Fixed vs Adjustable, 15 year or 30 year, getting equity in the loan for remodeling (even if it just sits in a bank account until needed like a HELOC), PMI

If this is his first mortgage ever, how is it a refi?

Most important thing is to get what you can afford now! Don't get something you can't afford now and hope your income gets better. Get a 30 year fixed mortgage and don't worry too much about the other types out there. In most cases (not all), 30 year fixed is the way to go.

Do not even consider an ARM (Adjustable rate mortgage). It usually offers a slightly lower rate in the short term, but in this market, it's easy to get stuck and be unable to refinance before the rate adjusts.

Negotiate on closing costs and lender fees. There's no hard and fast rule, but they're generally negotiable.

A mortgage at 21?? That's pretty incredible.

I'm not completely conversant on refinancing, but just from getting a mortgage, I'd imagine that he should be prepared for a similar occurrance. Given today's real estate market, the bank will probably want to reappraise his property and hopefully its value hasn't dropped too much, and is still 20% higher than the outstanding loan. Otherwise, he may have to now pay PMI, unless he's got the cash to cover the difference. So he'll probably have to pay for an appraisal, as well as a loan origination fee. Given his age, I'd have to wonder about his credit score, length of employment, etc., especially with the tightened credit market. Good luck.

Consider an ARM only if you plan on staying there for a short period of time - in which case, the savings from a refi may not materialize.

Shop your loan around. You should be able to bargain well for no closing costs and a pretty low rate.

Why are you refi-ing? I know rates are good now, are they that much better than you have now?

Personally I have a 5/1 arm at 5.25% that is adjusting later this month. Have been waiting for the letter telling me what it is adjusting to. Got the letter...it is adjusting down to 3.875 on Jan. 1st,2009.
Waiting for the next letter telling me it was a mistake!

I would advise seeing if you can have your broker put on a watch, where if there is a significant drop in rates, even for 15 mins, the broker will lock in the rate then call you in to do the paperwork. I wouldn't finalize anything today, because there is a good chance of rate drops in the next few weeks.

Try and get some assessment of what your property is currently worth - even if you go on Zillow, Trulia, etc. You'll need to have an appraisal done as part of the refi process, and that is a fee that you typically have to pay out of pocket - at least in my experience. If your property value isn't enough to cover the refi, you'll be out that appraisal money (that's how it works in Ohio anyway).

Also check rates on Bankrate.com or another website, again just to arm yourself with knowledge before you walk into the meeting with your loan officer.

You'll also want to know how you'll be paying the costs on the refi - are you going to pay them out of pocket, roll them into the cost of the new loan, etc? This again will hinge on the value of the property and your debt ratio on the house. And once you have a good faith estimate on the refi, make sure you take a VERY DETAILED look at all the costs associated - where they're coming from, who is paying what, etc. Lastly, check the fine print to see if there are any early termination fees, early payment fees, etc. You should check this on both your existing mortgage and the refi.

The most important step is to calculate whether or not it's worth doing financially. There are a lot of variables.

One of the most important ones is how long you intend to stay where you are, since there's a break-even date: if you sell before that date, you've lost money on the deal. And if you're 21, it may not be wise to commit yourself.

There are lots of online calculators that will give you various pictures of the cost and benefits. Be skeptical of these calculators, since the providers are often lenders, with an interest is making it look like a good idea. So get out a spreadsheet and start making your own calculations.

Good question, how is it a refi if it his first mortgage ever?

There are lots of things to keep in mind when looking for a mortgage. However, I think the best thing to do is make sure you believe, and trust, your loan officer. They pretty much all have the same access to the same lenders/banks; so make sure you trust the person. Lots of great info on my website (I am a lender) www.JakePlanton.com.

@Hawkins:
I agree with Hawkins... do the math to see how long it will take to recoup the costs incurred with the refi. At a minimum, you should be dropping 1 full point on your rate. And if you want case out, do it... you may be able to get a significant amount of cash at a very low rate without increasing your payments. It would be wise to use that for something, as it's not going to earn you more than it costs you (unless you want to play in a high-risk market!), but it's nice to have on hand. Or, fill in the need with a HELOC.

@IrvCrapper: Last time I checked, a lot of ARMs have pre-payment penalties to make sure the bank gets it's moneys worth. I really wouldn't suggest financing with an ARM unless you're willing to be really really really anal about paperwork and make sure that it will save you money in the long run. Even then, plans change, and the security of a fixed rate mortgage could prove beneficial.

