What Mortgage Refinancing Can do for You

Imagine a scenario where you can have access to extra cash, while simultaneously lowering your monthly mortgage pay-ment. This dream can become a reality through mortgage refinancing. A house is the largest asset you may ever own. Likewise, buying a property may be the largest expense you will have in your monthly budget. Would not it be great to use this asset to reduce your monthly payment and put extra cash in your pocket? When you refinance your mortgage, you can take advantage of the equity in your home and increase cash flow.

What is a "No-Cost" Mortgage refinance any way? And does it make sense?

No-Cost Refinance Defined

A no-cost refinance is one with an interest rate high enough that the lender’s rebate covers the closing costs (but not all closing costs, see below). Rebates are negative points. Lenders charge points on low-interest rate loans and pay them on high-rate loans. For example, on a 30-year fixed-rate mortgage, they might quote 5.75% with 2 points, 6.25% with zero points, and 7% with a 1.5-point rebate. If the 1.5 point rebate covered the settlement costs, 7% could be the no-cost rate.

In sum, the borrower taking a no-cost refinance is paying the settlement costs in the rate. If he pays off the mortgage in a few years, it’s a good deal. If he has it a long time, it is a costly deal.
The Break-Even Period

The proof of the pudding is in the numbers. The critical number for potential borrowers is the "break-even period" (BEP) for a no-cost loan, relative to the same loan with a lower rate on which the borrower pays the costs. Over periods shorter than the BEP, the no-cost loan has lower costs. Beyond the BEP, the no-cost loan has higher costs.

I have two BEP calculators:

11a Break-Even Period for FRMs
11b Break-Even Period for ARMs

The calculators factor in the tax benefits on interest and on points, the reduction in loan balance, and interest loss on monies used to make monthly payments and pay points.

To illustrate, on July 10, 2004 I shopped Eloan.com, a very competitive web site, for a 30-year fixed-rate loan that included a no-cost version at 7%. I used the calculator to determine the BEP relative to a 6.375% version on which the borrower paid settlement costs, including 4/10 of a point. The comparisons were done for both a refinance and a purchase, and to make it as unfavorable as possible for the refinance, I assumed the highest possible tax rate of 39.1%.

The BEP turned out to be 40 months on a purchase transaction and 44 months on a refinance. Over periods this short, the difference in tax treatment between a refinance and a purchase does not carry much weight. The reason is that a refinancing borrower who pays off his loan in full can take the entire remaining tax deduction in the payoff year. If payoff occurs in the fourth year, the loss from deferral of the deduction is small.

At lower tax rates, the BEP is even shorter. At a 15% rate, it is 31 months on a purchase and 32 months on a refinance.
Costs That Are Covered in a No-Cost Mortgage

If you shop for a no-cost loan, make sure that you and the lender agree on exactly what it means. It is not "zero points" which leaves you responsible for other types of lender fees as well as other payments to third parties. It is not "zero fees" which still leaves you responsible for payments to third parties. And it is not "no cash" because that could mean that you are paying the costs but the lender is increasing the loan by enough to cover them. On a true "no-cost" loan, the lender collects no fees and pays other settlement costs on your behalf without increasing the loan amount.

But there are some costs for which borrowers will remain responsible. One is per diem interest, which is interest from the day of closing to the first day of the following month. On a refinance, you will also pay interest on your old mortgage from the first of the month to the closing day. Another outlay you should expect to pay is escrows, though on a refinance you will get credit for escrows held by the old lender. In addition, expect to pay homeowners insurance and any transfer taxes.
The APR on a No-Cost Mortgage

I am frequently asked whether you can tell a no-cost loan from the APR? The answer is, "yes and no". If the APR is greater than the interest rate it means that you are paying some lender fees and don't have a no-cost loan. However, the fact that the APR equals the interest rate doesn't necessarily mean that you have a no-cost loan because not all settlement costs are included in the APR. You are not paying any of the fees that are included in the APR, but you might still be paying some others.
No-Cost Refinance in Conclusion

The no-cost real estate deposit refinancing is a clear winner for the borrower who intends to sell his house within a few years, and has an existing mortgage with an interest rate above the rate available in the market on a no-cost loan.

