Toronto Mississauga Mortgage Broker provides 100% financing for commercial, self-employed, and home mortgage refinancing across the GTA
Mortgage experts money saving tips:
To save money, you must stay in your house longer than the "break-even period" – the period over which the interest savings just cover the refinance costs. The larger the spread between the new interest rate and the rate on your existing loan, the shorter the break-even period. The more it costs to obtain the new loan, the longer the break-even period.
But beware! The break-even period is not the cost of the new loan divided by the reduction in the monthly mortgage payment. This widely used rule of thumb is a misapplication of the principle that when explaining something to the consumer one should "keep it simple." Simple is good, except when it’s wrong!
The rule of thumb does not allow for the difference in how rapidly you pay off the new loan as opposed to the old one. Lets say that in 1992 you took out an 11% 30-year fixed rate loan, which now has a $100,000 balance and 21 years to run. You refinance into a 7% 15-year loan at a cost of $3,750.
Monthly payment on the old loan = $1019
Monthly payment on the new loan = $899
Reduction in monthly payment = $120
$3750 divided by $120 = 31 months
The rule of thumb says that you break-even in 31 months. However, because of the shorter term and lower rate on the new loan, in 31 months you would owe $7,041 less than you would have owed on the old loan. So, the rule of thumb in this case seriously overstates the break-even period. Taking account of differences in the loan balance, you would actually be ahead of the game in 12 months, as shown below:
Savings in monthly payment: $120 for 12 months = $1440
Plus lower loan balance in month 12: $2620
Equals total saving from refinance: $4060
Less refinance cost: $3750
Equals net gain: $310
Next consider the case where an 11% loan taken out in 1992 was for 15 years, and now has only 6 years to run, while you plan to refinance into a 30-year loan. With the remaining term shorter on the old loan and longer on the new one, the difference in monthly payment rises to $1238. Using the rule of thumb the $3750 cost would be recovered in only 3 months. But this fails to consider the slower loan repayment on the new loan. Taking account of the slower repayment, you don’t actually come out ahead until 14 months out.
The rule of thumb (dividing the upfront cost by the reduction in mortgage payment) approximates the true break-even period only if the term on your new loan is close to the unexpired term on your old loan. In other circumstances it can lead you seriously astray.
The rule of thumb also ignores the fact that if you had not refinanced you could have earned interest on the money you pay upfront to refinance; and if you do refinance and the payment is reduced, you can now earn interest on the savings.
Money, Money, Money
Wednesday, July 23, 2008
Get a new home deposit loan
Toronto short and long term financing provider offers real estate deposit financing to bridge the gap when purchasing a new home.
Mortgage financing VS Contract Modification
The short answer is that most loans are serviced by firms that don't own the loan, and owners do not give servicing agents the discretion to modify the rate.
When market interest rates drop, a lender would rather drop the rate on a fixed-rate mortgage in good standing than lose it to another lender through a refinancing. On the other hand, if the borrower isn’t going anywhere, the lender doesn’t want to drop the rate. The lender’s objective is to drop the rate only if necessary to prevent loss of the loan.
If the lender is servicing its own loans, it may allow rate modifications for borrowers who request it. The writer who had his loan rate modified for $35 was one of them. But this doesn’t happen very often. The writer belonged to a dwindling group of borrowers whose loans are owned by lenders who do their own servicing.
Most loans today are serviced by lenders who don't own them. They sold the loans soon after closing and are now servicing agents of the owners. Except under special arrangements of the type described below, the owners do not grant their servicing agents the right to modify the interest rate.
This reflects a conflict between the interest of the owners and the interest of the servicing agents. Owners fear that if agents had the discretion, they would agree to rate reductions too readily because they lose nothing from a rate reduction.
Servicing agents make their money from a servicing fee, usually 1/4% of the loan balance when people are purchasing a home. The fee is deducted from the borrower's payment before the agent remits the remainder to the owner. A rate reduction that retains the customer protects the agent’s servicing fee but hurts the owner.
There are ways to reduce this conflict in order to make rate modifications possible. One approach is to charge the borrower a fee for the right to have the rate reduced in the future, with the fee split between the servicing agent and the owner. Countrywide Home Loans and Wells Fargo Home Mortgage have programs of this sort developed in collaboration with the Federal agencies Fannie Mae and Freddie Mac, who buy the mortgages from them. These programs have not had much market impact to date.
While lenders will seldom allow servicing agents to reduce rates, they don't want their loans being refinanced with other lenders either. Hence, they allow and even encourage their agents to adopt "loan retention programs". Under these programs, the agents attempt to identify borrowers who are likely to refinance, and try to head them off at the pass with their own refinancing proposal.
