Origination Fees and Points
Refinancing technically means you are re-apply for new credit, meaning a new credit application. Lenders often charge origination fees for evaluation and processing the transaction.
Make sure to review your Loan Estimate to see if an origination is being disclosed for your transaction. If you have a strong relationship with a particular lender, they may be incentivized to waive this charge, making your refinance all the more lucrative.
As the borrower, you may also choose to buy down the interest rate by electing to pay discount points. Points are a percentage of the loan amount. Therefore, one point is typically equal to 1% of the loan amount. These should also be listed on your Loan Estimate.
Prepaid Taxes and Insurance
While many borrowers decide to escrow for their property taxes and homeowners insurance as they don’t necessarily account for prepaid taxes and insurance as part of the “other costs” associated with refinancing. Pre-paids will be reflected in sections F and G on your Loan Estimate.
Your lender may also require an additional two month cushion for escrows as permissible by the Real Estate Settlement Procedures Act (RESPA). This protects the lender should you miss a mortgage payment. The amount collected may depend on your closing date.
A general rule of thumb is that the closer your closing date is to your last tax collection date, the less money you will be required to bring.
Title Insurance and Surveys
Title insurance and surveys may often be required by a lender to complete your mortgage refinance or purchase. However, you can save money by shopping for these services separately.
In addition, your lender should provide you with a list of service providers to choose from or you can proactively search and shop around for what meets your needs. If you find a vendor that is not on the list, just verify with your lender that provider is acceptable before moving forward with them.
If you have a copy of your previous title policy from a previous mortgage transaction dated within three years, you may be eligible for a credit and lowering the cost of a new policy. Similarly, it’s advisable to keep a copy of any recent survey as this might also save you time and money if required.
Underwriting, Processing, Doc Prep and Recording Costs
Lenders spend time and money processing a loan. Thus, with any mortgage transactions, there are usually processing costs. These include, but are not limited to, underwriting costs to pay the underwriter for reviewing the file, processing costs to have processors manage the file and order services, a cost to prepare the closing documents, and recording costs that are charged to record the mortgage with the county.
Above all, if you have questions about what a mortgage is, completing your refinance calculation, or FHA refinance solutions, contact New Century Mortgage, a preferred FHA provider. In conclusion, a mortgage is what you make of it. But at the end of the day, a mortgage is a tool that if used properly can benefit you.
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1 What is a mortgage? (n.d.). Retrieved May 28, 2020, from https://www.consumerfinance.gov/ask-cfpb/what-is-a-mortgage-en-99/
2 The Federal Housing Administration (FHA). (n.d.). Retrieved May 28, 2020, from https://www.hud.gov/program_offices/housing/fhahistory
3 Streamline Your FHA Mortgage. (n.d.). Retrieved May 28, 2020, from https://www.hud.gov/program_offices/housing/sfh/ins/streamline
4 FHA Streamline Refinance Loans – Learn About 2020 Mortgage Options. (n.d.). Retrieved May 28, 2020, from https://www.fha.com/fha_streamline_refinanc