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Posts Tagged ‘refinancing’

What are Prepayment Penalties?

Whether you’ve recently applied for a mortgage loan or are considering doing so, it’s important to familiarize yourself with prepayment penalties. Prepayment penalties are exactly as they sound; they are penalty fees charged to the borrower for paying off their loan before a certain time period. Generally speaking, the penalties are six months of interest payments, although this varies depending on the lender.

Do all Lenders Charge Prepayment Penalties?

Not all lenders charge prepayment penalties, which is why you’ll want to ask your lender if they do charge these fees, and if so, what the costs are and how they are calculated. NOLA Lending for example, does not generally write loans with prepayment penalties and explains to borrowers how these penalty fees are not a concern on most conventional and government loans.

If there are prepayment penalties however, the lender only charges the penalties if the loan is paid off before the sixth year, more specifically, in the second or third years. The penalties are designed to recoup some of the losses the lender may be faced with since the lender didn’t have time to make up for some of the costs it advanced.

Types of Prepayment Penalties

Prepayment penalties can be “hard” or “soft”. When the prepayment penalty is hard, that means that the fees will be assessed because the homeowner is selling or refinancing the home before the time period is met. When the prepayment penalty is soft, that means that the penalty is forgiven due to other circumstances.

Nevertheless, prepayment penalties can be expensive. Take a $200,000 mortgage loan for example. If you choose to pay off this amount in two to three years, you could be hit with six months of interest at 6 percent, which would come out to an additional $6,000 of penalty fees. Essentially, these fees are what deter homeowners from paying off their loans too soon and therefore, give lenders the time they need to regain their losses.

Final Thoughts

No matter the case, it’s always important to discuss prepayment penalties with your lender before signing. These penalties should never come as a surprise to the borrower and should be detailed in such documents as the Good Faith Estimate and Federal Truth in Lending. If you have an excellent credit score and are being told by your lender that you will have a prepayment penalty, be sure to get another opinion from a trusted lender.

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A second mortgage is a home mortgage that you take out in addition to your first. It is a different arrangement from a refinance. When you refinance a mortgage, you simply take out a loan that loan replaces your existing mortgage. A second mortgage is written in addition to your first mortgage so you have two payments instead of just one.

How Does it Work?

A second mortgage functions as a lien against your home for the amount of the second mortgage. You still owe whatever you had left on your first mortgage. The bank merely writes you another mortgage and, because it is secured by your home, it usually has good interest rates. This is the reason that some people choose to go this route instead of refinancing. Refinancing sometimes increases the interest rate on the mortgage and, therefore, a second mortgage is sometimes preferable.

What is it Used For?

A second mortgage is oftentimes used in the same fashion as a cash out refinance. Typical things people use 2nd mortgages for include:

• Paying off undesirable loans, such as credit card debt, and replace those debts with the superior interest rates available on the mortgage loan.
• Property improvements or other expenses that will increase the value of their home over time.
• Trips, vacations, tuition and other short term cash needs

 Two Loans Instead of One

A second mortgage is a separate lending product that you’ll have to make payments on. It’s not a part of your regular mortgage, so that may make your monthly finances a bit more complex.

A second mortgage is also tougher to qualify for than a refinance. The second mortgage will also have its own interest rates and so forth, so you’ll have to take this into account when you’re taking out the loan.

Getting a Second Mortgage

Talk to a loan officer at NOLA Lending  today to see if you qualify for a second mortgage. If this isn’t an option for you, you may want to consider a refinance, which is much more common these days. Second mortgages were more common in the past than they are today and, because of the convenience and wider availability of refinancing options, most owners go for that type of funding.

As mortgage lenders, one question we are often asked is whether or not you can refinance a home mortgage into just one person’s name.  There are some cases where you may want to have your mortgage debt in one name only. This can be done, but it will depend upon a couple of things:

Credit Ratings

In most cases, it will require that the person who is taking the debt into their name be able to qualify for it on the basis of their credit score and income alone. The refinance, however, is secured by the property, so this isn’t quite as hard as you may think. In most cases, one member of a married couple will be able to do this without any difficulty.

