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Is Your Mortgage Forbearance Ending Soon? What To Do Next

July 14, 2020

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Millions of Americans struggling to make their monthly mortgage payments because of COVID-19 have received relief through the Coronavirus Aid, Relief, and Economic Security Act.

But mortgage forbearance is only temporary, and set to expire soon, leaving many homeowners who are still struggling perplexed on what to do next.

Enacted in March, the CARES Act initially granted a 180-day forbearance, or pause in payments, to homeowners with mortgages backed by the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Furthermore, some private lenders also granted mortgage forbearance of 90 days or more to financially distressed homeowners.

According to the Mortgage Bankers Association, 8.39% of loans were in forbearance as of June 28, representing an estimated 4.2 million homeowners nationwide.

So what are affected homeowners to do when the forbearance goes away? You have options, so it’s well worth contacting your lender to explore what’s best for you.

“If you know you’re going to be unable to meet the terms of your forbearance agreement at its maturity, you should call your loan servicer immediately and see what options they may be able to offer to you,” says Abel Carrasco, mortgage loan originator at Motto Mortgage Advisors in St. Petersburg, FL.

Exactly what’s available depends on the fine print in the terms of your mortgage forbearance agreement. Here’s an overview of some possible avenues to explore if you still can’t pay your mortgage after the forbearance period ends.

Extend your mortgage forbearance

One simple option is to contact your lender to request an extension.

Homeowners granted forbearance under the CARES Act can request a 180-day extension, giving them a total of 360 days of forbearance, according to the Consumer Financial Protection Bureau.

The key is to contact your lender well before your forbearance expires. If you let it expire without an extension, your lender could impose penalties.

“If you just stop making regular, scheduled payments, you could have a late mortgage payment on your credit,” warns Carrasco. “That could severely impact refinancing or purchasing another property in the immediate future and potentially subject you to foreclosure.”

Keep in mind, though, a forbearance simply delays payments, meaning they’ll still need to be made in the future. It doesn’t mean payments are forgiven.

Refinance to lower your mortgage payment

Mortgage interest rates are at all-time lows, hovering around 3%. So if you can swing it, this may be a great time to refinance your home, says Tendayi Kapfidze, chief economist at LendingTree.

Refinancing could come with some hefty fees, however, ranging from 2% to 6% of your loan amount. But it could be worth it.

A lower interest rate will likely lower your monthly payment and save you thousands over the life of your mortgage. Dropping your interest rate from 4.125% to 3% could save more than $40,000 over 30 years, for example, according to the Consumer Financial Protection Bureau.

“Lenders have tightened standards, though, so you will need to show that you are a good candidate for refinancing,” Kapfidze says. You’ll need a good credit score of 620 or higher.

As long as you’ve kept up your end of the forbearance terms, having a mortgage forbearance shouldn’t affect your credit score, or your ability to refinance or qualify for another mortgage.

Ask for a loan modification

Many lenders are offering an assortment of programs to help homeowners under hardship because of the pandemic, says Christopher Sailus, vice president and mortgage product manager at WaFd Bank.

“Lenders quickly recognized the severity of the economic situation due to the pandemic, and put programs into place to defer payments or help reduce them,” he says.

A loan modification is one such option. This enables homeowners at risk of default to change the terms of their original mortgage—such as payment amount, interest rate, or length of the loan—to reduce monthly payments and clear up any delinquencies.

Loan modifications may affect your credit score, but not as much as a foreclosure. Some lenders charge fees for loan modifications, but others, like WaFd, provide them at no cost.

Put your home on the market

It may seem like a strange time to sell your home, with COVID-19 cases growing, unemployment rising, and the economy on shaky ground. But, it’s actually a great time to sell a house.

Pending home sales jumped 44.3% in May, according to the National Association of Realtors®’ Pending Home Sales Index, the largest month-over-month growth since the index began in 2001.

Home inventory remains low, and buyer demand is up with many hoping to jump on the low interest rates. Prices are up, too. The national median home price increased 7.7% in the first quarter of 2020, to $274,600, according to NAR.

So if you can no longer afford your home and have plenty of equity built up, listing your home may be a smart move. (Home equity is the market value of your home minus how much you still owe on your mortgage.)