Because loan retention programs create a new mortgage, they generate settlement costs. Some lenders, and the major Federal agencies Fannie Mae and Freddie Mac, have offered "streamlined refinance" options. These programs reduce the required documentation and costs when lenders refinance loans that they have been servicing, for which they have the borrower’s payment history right at hand.
A few lenders have combined streamlined refinance with "no-cost" mortgages to offer programs where borrowers can refinance at little or no cost whenever interest rates decline. A widely publicized program of City Line Mortgage allows borrowers to refinance by paying only for title insurance. All other settlement costs are borne by City Line.
City Line prompts borrowers when the market has fallen .5% or more below the rate on their mortgages. The borrower must request the refinance and must have a good payment record, but City Line does the work using "streamlined refinance" rules set forth by their investors.
The appeal of this program to borrowers is that refinancing is quick and easy, the refinancing cost is very low, and the lender prompts them when the opportunity is there. The downside is that borrowers pay an above-market rate when they take out their loan.
On January 11, 2001 I found that City Line’s quoted price for new customers on a 30-year fixed-rate mortgage was about .625% above the rate available from three mortgage shopping sites. That’s a stiff price to pay for a low-cost refinance option.
Money, Money, Money
Mortgage financing VS Contract Modification
The short answer is that most loans are serviced by firms that don't own the loan, and owners do not give servicing agents the discretion to modify the rate.
When market interest rates drop, a lender would rather drop the rate on a fixed-rate mortgage in good standing than lose it to another lender through a refinancing. On the other hand, if the borrower isn’t going anywhere, the lender doesn’t want to drop the rate. The lender’s objective is to drop the rate only if necessary to prevent loss of the loan.
If the lender is servicing its own loans, it may allow rate modifications for borrowers who request it. The writer who had his loan rate modified for $35 was one of them. But this doesn’t happen very often. The writer belonged to a dwindling group of borrowers whose loans are owned by lenders who do their own servicing.
Most loans today are serviced by lenders who don't own them. They sold the loans soon after closing and are now servicing agents of the owners. Except under special arrangements of the type described below, the owners do not grant their servicing agents the right to modify the interest rate.
This reflects a conflict between the interest of the owners and the interest of the servicing agents. Owners fear that if agents had the discretion, they would agree to rate reductions too readily because they lose nothing from a rate reduction.
Servicing agents make their money from a servicing fee, usually 1/4% of the loan balance when people are purchasing a home. The fee is deducted from the borrower's payment before the agent remits the remainder to the owner. A rate reduction that retains the customer protects the agent’s servicing fee but hurts the owner.
There are ways to reduce this conflict in order to make rate modifications possible. One approach is to charge the borrower a fee for the right to have the rate reduced in the future, with the fee split between the servicing agent and the owner. Countrywide Home Loans and Wells Fargo Home Mortgage have programs of this sort developed in collaboration with the Federal agencies Fannie Mae and Freddie Mac, who buy the mortgages from them. These programs have not had much market impact to date.
While lenders will seldom allow servicing agents to reduce rates, they don't want their loans being refinanced with other lenders either. Hence, they allow and even encourage their agents to adopt "loan retention programs". Under these programs, the agents attempt to identify borrowers who are likely to refinance, and try to head them off at the pass with their own refinancing proposal.
Because loan retention programs create a new mortgage, they generate settlement costs. Some lenders, and the major Federal agencies Fannie Mae and Freddie Mac, have offered "streamlined refinance" options. These programs reduce the required documentation and costs when lenders refinance loans that they have been servicing, for which they have the borrower’s payment history right at hand.
A few lenders have combined streamlined refinance with "no-cost" mortgages to offer programs where borrowers can refinance at little or no cost whenever interest rates decline. A widely publicized program of City Line Mortgage allows borrowers to refinance by paying only for title insurance. All other settlement costs are borne by City Line.
City Line prompts borrowers when the market has fallen .5% or more below the rate on their mortgages. The borrower must request the refinance and must have a good payment record, but City Line does the work using "streamlined refinance" rules set forth by their investors.
The appeal of this program to borrowers is that refinancing is quick and easy, the refinancing cost is very low, and the lender prompts them when the opportunity is there. The downside is that borrowers pay an above-market rate when they take out their loan.
On January 11, 2001 I found that City Line’s quoted price for new customers on a 30-year fixed-rate mortgage was about .625% above the rate available from three mortgage shopping sites. That’s a stiff price to pay for a low-cost refinance option.
Money, Money, Money
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