Find out ALL closing costs.

A low rate is great, but if they tag on a ton of closing costs it may not even be worth it. They typically charge points or more money the lower the rate.

Shop around. They should give you a "Good faith estimate" on closing costs and rates, take that around town and see if anyone can beat it. The good faith estimate and rate should be good for a couple days.

At the end before you agree, ask if that's the best they will do on closing costs. Never hurts to ask for a better deal.

Ask if you can get an "Assumable Loan", this is where if you sell your house in a few years, they people who buy it will take over the loan and that rate. Most banks will not do it, but can't hurt to ask.

I would highly recommend NOT doing an ARM. Sure you'll get an even lower rate, but believe me....these rates will go up. I think ARMS are what got us into this mess in the first place.

@IrvCrapper: Isn't this part of the same advice that sort of got us into the whole credit crunch mess to start with? People with short term goals and plans that fell through, now suffering long term penalties?

Get quotes from at least 2 different lenders and let them all know that you are doing this, then show the quotes around to the reps. They will fight for your business and probably waive quite a few fees and add ons. We did this about 2 months ago and came away with about a grand in fees gone.

@failurate: ARM's aren't inherently bad. If you can only afford the home you're in with a low rate ARM, that's a problem. That problem stems from living outside your means, not the financing vehicle.

The OP needs to ask himself this, if he gets a 5 year ARM, will that save him more in the long run than the refi fees? Assuming your refi fees are around $4000, an 5 year ARM would only have to be $66 less a month than a fix mortgage to come out ahead .

@nataku83: Some have pre-pays but not all. I wouldn't touch any loan with a pre-pay penalty. The lender obviously doesn't understand the time value of money and fundamentally isn't someone you want to deal.

@failurate: Not at all. What got us in this mess was people buying more house than the could afford on 1/1 teaser rate ARMs. If you're responsible about using an ARM, they can be a fantastic way to save money.

Take us for instance, when we bought our first home, we only had 10% to put down. Rather than pay PMI, our mortgage company charged an additional 1.5% interest until you'd reached 20% equity in the home. Shortly after we bought, prices shot up. In less than a year, we had about 25% equity in the home. We already had one child, and knew we wanted more, and thus knew that before #2 came along, we'd need more space. So, when we did that refi, knowing we'd be in that house for another 1-2 years, I took a 3/1 ARM, at a full 1% lower than our existing base rate, so in reality, we dropped 2.5% on our rate (factoring in the higher PMI rate).

A bit more than a year later, we moved. We never had a rate adjustment, and saved money. ARMs can be a great money saving tool for a short term -- not a solution to be able to afford a bigger house.

You may be able to get reduced closing fees if you try to renegotiate with your current lender.

From my previous experience, I found that the APPRAISAL was a huge part of the refi process that can either help or cause problems. Most recently, the guy the bank sent to my house was, well, not impressive, professional, or confidence inspiring, and the result was, unsurprisingly, a much lower value than I thought reasonable. (note: This was early in the market troubles and I was anticipating some decline, but his number was a bigger decline than I expected, while other homes in my neighborhood were selling for significantly more.) What advice is there for making sure you get a good appraisal? And what recourse do you have in a situation like this? We called and complained about this guy, but of course the bank still used his figures.

@meske:

I agree. Also, what is your goal with the ReFi? Are you trying to lower your payements, lower the amount in interest you pay over the term of the loan, reduce the term? Or are you trying to access equity to spend on something else? We've been looking at ReFi for a while and we are still open to the idea, especially if rates continue to drop, but our goal is to reduce the overall cost of our original loan so we want to refi to a lower interst and a shorter term (we are 4 years into a 30 year loan, so we are looking at 25 and 20 year mortgages). When we ran the numbers earlier this year we determined that we could obtain basically the same end result (reduce our term and our overall interest without paying the costs of a ReFi) by just paying an extra $250 a month. So that is what we've been doing but if interest rates continue to drop we'll run the numbers again.

@Jevia: I'm 22, and the ink still isn't dry on my first mortgage. But to be ready to refi at 21 is pretty incredible, I agree.

@kiltman: Holy crap! 3.875! If only you could lock that rate in!