Consider foreclosure as a last resort

Foreclosure may be the only option for many homeowners, especially if you fall too behind on your mortgage payments and can’t afford to sell or refinance. In May, more than 7% of mortgages were delinquent, a 20% increase from April, according to mortgage data and analytics firm Black Knight.

“When to begin a foreclosure process will vary from lender to lender and client to client,” Sailus says. “Current and future state and federal legislation, statutes, or regulations will impact the process, as will the individual homeowner’s situation and their ability to repay.”

Foreclosures won’t begin until after a forbearance period ends, he adds.

The CARES Act prohibited lenders from foreclosing on mortgages backed by the government or government-sponsored enterprise until at least Aug. 31. Several states, including California and Connecticut, also issued temporary foreclosure moratoriums and stays.

Once these grace periods (and forbearance timelines) end, and homeowners miss payments, they could face foreclosure, Carrasco says. When a loan is flagged as being in foreclosure, the balance is due and legal fees accumulate, requiring homeowners to pay off the loan (usually by selling) and vacating the property.

“Absent participation in an agreed-upon forbearance, deferment, repayment plan, or loan modification, loan servicers historically may begin the foreclosure process after as few as three months of missed mortgage payments,” he explains. “This is unfortunately often the point of no return.”

The post Is Your Mortgage Forbearance Ending Soon? What To Do Next appeared first on Real Estate News & Insights | realtor.com®.

6 Things Your Mortgage Lender Wants You To Know About Getting a Home Loan During COVID-19

May 29, 2020

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Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.

But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.

Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.

1. Rates have dropped, but getting a mortgage has gotten more complicated

First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.

That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.

“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”

Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.

As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.

“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.

2. Be ready to prove (many times) that you can pay a mortgage

If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.

“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”

Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.

Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”

3. Your credit score might not make the cut anymore

Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.

“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.

Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.

“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.

4. Forbearance isn’t forgiveness—you’ll eventually need to pay up

The CARES (Coronavirus Aid, Relief, and Economic Security) Act requires loan servicers to provide forbearance (aka deferment) to homeowners with federally backed mortgages. That means if you’ve lost your job and are struggling to make your mortgage payments, you could go months without owing a payment. But forbearance isn’t a given, and it isn’t always all it’s cracked up to be.

“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”

You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.

To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.

If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.

After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.

5. Don’t be too fast to refinance

Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.

“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”

If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.

“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.

6. Now could be a good time to take out a home equity loan

Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.

“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”

Just be careful not to overimprove your home at a time when the economy and the housing market are both in flux.

The post 6 Things Your Mortgage Lender Wants You To Know About Getting a Home Loan During COVID-19 appeared first on Real Estate News & Insights | realtor.com®.

6 Refinancing Mistakes Homeowners Risk Making Right Now

March 31, 2020

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Between low mortgage interest rates and the coronavirus pandemic sending our economy in a tailspin, many people have recently rushed to refinance their mortgages. But as we all know, haste makes waste—and many of those eager homeowners made mistakes that could cost them tons of money in the long run.

So if you’re tempted to jump on the refinance bandwagon, do so with caution. To help clue you in to where the pitfalls lie, here are six mortgage refinancing mistakes to avoid.

Mistake No. 1: Assuming that a federal rate of 0% means you can get a 0% mortgage rate

In an effort to stimulate the economy amid the coronavirus pandemic, the Federal Reserve dropped the federal funds rate to a range between 0% and 0.25%. Many people assumed that this meant that mortgage rates would fall into that range, too. That is not the case, as it happens.

“I think one of the most misunderstood things that people are seeing right now is the news about interest rates going to 0%,” says Ryan Wright at Do Hard Money.

The reason? Wright explains that the Federal Reserve interest rate, the prime rate, and the actual rate someone’s lender will offer are all different.

The federal funds rate, which is what the Fed sets, is the rate that banks pay to borrow from each other. This actually doesn’t directly affect mortgage rates, but it does have a trickle-down effect.

The mortgage rate reports that come out weekly typically compile the average rate for a 30-year loan. But there are a lot of variables, including where you live and what your borrower profile looks like. Prime borrowers, with the best credit score and debt-to-income ratio, get the cheapest rates. Meanwhile, if you aren’t the ideal borrower, your rate is likely to be higher.