During periods of declining interest rates, such as occurred between early 2001 and mid-2004, the no-cost option also works well for borrowers who refinance every time the market drops to a new low. Through successive refinancings, these borrowers keep the life of their loans short. When interest rates start to rise, however, the last no-cost refinancing turns out poorly for those who keep the mortgage for a long period.

In addition, no-cost mortgages are easy to shop, which can result in significantly lower costs. This important point is discussed in No-Cost Mortgages.

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Not Only a Great Rate

Most people assume the lowest rate means the best rate mortgage. A great rate is important – but it is all the other terms that add up to a great mortgage.Banks know it – that is why they display their rates in large numbers everywhere you look. A mortgage broker understands that rate is only one aspect of the mortgage, and that negotiating other terms to your advantage will maximize your savings in the long run. We will help you get the whole package – a great rate plus the best amortization schedule, payment frequency, flexible repayment terms, transferability, and more so you do not find yourself trapped with huge penalties if your needs change.

And in what situation a lender you lend you money?

Lender Ambivalence Toward Refinancing Their Own Customers

In a refinance market, lenders are conflicted with regard to how they treat their existing borrowers. They don’t want to encourage any of their borrowers to refinance who might otherwise not get around to it. On the other hand, if they know that a borrower is going to refinance regardless, they want the new loan.

To keep loans that might otherwise get away, many lenders have "retention" programs. These programs are designed to recapture borrowers who are determined to refinance, without putting any refinance ideas into the heads of other borrowers. Distinguishing the two groups is not easy, but there are ways (such as real estate financing deposit).

For example, if you call your lender to find out the exact balance of your loan and your lender has a retention program, you will quickly receive a call from its loan origination department offering to refinance your loan. A balance inquiry usually means the borrower is looking to refinance.


Advantage of Refinancing With Your Current Lender

The lender to whom you are now remitting your payments may be in a position to offer you lower settlement costs than a new lender, but this can vary from case to case.

The greatest potential for lower settlement costs arises where the current lender was the originating lender which still owns your loan, a common situation with loans made by banks and savings and loan associations. If your payment record has been good, the lender may forgo a credit report, property appraisal, title search and other risk control procedures that are otherwise mandatory on new loans. This is strictly up to the lender.

Indeed, if you are not looking to take any cash out of the transaction and are looking only to reduce the interest rate, the lender may elect simply to reduce the interest rate on your current loan rather than refinance. This avoids all settlement costs except a small fee for changing the contract.

If the lender to whom you are now remitting your payments is the originating lender but no longer owns the loan, the potential for lower settlement costs is less. In this case, your lender does not have the same discretion to forego settlement procedures but must follow the guidelines laid down by the owner of the loan.

If the loan had earlier been sold to one of the Federal secondary market agencies, Fannie Mae or Freddie Mac, the guidelines are theirs. While both agencies have provisions for "streamlined refinancing documentation", the discretion granted the lender, and therefore the potential cost savings, is quite limited.

The potential for lower settlement costs is least when the lender to whom you are now remitting your payments is neither the originating lender or the current owner. This is a fairly common situation that arises when the contract to service the loan is sold. In this case, your lender may not be in a position to use all of the streamlined refinancing procedures because its files do not contain some of the information those procedures require, such as the original appraisal report.
Disadvantages of Refinancing With Your Current Lender

When lenders take the initiative in soliciting their own customers, they may base their offer on the borrower's existing rate. This means that in a 5% market, the borrower with a 7% mortgage might be offered 6% while an otherwise identical borrower with a 6% mortgage might be offered 5.5%.

The goal of the existing lender is to provide an attractive saving over the existing loan while giving up as little as possible. Potential new lenders try to do this as well, but they don't know what your existing rate is unless they dig for it in the county courthouse, or purchase it from a lead generator who induced you to disclose it.

In addition, you may not get the best service from your existing lender, as illustrated by this letter.