As a banker, here's what I would recommend:

1. Ask for a rate quote based on paying NO POINTS. This way, if you shop around, it's easier to compare apples to apples. Also ask for the total of closing costs. If they beat around the bush on this, find another lender. Note this will probably be an estimate based on guesses for taxes and insurance if you will escrow both.

2. Please, please, please consider a 15 year mortgage. If you can afford the ~$150 extra payment (for a 100k loan, adjust accordingly), it will save you massively in the end.

3. Ask who will be servicing your loan. If you care about customer service and you like the bank you're getting your mortgage at, you might care to know if you'll be making your payment to them or not.

4. Avoid Private Mortgage Insurance at all costs. Ask them to structure the loan differently if they can. Please avoid PMI- it's a protection for the lender that will cost you ~$50-$75 per month and you get literally nothing for it. Though you will probably have to pay it if you have less than 20% equity in your home, it never hurts to ask.

5. Do not bundle a home equity line of credit into your mortgage. Most banks will urge you to, but you'll (probably) end up dipping into your equity and regret wasting 20-50k on nothing. And then you'll refinance your mortgage again in 5 years just to close your HELOC. I've seen plenty of people in the last year refi at our bank because they got too loose with their HELOCS and ended up cashing out 20-50k in equity and massively regret it. An emergency fund of real cash will suffice.

6. Get armed with closing cost information. If you bring in quotes of closing costs in the form of a Good Faith Estimate (any lender will understand what this means)from other institutions in your area, you're more likely to get your closing costs lowered. At least you'll know you're getting the best deal.

Finally 7. Consider a credit union. They always seem to have the best rates. If not, consider a small, locally-run bank. They will have lower closing costs and rates, almost always.

Good luck with the process! If you need any other advice from someone who knows this stuff- my email is lymanjt at gmail dot com. I will gladly answer any questions you may have.

Agreed. ARMs are not inherently BAD.

What made them a bad idea were A: Loan officers that pushed them on people so they could afford more mortgage. B: The people who didn't know any better, or lied to themselves about their situation, and went with the loan officer recommendation.

I know a lot of load officers were PUSHING the ARMs back 2003-2006. My wife and I bought a house in 2003, and the officer was in love with his ARMs. I ended up not doing the ARM because a "Variable" interest rate on a 150K loan was a tad worrisome.

The real key: Know you have a good loan officer. Your loan officefr should be shopping around for your loan. If you don't trust your loan officer then find one recommended by friends/family. It sounds as though you don't trust the one you are working with.

I am confident my Loan officer is my advocate.

@stopNgoBeau: I think he means the mortgage he has now, which he wants to refinance, is his first ever.

@Jevia: Thats age discrimination!

I agree with lymanjt. You definitely should consider using a credit union. Avoid HELOC unless you really plan on using the money immediately for home improvement or something like that. Regarding ARM, there's nothing wrong with them if used properly. If this is your first house and you aren't planning on staying for too long, a 7/1 ARM is safe. Even a 5/1 is not too bad.

Finally, before you refi you should calculate exactly how much you're saving by refinancing. Apart from the difference in interest rates, you have to factor in all the closing costs of a new loan.

@lymanjt: Unless there's a major rate savings by getting a 15 year mortgage, I'd get a 30, and then pay extra. If there's extra money, you pay more. If you get in financial trouble, you aren't beholden to a higher monthly payment.

@tundey:

I forgot to add these two things. Go to bankrate.com and use their calculator to make sure your refi is worthwhile.

And yes, ARMs are not inherently evil. Just be prepared for the fact that your rate may go up. That being said, fixed rates are still pretty close to historic lows and its comforting to know when you sign the paperwork that it's not gonna change unless you refi (again).

@lymanjt: All sound advice and probably good stuff for a person who is looking to purchase, not just re-finance. Good Faith Estimate documents are absolutely essential, because lenders always try to tack on a mysterious fee and they have to explain everything to you before you sign your document. If you weren't informed of a particular fee beforehand and it shows up in your closing documents, it definitely pays to challenge that fee, because there are good chances you can get it removed.

As for refinancing, just remember that it's a process that can remove any of the good terms in your current loan too. If you've ever received any type of government subsidy or assistance (e.g. reduced interest rates), you'll probably lose those benefits if you refinance. Also, borrowers who split their mortgage into 2 separate loans to avoid a PMI (80%/20% split) need to be careful that you refinance into a loan that you don't end up getting slapped with any penalties, because you are no longer getting that PMI-free loan structure. If you've paid into enough of your current mortgage where you don't have as much to split, it does make sense to go ahead with refinancing.