Moreover, interest rates have been going up and down in the last few weeks, and are likely to continue in this way before they level out. As a prospective refinancer, it’s important to stay informed, and not to try to refinance with unreasonable expectations.

Mistake No. 2: Jumping on the refinancing trend too late

With so many people refinancing, you might be tempted to do the same. Unfortunately, it may already be too late.

That’s right: Good news travels fast, and with so many people rushing to refinance, lenders have been inundated by the demand, and rates have gone up.

“We are seeing a major influx of refi applications to capture lower interest rates,” Nicole Rueth, a mortgage lender with Fairway Independent Mortgage Corporation explains. But it’s not just homeowners hoping to score a deal during a dip in the economy. Plenty more are visiting lenders to prepare for an uncertain future.

Rueth reports that she’s seen many homeowners who are leveraging equity with cash-out refis, aiming to secure a nest egg to prepare for the ongoing COVID-19 emergency.

And it’s not just Rueth who’s experienced the surge in refinancing. As of March 11, the volume of refinancing applications was up 79% from the previous week and 479% year over year, according to data from the Mortgage Bankers Association.

Since the industry wasn’t prepared to process all these applications, many lenders hiked up rates in an effort to slow business.

“Mortgage rates move according to supply and demand and liquidity in the market,” Mike Zschunke, a real estate specialist in Arizona, says. “The more people that want to refinance or that apply for new mortgages, the higher the rates will go.”

Mistake No. 3: Forgetting about refinancing fees

As stated above, it may be hard to get a good refinance rate, now that so many homeowners have gone running to their lenders. Still, that doesn’t mean it’s impossible to find a better rate than the one you currently have.

But the promise of a lower rate doesn’t necessarily mean you should refinance.

A refinance will come with plenty of fees and closing costs, and sometimes those fees can make your refinance cost even more than you’d save on the lower rate.

“People should know that just because their new interest rate may be lower than their current interest rate, it may not make sense,” says Roger Ma, a certified financial planner. “They need to consider how much longer they’ll be staying or keeping their current place, the upfront closing costs involved, and the ongoing interest savings.”

If you crunch the numbers and realize that, in the long run, a refinance will be worth the costs up front, great!

Just make sure you know what fees you’re facing so you can make an educated decision.

Mistake No. 4: Refinancing too much equity out of your home in a time of uncertainty

There are many reasons to refinance, but if you’re planning to tap into your home equity—to, say, consolidate your debt or pay for home improvements or other expenses—watch out.

“We should be concerned about people refinancing too much equity out of their homes and not being able to afford the mortgage payment,” says Odest Riley Jr. of WLM Financial. “This is especially the case if the COVID-19 virus causes any type of economic downturn, which could tighten up a homeowner’s ability to keep up with their financial obligations.”

So if you’re refinancing—even with a lower interest rate—make sure that your new monthly payments make sense for your budget. Before you make any big decisions, remember that rates are low for a reason, and in this time of national and international financial uncertainty, it may be best to play it safe, financially speaking.

Mistake No. 5: Expecting to lock in your lender’s quoted rates and fees ASAP

Since the rates could go up (or down) while you’re in the process of refinancing, it’s always good practice to lock in your lender’s rate to ensure you’ll be paying what you expect. This lock may cost a fee.

But with all the volatility in the market these days, locking in rates can be especially tricky. It can be difficult to get a lender to look at your application, let alone lock in a rate, before the rates move again.

If you’re lucky enough to lock in a rate that works for you, even if it’s not the best rate you’ve seen, you might want to take the opportunity while you can. Here’s more on when to lock in a mortgage rate.

Mistake No. 6: Shopping for the right loan for too long

With today’s online financial tools, like this mortgage rate comparison tool, there’s no excuse to not get the lowest rate possible. Still, experts warn against falling into a black hole of shopping for the best rate indefinitely, always thinking you can find a better deal.

“I have many clients who are too focused on rates or making a perfect decision on small details of their loan—so much so that they are likely to miss out on an incredible opportunity in an effort to make a perfect decision,” says Todd Huettner with Huettner Capital.

“A few are in a position where they could save thousands of dollars a year—tax-free, no less—by refinancing, but they are waiting to start the process. Many of them will get left behind.”