"I filled out all the forms to refinance my loan [with the existing lender], paid the $350 lock-in fee, provided all the documents they asked for...But it is now 4 months and still it hasn't closed...I call the person in charge of my refinancing, and he says he will get back to me, and he never does... What do you think could be the problem?"

The problem is that the lender already has a loan at a higher rate, and has no incentive to close the new one. While it probably is not deliberate, in a refinance boom lenders get behind in loan processing and have to set priorities. If they have to choose between processing a loan they will likely lose if they don't get it done quickly, or a loan they can't lose because they already own it, the choice is all too easy.

Finally, when you borrow from your existing lender, you do not have a right to rescind within three days of closing, as you do in all other refinances. This could be critically important. See Rescinding a Mortgage deposit financing.

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Some Things to Know About Applying for a Mortgage

Applying for mortgages with several banks can harm your credit rating. Many people are surprised to learn that skipping payments isn’t the only way to damage a credit rating – the truth is, you weaken your credit rating with every application you fill out. This is because each bank pulls a credit bureau on you to assess your application and these inquiries are reflected on subsequent bureaus. Many lenders consider multiple inquiries to be a red flag on your credit. A good credit rating is critical in getting the best mortgage rate and terms. A mortgage broker protects your credit by pulling just one credit report and submitting it to lenders on your behalf. This way you can shop for the best possible mortgage amongst many lenders without damaging your credit rating.



Factors Affecting the Choice Between Second Mortgage and Mortgage Insurance

Interest rate on the second mortgage relative to the rate on the first:The smaller the difference in rate between the two mortgages, the greater the advantage of the combination relative to the single loan.

Term on the second mortgage relative to the term on the first: Shorter term loans pay down the balance faster than longer term loans. Since the second mortgage has a higher rate than the first, the faster the second is paid off relative to the first, the greater the advantage of the combination compared to the single loan.

See also the real estate financing when you are buying a property

Your tax bracket: Because the combination loan enjoys a larger tax write-off, the combination is most advantageous for borrowers in the highest tax bracket. This was not true in 2007, however, and may not apply in future years as well.

Closing costs: With one loan closing, closing costs should be the same for one loan or two. But if the second mortgage is from a different lender and requires a separate closing, the combination will have higher closing costs.

Expected appreciation rate: Borrowers can request that their mortgage insurance be terminated when the loan balance reaches 75% or 80% of the home’s appreciated value. This means that the higher the expected appreciation rate, the less the advantage of the combination.

Other factors: How long you expect to remain in the home and the rate of return you can earn on investments also affect how your choices shake out.

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Money2Close's Services

Money 2 Close Inc. is a private corporation that was created to facilitate real estate transactions, for Buyers that do not have their Deposit funds readily available.During the Founder’s real estate career, this problem would occur on a regular basis. A solution had to be found whereby the Buyer could borrow this money quickly, until the closing date. Normally the money is either in the equity of the Buyer’s existing home that they have just sold, or in the case of First Time Buyer’s with the 100% financing program, the funds will arrive from their lending institution on closing day.

This however creates a problem, as the home deposit is needed “Upon Acceptance” of the “Purchase & Sale Agreement”.Therefore, once you apply to us for your real estate financing deposit, we will move quickly to approve you, and fund your Deposit. There is a $49.95 application fee, which is paid to the Government in order for us to do our due diligence. Also we have provided a “Deposit Advance Calculator”, so that you can estimate the cost of borrowing. All our advances are registered, and the legal fee is $250.00 + GST. However this fee can be borrowed with your home deposit.

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Variable Rate Mortgage Financing

There is more to most variable rate mortgages than meets the eye. Just like most mortgages when buying a property or home, people typically fall into two categories: Variable Rate or Fixed Rate. “Fixed rate” people feel most comfortable when they know their exact mortgage payment at all times. “Variable rate” people are willing to experience the uncertainty of their payment amount in exchange for the savings that come with it Variable rate terms and conditions can be quite complex, however.



