Do You Need To Refinance Your Mortgage?

Are there better times of the year for refinancing your mortgage? You would think not, but the fact is that certain times of the year are slower than others in the mortgage business, and during those slow times, even mortgage lenders have been known to make some deals in order to keep business steady. Many homeowners tend to refinance a few months before the holidays, some to pull equity cash from their house, and others to just reduce their payments in order to have more cash on hand for the holiday season.

Some tips if you’re considering refinancing for the holidays:

Of the two ways of lowering your monthly payment, one is better than the other. The two ways are to extend the life (term) of your loan — but be extremely careful here, as you could wind up paying substantially more over the life of the loan, even if the interest rate is lower. The second way is to refinance at a lower interest rate while keeping the same term (length of loan). This method is the preferable of the two, for reasons that should be clear in a moment.

Most standard mortgages have terms of 15 or 30 years; however, nowadays, there are terms available of forty or even fifty years. If you are extending the term of your loan, you will be paying a lower amount per month, but since you are paying that payment for many more months, your total overall paid amount could be substantially higher than before you refinanced.

Here’s an example of how the Yield Spread Premium works: Say, for example, you’re getting a loan for $200,000. The originating lender approves you at 5.5%. However, your broker marks that up to 6.75% without telling you. Now, of course, you’re paying a few hundred more each month in interest; over the life of your loan you’ll be out thousands of dollars. But it gets better. that 1.25% difference in what you go approved for and what you’re going to be paying — that’s the Yield Spread Premium. And for each 0.25% that the broker increases your loan interest rate, the broker gets 1% (of the original loan amount) up front — as a useless commission. In this example, he’s getting $10,000 in addition to the $2,000 loan origination you’ve paid. Now that you know about the Yield Spread Premium, avoid it at all cost.

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