Plenty of people track rates as they sink, waiting to pounce when rates drop to their absolute lowest, but Huettner says this isn’t the best tactic.

“If you think you can time the bottom, you can’t. You can only get lucky,” says Huettner. “Find a rate that makes sense for you, and jump on it if you get it.” Here’s more info on how to shop for a mortgage.

The post 6 Refinancing Mistakes Homeowners Risk Making Right Now appeared first on Real Estate News & Insights | realtor.com®.

Should You Prepay Your Mortgage? The Pros and Cons

August 14, 2019

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Should you prepay your mortgage? For some homeowners it’s a financially savvy move—but for others, beefing up their loan payments just doesn’t make sense. To help you figure out whether prepayment is right for you, here are the pros and cons cited by financial experts.

Pro: You’ll cut down on the interest you owe

Interest is the extra fee you pay your lender for loaning you the cash you needed to buy a home. After all, lenders don’t just hand out dough for free—they’re in the business to make money.

By increasing your monthly mortgage payments—also called “prepaying” your mortgage—you’ll effectively save money in interest charges. Those savings can add up big-time.

For example, let’s say you take out a $200,000 mortgage with a 4% fixed interest rate and a 30-year term. If you continue to make your minimum monthly payments, you’d be forking over $143,739 in interest over 30 years until the debt is paid off. But, by paying an extra $100 per month, you’d pay only $116,702 in interest over a 25-year time span—a savings of $27,037.

Pro: You’ll get your mortgage paid off sooner

By accelerating your mortgage payments, you’ll also be shortening how long it takes to pay off the loan, which would increase your cash flow in the future. That’s a huge incentive for some borrowers.

“For families with young children, where the parents are concerned about paying for their children’s college tuition, sometimes we will recommend they increase mortgage payments so that when their kids head off to college their mortgage obligation is gone,” says Joe Pitzl, a certified financial planner for Pitzl Financial, in Arden Hills, MN.

Paying more money each month toward your mortgage’s principal can also give you peace of mind, says Marguerita Cheng, a certified financial planner at Blue Ocean Global Wealth in Gaithersburg, MD.

“Emotionally, it’s gratifying knowing that you’re paying your mortgage sooner than you originally planned to do,” Cheng says.

Pro: You’ll build equity faster

No matter how much money you put down on your mortgage, your home equity is the current market value of your home minus the amount you owe on your loan. So say your home is worth $250,000 and your mortgage balance is $200,000. In this case, you’d have $50,000, or 20%, in home equity.

Making larger mortgage payments toward your loan’s principal would enable you to build equity faster. Having more home equity can be a tremendous boon if you’re looking to get a home equity loan or home equity line of credit, such as to pay for home improvements, says Tendayi Kapfidze, chief economist at Lending Tree.

Pro: It helps your credit score

Showing that you have less debt—and that you manage your debts responsibly, by paying your mortgage off early—can raise your credit score. That can help if you’re planning to apply for a car loan or a second mortgage on a vacation home, since your credit score would affect the interest rate you qualify for.

Con: Prepaying reduces mortgage interest, which is tax-deductible

Because prepaying your mortgage reduces your mortgage interest, it may not make sense from a tax-savings perspective. Mortgages are structured so that you start off paying more interest than principal.

For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid in mortgage interest last year, punch your numbers into our online mortgage calculator.)

Nonetheless, taking a mortgage interest deduction under the new tax law requires itemizing deductions—and itemizing may no longer make sense for many homeowners, since the standard deduction jumped under the new tax plan to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly.

Another thing to consider: In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly). However, for loans taken out from December 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible, says William L. Hughes, a certified public accountant in Stuart, FL.

Con: You could miss out on more lucrative investment opportunities

Every dollar you put toward your mortgage principal is a dollar you can’t invest in higher-yield ventures, such as stocks, high-yield bonds, or real estate investment trusts, Pitzl says.

That being said, “you’d be assuming more risk by investing your money in, say, the stock market instead of putting the money toward your mortgage,” Pitzl points out.

“You have to consider your risk tolerance before you decide where to put your extra cash,” says Cheng.

Con: You may miss paying off higher-interest debts

For many homeowners, paying off higher-interest debt—such as from a credit card or private student loan—is more important than prepaying their mortgage, Cheng says.