@InfiniTrent: don't totally discount ARM. there are longer ARMs available. for example, we are 2 years into our 10 year ARM at 6 percent. we figure its our first house (small, only 1,300 sq ft) and plan on moving in the next few years when our family expands... they can be beneficial, you just have to be careful, and smart about a decision this big.

Check out Pentagon Federal CU. [www.penfed.org.] They have a 5/5 ARM that is at 5.0% today. It adjust only every 5 years, so if you plan to move by then, it shouldn't be too risky. Their fees are pretty reasonable. The only requirement to join is that you have a certain military connection, or if you join the military family organization for a small one-time fee. There's a bunch of threads on the fatwallet.com finance forums about them. I had a pretty good experience using them last year.

@InfiniTrent:

I wouldn't trust myself to do that. I'd rather have a 15 year rate and not have the "convenience" of choosing whether or not to pay extra. Human nature and all.

But that may just be me. Martin may be more disciplined.

@TakingItSeriously: Really, with the housing market in the tank and heading for the basement, ARMs are just a bad idea at the moment. When the ARM expires and you need to refi (again) then if your house value has dropped you'll be paying money out of your pocket just to get a mortgage to make up the negative equity. We're talking thousands and probably tens of thousands of dollars out of your pocket, or worse wrapped up in some load product that will end up costing you more.

And when interest rates are already at an all time low, why not lock in a 30 or 15 yr fixed now instead of getting (maybe and probably) a higher rate when the ARM is up? If we were looking at 8% 30yr fixed mortgages, then yeah, an ARM might be good. But not now.

@falc: ARMs are useful when you're betting rates will go down. Given how low they are now, they won't probably be lower when it comes time to refinance the next time, so I wouldn't get one (unless you plan to move, and know you can sell, before the adjustment).

Also, if you consider an ARM, make sure there's a cap to the adjustment, and that you're not liable for the difference. For example, if rates climb 2 percent, and your cap is a 1% max, the lender can't roll the difference into your loan.

The most important thing with an arm is to make sure you can afford the worst case scenario - if rates rise to their max, can you still afford the payments?

If you set it up correctly, ARMs can be very useful, but my bet is on a standard 15 year fixed. They're not that much more expensive monthly, come with lower rates, and think about it - you could be mortgage free by 36! That's when life begins!

@falc:

ARMs can be useful...but you better fully understand the terms, conditions, and most importantly the payment schedule, up front.

The biggest trap with an ARM is that the payment is just interest only. This makes them attractive, initially, to buyers as the payment is really low. However, they're generally a bad idea to keep if you plan on living in the house beyond the initial term of the loan, because once the loan adjusts, it can do more than increase just the amount of interest that's due.

For instance, say you took out a 5/1 ARM. Your first 5 years are interest only, but on the 6th year, the loan adjusts, but now you're also required to start paying back the principle. ARMs are still a 30 year loan, so if you made no additional payments against the principle in your first 5 years, the loan adjusts and now you're paying off the entire principle as though it were a 25 year loan, at whatever the interest rate adjusted to. In another year, you'll be paying it off as though it were a 24 year loan at whatever the rate adjusts to again, and so on. Many people don't take this into account, and suddenly see their mortgage payment jump by 30% (or more) after their initial period ends causing them to have to dump the house or default. Worse still, since they were only making interest-only payments, they have no equity in the house, so they usually end up selling the house at a loss.

@kiltman: That's the way they're supposed to work - you get them when you bet rates are falling.

@310Drew:
What are you talking about?

What Jevia said is 100% accurate. Banks will only finance a mortgage that is up to 80% of the value of the house. You CAN go up to 100%...but anything above 80% and the bank will require you to carry PMI which is very expensive and will pretty much negate any benefit a lower interest rate would have had from the refi. This is exactly the situation we're in right now. Prices have dropped in our area, meaning when the bank does an assessment, the refi would be around 95% of the house's value. The savings we would get from dropping 1% on our interest rate would be totally obliterated by the PMI payment.

@HIV 2 Elway Resurrected: A lender with a pre-payment penalty definitely understands the time value of money issue. (They just don't make their decision in your favor.) By adding the penalties they reduce the risk you will pay off early and disrupt their revenue stream.

Spend 3 days listening to Dave Ramsey before you refi. