Reduce Your Monthly Mortgage Payments By Refinancing The Smart Way

by Marian Cates

A lot of people are in a tight spot right now and need to lower their monthly mortgage payments.

I was in the mortgage business for 10 years and, as a loan officer, helped many home owners figure out the best way to refinance their mortgage loans.

Your first step is to ask your current mortgage holder (the company to which you are making your payments) if they offer a fixed-fee option.

With a fixed-fee, you pay the mortgage company a certain amount of money to reduce your interest rate. This can save you money, as a full refinance is generally more expensive.

If you need to refinance, a fixed rate is the better way to go.

With an adjustable rate, you may have a very low payment at the beginning of the payment period.

But when it first adjusts, it always adjusts upward. Why? Because you are offered, as an incentive, a lower introductory rate that will expire at the first adjustment. Then there's a big jump.

If you are in a tight financial situation and have a fixed-rate loan, consider refinancing to a 1-year adjustable rate loan (ARM).

For the first year, your monthly payments will be substantially lower. That may give you enough time to get through a financial challenge.

There are also 3-year and 5-year ARMS, but those rates may be close to the fixed-rate loan you already have. Still, they are viable options.

There are also adjustable-rate mortgages that have shorter terms than a year. Avoid these products. Having your mortgage adjusting every 6 months is a formula for disaster. As I've said above, your first adjustment will be upwards and by a good amount.

Why go to the expense of refinancing if your rate is going to increase greatly in a mere 6 months? And how can you have peace of mind knowing that your monthly payment may go up every half year?

Some mortgage companies offer loans that don't require you to pay the full monthly payment every month. They may present this as a benefit for you.

Don't fall for this.

Every month that you do not pay the full principal and interest -- plus other monthly fees like taxes, homeowner's insurance, and mortgage insurance -- you go into the hole.

Some of these loans are called interest-only loans. That is, you will pay only the interest every month.

This may sound great when you first hear about it. But if you don't cover your full principal-and-interest payment every month, you will have to make up at the shortfall at some point.

Where will you get the money to catch up on the principal payments you've missed? If the housing market goes into a slump, you may find yourself owing more on the house than it is worth. And that's a highly undesirable predicament to find yourself in.

Whatever you do, never sign up for a mortgage loan that involves negative amortization. (Amortization just means payments spread over time and calculated in a particular way.)

An interest-only loan is negative in that you build up debt every month that you do not pay your principal but only the interest.

Even a monthly payment that includes both principal and interest will build up debt if you are not covering your full monthly principal-and-interest payment.

The steps for finding the best refinance for you are these:

1. Pick a loan type from a particular lender you feel you can trust. Pick a loan amount that you feel meets your needs.
2. Ask a mortgage loan officer at that lender to tell you in writing the full costs of the refinance and how much your proposed full monthly payment will be, breaking it down into principal and interest, mortgage insurance, home insurance, taxes, etc. You can talk to the loan officer on the phone and have the information faxed to you.
3. Calculate how much you will save per month after you've refinanced. (Simply subtract your current monthly payment from the proposed monthly payment. Make sure that you include taxes, home insurance, mortgage insurance, etc. for both current and proposed. That way you will be "comparing apples with apples.")
4. Divide your monthly savings into the total cost of refinancing. That will show you how many months it will take to pay off the costs.
5. Estimate how long you'll stay in the house. If you think that you may well move in 2 years and it will take 3 years to pay off the cost of the refinance, that may not be the best loan for you. However, if you don't think you'll move again for 8 years, it could be a good idea.

If you need to refinance in order to stay afloat financially, be sure to scrutinize the loan types available. If you don't understand what the loan involves, consult your local bank branch manager or a real estate attorney before signing papers or giving the mortgage lender any non-refundable money.

Don't accept without question a type of loan that seems "too good to be true." What seems too good to be true usually is.

Most mortgage loan officers and all mortgage brokers work on commission. So they may urge you to get the loan amount and loan type that will earn them the largest commission. Be wary.

If you don't understand the terms of the loan or how high the loan amount really needs to be, consult your local bank branch manager, who does not work on commission. Consulting your branch manager will not commit you to refinancing through them. You can still go elsewhere to obtain the rate you want. But the branch manager can help you get perspective on your situation and what type of loan you need.

When you make formal application for your refinance, the fees you will be charged will be disclosed to you. Hold onto the document that outlines your charges.

As your loan is processed, your loan amount may change, based on the exact payoff figure required by your current lender. Also, if you are paying off consumer debt with the funds from your refinance, these payoff amounts may vary a bit from what you told the lender when you applied for the refinance.

You'll be issued a final statement of fees at the time of closing. Keeping in mind that payoff amounts may have changed somewhat, compare your final statement of fees with the disclosure of fees you received when you applied for the refinance. If unexpected fees have been added, especially lender fees, challenge them.

The closing attorney is working for you, even if he or she was recommended by the lender. And the attorney is required to ensure that you are not overcharged by any party to the loan, including the lender.

A loan closing can be an intimidating experience. But don't feel rushed. Look over every line item, compare it to your previous cost disclosures, and question anything you don't understand.

Even after the loan has closed, you still have the ability and the right to question the attorney about any fees. If they were unfairly charged to you, your attorney has a duty to see that those fees are refunded to you.

With a refinance, you have a three-day right of rescission. That means that you can freely walk away from the loan during those three days. However, if you choose to do so, you will lose any nonrefundable money that you paid to the lender, including:

• the cost of your appraisal, if one was required
  
• the cost of your credit report
• any part of your discount points that you were required to pay when you applied for the loan.

Refinancing can be the solution to pressing financial problems. For most people, their largest monthly expense is their mortgage payment.

If you have a fixed rate, consider going with a 1-year ARM. But don't go with an ARM that adjusts more often than yearly.

And be sure that you are paying your full principal-and-interest payment every month, so that you don't go into the hole.

Don't accept any too-good-to-be-true loan types. Remember, most loan officers and all loan brokers are working on commission. They may suggest a loan type that will make the most money for them, regardless of whether it's the right type of loan for you.

If you feel confused, get advice from a disinterested party, an authority who has nothing to gain -- a real estate attorney or your local bank branch manager. They can help you find your way to the refinance program that is best suited to meet your financial needs.

Sometimes people decide to refinance in order to save on interest payments. But there is a free way to save on interest.

As you may know, mortgage loan payments are front-end loaded. That is, at the beginning of the loan, you pay a lot more interest than principal. For a monthly payment of $800, you may pay about $50 in principal payment (rough figures).

So every month, or at intervals, pay an extra principal payment along with your regular mortgage payment amount, and state in writing that this extra amount is to go towards your principal. You must put this into writing. If you don't specify that the extra amount goes towards principal, the mortgage lender will apply it to both principal and interest, and you'll save nothing.

By adding $50 to your monthly payment of $800 (rough figures), you will pay, not only your current month's payment, but the next month's payment in advance. The interest associated with your next month's payment will be eliminated. You will have saved $750 in interest.

That doesn't mean that you can skip a month of payment. Every month you need to send in your scheduled mortgage payment or you will fall behind.

If you prepay your principal monthly, It will add little to your payment and you will save all the interest associated with your next payment. To find out the principal amount, look at your statements from the lender to whom you are sending your loan payments. The statements should break down your payments into principal and interest.

Actually, you can send any amount extra. It doesn't have to be the exact amount of your next principal payment. But you must always specify in writing that the extra amount is to go towards principal.