Think about it: If you’re carrying a $400 debt on a credit card from month to month with a 20% interest rate, the amount of money you’re paying in credit card interest is $80 per month—that would be leaps and bounds higher than what you’d be paying in mortgage interest on a home loan with a 4% interest rate.

Con: Prepaying a mortgage could hamper achieving other financial goals

Building your retirement savings is crucial, of course. However, some people make the mistake of prepaying their mortgage instead of maxing out their retirement contributions, Cheng laments.

“At the bare minimum, I recommend my clients do a full 401(k) match with their employer,” she says.

Moreover, Pitzl encourages people to build a sufficient emergency fund—typically, a fund large enough to cover three to six months of their essential expenses—before they focus on prepaying their mortgage.

“If you get into a bind, you can’t sell off windows and doors to make ends meet,” Pitzl says.

Con: There may penalties for prepaying your mortgage

Some lenders charge a fee if a client’s mortgage is paid in full before the loan term ends. That’s why it’s important to check with your mortgage lender—or look for the term “prepayment disclosure” in your mortgage agreement—to see if there’s a penalty and, if so, how much it is.

The bottom line: If you don’t have enough money to pad your savings before you begin paying off your mortgage early, prepaying your home loan may put you in a financial hole if an emergency crops up.

Still not sure what direction to go in? Consider sitting down with a financial planner to discuss your options based on your personal finances.

The post Should You Prepay Your Mortgage? The Pros and Cons appeared first on Real Estate News & Insights | realtor.com®.

What Is an Amortization Schedule? Mapping Out Your Mortgage Payments

July 27, 2019
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What is an amortization schedule? When you borrow money to buy a home, one of the documents you’ll see is an amortization schedule provided by your mortgage lender who could be a retail bank, a mortgage bank, a mortgage broker, or other lender. The word “amortization” refers to the repayment of a debt through regular payments until the loan is paid off in full.

What is an amortization schedule?

In essence, an amortization schedule outlines your loan payments each month and helps keep you on track.

When you take out a fixed-rate mortgage—whether it’s for 30 years or any other term—your lender calculates an amortization schedule based on the beginning balance, interest rate, and number of payments that shows your payment for each month of your loan.

The schedule shows your interest calculation and how the payment is divided into principal and interest, so you know how much of each you pay each month. It also calculates the outstanding balance of your loan as you progress through the loan term.

By looking at your amortization schedule calculator, you can see how the amount of interest you pay changes compared with the amount of principal you pay during the life of the loan.

You can view your amortization table on a monthly or yearly basis. In the early years of your mortgage, the schedule shows that your monthly payment is almost entirely interest. The higher your interest rate, the more interest expense you pay with each monthly payment. Gradually that shifts due to amortization—lowering of the balance by periodic payments. By the end of your loan schedule, the calculator shows your payments going almost entirely to pay down your principal.

Thinking about refinancing your loan?

When you make your first payments on a home, you may not pay attention to your balance or how your payments are split. You may be happy to be in a home and keeping up with the payments.

After you’ve owned your property and made payments for a few years, though, you may be thinking about refinancing or selling. In that case, you’ll need to know your balance so you can estimate your home equity. You can find this information on the amortization schedule calculator, or on your latest mortgage statement.

If you decide to refinance, remember if you switch from one 30-year loan to another, you’re restarting the interest clock and could end up paying more over time, even with a lower rate. For example, if you get a new loan after seven years of payments into a new 30-year loan, you’ll be paying interest on your home for a total of 37 years, between the two loans. It may be worth it, however, if you qualify for a lower interest rate.

Paying down your principal loan balance

Another reason to pay attention to your amortization table—and to use an amortization calculator—is you can easily see the benefit of making extra payments to reduce the principal balance on your loan. While your monthly payments won’t change unless you start over with a new loan, you can pay off your loan early by making additional payments.

In fact, you can use amortization to your advantage to save money and pay off your loan faster. If you make an additional loan payment of $1,000, for example, a calculator will show you that it saves you more than $1,000 over the life of the loan. That’s because the additional payment helps you amortize your loan faster; in other words, lower the balance and thus save on interest expense.