A mortgage broker has the expertise to sort through the conditions, explain their implications to you and help you find the right variable rate mortgage for you.There’s a world of mortgage products the average person doesn’t know about. Most people aren’t aware that banks offer only a fraction of the mortgage products available. A mortgage broker, however, is an expert on the different products and lenders in the industry and stays abreast of changing market conditions. That knowledge can be invaluable in finding the best mortgage for your needs. Self-employed? New to Canada? Looking to buy a rental property? A mortgage broker can help you qualify for specialized mortgage products like these and many more.

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Some Financing Options

Gap Financing is a term mostly associated with mortgage loans or property loans. It is an interim loan given to finance the difference between the floor loan and the maximum permanent loan as committed. This is to provide funding during the time between the end of loans extended during the development stage of a project and the beginning of the permanent mortgage extended to the buyer.When getting a home deposit or short term financing, a deposit advance is funded within 24hours of receipt of all paperwork and contracts requested normally.









Interim financing is not the same thing as gap financing. The difference between them is that gap financing is not secured. For gap financing, the project has a funding shortfall, or gap, because its contracts do not provide full funding of the costs of the film.

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Best Variable Rate Mortgage

Your mortgage broker works for you, not your lender. When you visit a bank, the representative’s job is to recommend their mortgage products to you, regardless of whether they really suit your needs. A mortgage broker, however, has no such mandate – our only job is to ensure you get the best rate mortgage possible.

Think of it this way. You probably wouldn’t buy a home without the advice of a real estate agent. Nor would you close the sale without a lawyer. Why? Because they’re specialists in the field of home buying – they know the right questions to ask and the proper steps to take to minimize the risk that you’ll regret your purchase later. They’re looking out for you. And so are we.

A mortgage broker is a good person to turn to when shopping for a home loan. These individuals have connections with various lenders and can help you determine which lender has the best loan deal for you. Unlike a loan officer, a mortgage broker usually does not work directly for any one lender. This means that you can shop the competition with the help of your broker much easier.

If you are considering using a mortgage broker, you are probably wondering how that individual will be paid. You do not want to pay more for your mortgage to cover the commissions from the mortgage broker. Using a broker does not end up costing you more. The broker is paid by the bank, not the borrower. If a broker is charging you an upfront fee, find a different broker. The bank will pay the mortgage broker a small percentage of the entire mortgage amount.

A mortgage broker is particularly helpful if you are searching for a specialized mortgage product, such as a bad credit mortgage or a mortgage for most of the home's value. Because brokers have inside knowledge of the industry, they can help you avoid constant rejections from lenders that do not offer the services that you need.

Working with a mortgage broker will save you time and frustration as you shop for your next home loan. The broker does all of the work for you. You do not have to approach lender after lender. Rather, the broker will scour all of the current offerings and find the best deal for your needs. You will not have to fill in application after application. You simply fill in one application with the broker, and possibly one with your chosen lender. In the end you will have an excellent loan that fits your needs perfectly!

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What Lending Rate Cut Means For Your Mortgage

On Tuesday, the Bank of Canada cut its key lending rate by half a percentage point, the biggest cut in six years.

For those looking to buy a house, that decision is a big influence on what kind of mortgage to chose.

"We're in a variable mortgage right now," says homeowner Dan Davies. But that might not last long.

"We're considering dropping it. A half a percent is a big drop so it's a lot of money to be saving."

There are other factors that influence his decision, like a new baby. "The fewer variables in my life, the better, especially with this guy around," Davies jokes.

However, that may not be the case for everyone.

"For that first-time purchasing a home, obviously the fixed rate is going to be the best solution," points out Kathy Ellis, a spokesperson for RBC.

"If you're somebody who's a more experienced purchaser, who may be a second or third time homeowner, they may want to float with a variable rate."

The key interest rate of 3.5% is the bank's way of boosting the housing market. An RBC survey found that there's a big drop in people looking to buy real estate.

"There is a slowdown. There's no question about that," admits Ellis. "But their intentions of our respondents are still very positive."

Many Canadians still believe real estate is a good investment, and their confidence may get another boost soon: The Bank of Canada has hinted that further cuts to its overnight rate may come at its next scheduled meeting on April 22.

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