How does refinancing a home work?

That's because Fair Isaac Corp. (the company that works with the credit reporting agencies to provide your credit score to lenders) considers these multiple mortgage inquiries as one inquiry when calculating your credit score.

3. Is it common for a mortgage broker to get a "finder's fee? 

A finder's fee, paid to the mortgage broker by the originating lender, is just one way that a mortgage broker can be compensated for arranging your refinancing.

A mortgage broker is an intermediary between you and the lender. Like most middlemen, they add a markup to the wholesale cost, and then you pay the retail rate.

There's nothing wrong with this arrangement as long as the mortgage broker doesn't cut corners to increase his profit margins and provided that he hasn't priced a huge markup in his services.

Bankrate's feature on using a mortgage broker can help you understand how to manage this process. A typical starting point for a mortgage broker is to charge you one point (1 percent of the loan amount) for his services. You may also have to pay an application fee.

Most mortgage brokers don't reveal their compensation until required to by law -- when the loan application has been submitted. The amount of fees and charges that you pay in connection with your loan will be provided on the Good Faith Estimate that the mortgage broker is required to provide you under the Real Estate Settlement Procedures Act.

This disclosure is only an estimate. The final amount will be disclosed on your HUD-1 or HUD-1A Settlement Statement. You are entitled under RESPA to request and receive a copy of the Settlement Statement, with actual closing costs, one day prior to closing.

This is helpful information, but it comes a little too late to help you in comparison shopping or negotiating with mortgage brokers or lenders. A better way to compare lending programs is to use the FTC's online brochure "Looking for the Best Mortgage."

The advantage to using a mortgage broker is that the broker can shop multiple lenders. Mortgage brokers are not miracle workers and can't make someone with a bad credit history magically qualify for a low interest loan. Think of them more as personal shoppers who is helping you find a loan that's right for you.

One good way of keeping your broker honest is to shop rates in your local market using Bankrate. Bankrate's mortgage search feature will provide you with mortgage rates, points and annual percentage rates on loans and can be invaluable in understanding the mortgage market in your community.

If you want to negotiate your best deal with a mortgage broker, you should spend the time and money to know your credit score, review your credit report for errors and correct any errors on your report.

To get a low interest rate, you will need to put your best foot forward. Knowing your credit score will help you understand whether you'll qualify for a lender's best rates. All three consumer reporting agencies can provide you with a credit score along with a credit report.

4. What is the difference between the rate and the APR? 

The annual percentage rate adjusts the mortgage interest rate to reflect estimated closing costs, including points paid at closing and mortgage insurance.

The Truth in Lending Act requires lenders to provide the APR when advertising a mortgage loan and provide prospective borrowers with the loan's APR upon request. APRs aren't perfect, since closing costs are estimated and the lender can round off by up to a quarter-percent.

In general, neither the lender nor anyone else may charge you a fee until you have received this information. The Federal Trade Commission has a mortgage shopping work sheet that can help you lay out the costs associated with several loans and identify the loan that is best for you.

Bankrate also provides you with an estimate of a loan's APR when you search for mortgage loan rates.

With so much refinancing taking place, you need to have confidence that your lender will be able to complete your loan origination in a timely and efficient manner. Ask the lender for references, and check them out with the Better Business Bureau.

5. Does a cash-out refinance for home projects make sense? 

First, find out whether you'd end up with both a lower monthly payment and a shorter loan term. If your credit is good and the house appraises well -- no sure thing with today's falling home prices -- refinancing may be a slam-dunk.

For example, let's say a consumer can go from a 9 percent loan to around 5.25 percent on a 15-year fixed-rate loan. The borrower would end up with lower monthly payments and a shorter loan term. Refinancing is a great choice.

Does it make sense to refinance?
 Existing loanRefinancingDifference
Loan balance:$99,000$99,000 
Interest rate:9.00%5.25% 
Loan term (months):210180 
Total payments:$196,932$143,251 
Total interest expense:$143,251$44,251$53,681

You can use Bankrate's mortgage calculator to create your own table using the actual balances, interest rates and loan terms. Even if you have to pay a few thousand dollars to close on the new loan, the interest savings combined with the shorter loan term provide a great incentive to refinance. Bankrate's refinancing calculator will estimate how long it will take to recoup your closing costs given the lower mortgage payment.

Does it make sense to spend money on home improvements? If you accept that you're not going to get back every dollar you put into the house and that the benefit you get from the improvement is what balances out the equation, then it may make sense to remodel or renovate your property.

The following table takes a look at the cost of doing a cash-out refinancing for $20,000. It ignores the closing costs associated with the financing. You'd have a monthly payment about the same as you have now on your mortgage but you'd be able to finance $20,000 in improvements and still have the loan paid off 2.5 years before your original mortgage.

The cost of cash-out refinancing
 RefinancingCash-out refinancingDifference
Loan balance:$99,000$119,000$20,000
Interest rate:5.25%5.25% 
Loan term (months):180180 
Total payments:$143,251$172,191$28,940
Total interest expense:$44,251$53,191$8,940

Assuming your home hasn't lost too much value in recent years, and depending on the cost of your projects, you should be able to do a cash-out refinancing without paying private mortgage insurance (PMI) on the loan. If the loan-to-value on the cash-out refinancing will be over 80 percent, you should consider other financing options before deciding how you'll finance the home improvements.

6. Should I refinance to pay off an auto loan? 

Restructuring your debt load to pay off your car loan with mortgage debt can make sense if: (1) you can use the mortgage interest deduction on your taxes; (2) the after-tax rate on the mortgage loan is less than the interest rate on the car loan; (3) there isn't a prepayment penalty on the car loan; and (4) you have sufficient equity in your home that borrowing the additional $27,000 won't cause you to pay private mortgage insurance on the mortgage debt.

There are some drawbacks. Paying off your car over 15 to 30 years will negate any savings from a lower interest rate, not to mention the debt hangover you'll have when you go to buy your next car and you're still paying off the old one.

Both auto loans and car loans are secured loans. If you don't make your car payment, the lender can have your car repossessed, but if you don't make your mortgage payments the lender can foreclose on your home.

When deliberating about whether to take this step, look at the refinancing as a stand-alone decision. Does it make sense to refinance to capture an interest rate 1.25 percent lower than your current mortgage? It may not if you only plan on being in the house for a few years and closing costs are expensive.

Bankrate's refinancing calculator will help you determine how long it will take you to recoup your closing costs from the lower monthly mortgage payment.


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