Here are three ways to pay down your balance faster:

  • A little extra each month: Round up your payment and designate it to pay down your principal.
  • A lump sum payment: If you get a windfall, bonus, or tax refund, use it to pay down your balance.
  • Biweekly payments: By paying half of your mortgage every two weeks, you end up making one extra month’s payment each year.

You can try different scenarios on a calculator to see how even small, regular additional amounts can speed amortization of your loan along.

Regardless of how you make extra payments on your amortizing loan, make sure your lender applies the payment to the principal amount, if your goals are to decrease total interest expense and shorten the effective term of the loan.

Study your amortization schedule when you get it to see if you can accelerate your loan payoff date.

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What Is a Recast Mortgage? Way Easier Than Refinancing—Should You Try It?

October 4, 2018

What is a recast mortgage? While it sounds more like a fishing trip than a financing tool, it’s actually where you pay off a lump sum of your principal (that’s the money you owe), then have your lender “recast” or reamortize the rest so you can lower your monthly payments.

Recast mortgages are rare, at least compared with the more typical way homeowners reduce their mortgage payments by refinancing. Nonetheless, it’s well worth considering in certain circumstances.

Here’s everything you need to know to decide whether a recast or refinance is right for you.

What is a recast mortgage?

To make the idea of a recast simpler, imagine your Aunt Susan has died and left you $10,000, or you get a bonus at work. Sure, you could put that money in a CD or other investment, or spring for a kitchen remodel. However, if lowering your monthly mortgage payments sounds far sweeter, then a recast is the way to go.

“Recasting your mortgage is a great option if you want to lower your monthly payments and have the funds to make a lump sum payment to your lender,” says Randall Yates, founder and CEO of The Lenders Network.

The process of recasting is fairly simple: You head to your bank, fork over your money, and pay a small fee to recast your mortgage.

From there, your lender will use that money you’ve offered up to pay off your principal. It’s as if you’ve made a bigger down payment on your loan. If, say, you’d originally put down $50,000 and borrowed $200,000 to pay for a $250,000 house, after a recast, you’ve now put down $60,000 and owe only $190,000 (actually a bit less, if you’ve been paying your mortgage for a while already).

So now that you owe less, your lender will recalculate monthly payments over the life of your loan. For instance, if you owe $200,000 on a 30-year fixed loan with 5% interest, your monthly payment is $1,397. Recast so you owe only $190,000, your monthly payment will dip to $1,343, giving you an extra $54 a month (crunch your own numbers and see how much you’ll save with an online mortgage calculator).

Refinancing vs. recasting a mortgage: What’s the difference?

When you refinance a mortgage, your loan is actually closed, then reopened as a new loan with new terms (length of loan and/or interest rate). Refinancing also comes with a bunch of steps, including a home appraisal and related fees. As a result, a refinance also takes time to finish (typically 30 to 45 days).

A recast, in contrast, is much simpler: Your loan life, terms, and interest rate remain as is; the only thing that changes is you get to make lower monthly payments.

“Mortgage recasting is a much simpler process than refinancing,” says Yates. “There is no income verification or credit check needed. The entire recasting process can be completed in less than 30 days.”

A recast is also different from merely sending in a lump sum to prepay your mortgage early. In those cases, your monthly payments remain the same. You will just finish off paying your mortgage earlier.

Requirements for a recast mortgage

Mortgage recasting is not available to all. Here are a few requirements for a recast:

  • You must have a conventional loan. “Government-backed loans such as FHA or VA loans are not eligible for recasting,” says Yates.
  • Your bank must offer recasting. Most larger banks like Wells Fargo or Bank of America offer a recast, but smaller local banks or credit unions may not offer the option.
  • You must have enough money. Most lenders require a minimum $5,000 payment to recast a loan. As such, recasting can be a good option only with large lump sums, rather than smaller amounts arriving via paychecks if, say, you got a raise at work.