What About the Title?

You should still be able to leave the title in both names, even if the refinancing is only done under one name. The refinancing is just a loan and it’s used to pay off the first mortgage. This should only affect the financing, not the actual ownership of the house from a legal standpoint.

How Do We Do It?

NOLA Lending will help you fill out all the paperwork for the refinance and get you started on the process. Changing from one name to two will usually just be a matter of letting your lender know that this is something you want to do. Beyond that, the process won’t be any different than applying for any other form of refinancing.

Before getting started though, we will check the new borrower’s credit, so that aspect of applying for the loan will not change. The only difference will be that the paperwork will contain one name rather than two and that the refinancing will be done completely against one person’s credit and income. If that person happens to have excellent credit, it may be worth it to remove someone else from the application and to have it written against the name of the person who has the better credit. The loan is secured, of course, but credit still does play a part.

Cash out refinancing is a way that you can borrow money against the investment you have in your home by refinancing more than the balance you owe on your home mortgage. It’s important to remember that this is, in fact, a loan. It’s not a profit that you’re making off of your home and is definitely not “free money”. That being said, there are some significant benefits that you may be able to take advantage of by using this form of refinancing.

Benefit #1: Money

The most significant benefit is the money you walk away with. The cash out is literally money in your pocket. The amount that you’re allowed to borrow will depend upon the company you’re working with and your credit worthiness. In some cases, you may be able to borrow a high portion of what the home is worth (as much as 85% LTV) and, in some cases, you may have to settle for 70 or 80 percent of the home’s value in the total amount of the refinance.

The actual sum of the money you walk away with depends on how much you refinance for and the difference between that amount and the value of your house. You pay off the balance on your mortgage with the money you refinance and walk away with the balance in your pocket.

Benefit #2: Interest Rate Savings

You may be able to get a lower interest rate by refinancing. This is a strategy that some people use to offset what they’d pay in interest if they kept their current loan. For instance, if you owed $100,000 on a home and had a bad interest rate, you may find that refinancing the home for $120,000, paying off the $100,000 and using the additional $20,000 to pay off other bad loans may get you out of some interest debt that’s coming down the road. This is a rather popular strategy and can save you thousands in interest payments.

Benefit #3:  Taxes

If you use the money you get out of your cash out refinance to pay off credit cards or other debt, you may be able to basically transfer that debt to a form—your mortgage debt—that can be written off of your taxes in part. This means that you get more out of the money you pay toward your debts and also means that you can get out of some very common credit traps.  You should consult your NOLA Loan Officer as well as your tax advisor to find out what’s best for you!

Some people also use these loans for home improvements, which is a way to bring up the value of the home and, if you plan on selling it, a good way to finance improvements that may end up netting you more out of the sale.

If you have an adjustable rate mortgage or a home mortgage with rates that aren’t favorable, you may want to consider refinancing. Before you do, however, you have to take a look at your situation and see if it’s a good time to go through with it. Even though the rate will drop, there are some big considerations with this move that you have to take into account.

Has Your Credit Improved?

Your score is important and has an impact on your rate. If you’ve suffered financially in the last few years and your credit score reflects as much, you may want to still call so your lender can tell you what to work on. To get the most basic shortcomings on a credit report fixed:

• Bring all your accounts up to date
• Hold off on applying for any new credit such as credit cards or finance company loans

Some credit repair can be quicker than you think.

Are You Staying In Your Home?

Discuss it with your lender if you think you may have plans on moving within 5 years. They may offer you a different set of mortgage options to get the benefit of a better rate but keep the cost low with products like adjustable rate mortgages.

Talk to a Loan Officer

It’s important to talk to a mortgage advisor about your refinancing options and not just take advice from the neighbor or a family member!

The mortgage experts at NOLA Lending will listen to your situation and may advise that you consider refinancing to bring down your rate. There is sometimes a real financial need to take this step and to bring your rate down to an affordable level. Talking to an expert is the best way to find out what’s out there and how you can get credit in these rather tough times.