 

Recast or refinance? How to decide

If you are eligible for a recast, there are still some questions you should ask to determine whether a recast or refinance is right for you:

  • The cost: With a refinance, you are looking at a whole lot of fees. These include an appraisal fee of around $300 to $500 and closing costs between $1,800 and $4,000 depending on your credit score. If you’re depositing $10,000, refinance fees could take upward of $4,500, leaving only $5,500 to be applied to your loan.
  • Interest rates: “If present interest rates are lower than when the loan was opened, it often makes sense to refinance,” says Matt Hackett, operations manager of EquityNow. However, if present interest rates are higher, then a recast is more favorable since you get to keep your original lower rate. “In an environment where rates are on the rise for the first time in several years, mortgage recasts will most likely become a more popular option,” says Tammi Lindley, senior loan officer at the Lindley Team at Mortgage Express.
  • How long you plan to live there: If you sell your house within five years, a refinance may not be practical and a recast may be a better option.

 

Pros of a recast mortgage

  • Reduces monthly payments and principal
  • Easier than a refinance
  • Low fees
  • Less paperwork
  • No appraisal required
  • You keep your original loan and interest rate
  • No credit check
  • You don’t have to stay in home a certain amount of time to recoup refinance fees
  • You can do it more than once, whenever you receive lump sums above $5,000

 

Cons of a recast mortgage

  • Offered only by mostly larger banks
  • Available on loans from institutions such as Fannie Mae or Freddie Mac (not FHA or VA)
  • Doesn’t reduce the interest rate
  • Doesn’t shorten overall mortgage term
  • Liquid cash reduced and tied up in equity

 

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What Is the Right of Rescission? It’s Like a Safety Net for Home Loan Seekers

August 3, 2018

Rescission on Home Loan

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The right of rescission is a little-known—but very valuable—part of the home loan process. This federally protected right can come into play when you are refinancing or taking out a home equity loan or line of credit. Essentially, the right of rescission allows you to change your mind about a loan and walk away without a financial burden sitting on your shoulders.

Of course, there are limitations to when homeowners can and can’t exercise their right of rescission. So what are your rights when it comes to opting out of a loan? Below, our experts share how you can get out of a sticky financial situation.

What is the right of rescission?

The right of rescission falls under federal consumer protection laws that dictate what lenders can and can’t do. Called the Truth in Lending Act, these laws allow for borrowers to have a cooling-off period in which they can change their mind after signing loan paperwork. If you do change your mind, that’s when you get to exercise your right of rescission.

So how long do you have to change your mind and cancel the transaction? Three days from the date of closing, says Clint Bonkowski, director of mortgage lending at the online bank, Laurel Road.

“When a buyer exercises the right to rescind, the lender will withdraw the loan, and no funds will be disbursed,” he says.

Limits on the right of rescission

If you’re a homeowner, you may be wondering whether the right of rescission applies to you. It may, but there are limitations on the law.

  • Time limit: If you let more than three days lapse between signing the paperwork and speaking up, it’s too late. You’re now locked in to that loan contract.
  • Types of loans: Borrowers can only use this step to cancel refinance transactions, home equity loans, or home equity lines of credit (HELOC), says Richard Pisnoy, principal at the Silver Fin Capital Group in Great Neck, NY. That means you can’t use the right of rescission to walk away from a traditional home mortgage.
  • Types of properties: “The right of rescission is for primary residences only,” Pisnoy says. “A loan on a second home or investment property will fund the same day as the closing.”

 

How to exercise your right of rescission

Does your loan meet the standards of the right of rescission? If the answer is yes—and you’re having a major case of borrower’s remorse—it’s time to act.

You should have been provided with copies of the right to rescind document at closing, Bonkowski says, so check your paperwork.

“One of the copies will be signed, stating the buyer has received the form,” he says (this is actually required by federal law too!). “On the notice itself, the lender will provide instructions on how to exercise the right to cancel.”

To exercise your right of rescission, most lenders require the buyer to sign the right to rescind document and mail it to a specific address. But the process may vary depending on your lender. If you’re not sure what your bank requires, pick up the phone and call to find out. An emailed or faxed copy of the right of rescission document may also be acceptable.

How to avoid having to cancel your loan

Let’s hope you never get into a situation where you regret signing a loan contract, but there are a few things you can do to make it less likely that you’ll need to exercise your right of rescission.

Mat Ishbia, President and CEO of United Wholesale Mortgage in Pontiac, MI, suggests working with an independent mortgage broker who can explain the process to you face to face.

He also reminds us of the importance of never signing a contract without reading it first: “Make sure that you review your documents up front with the broker, so that it’s not a surprise at closing.”

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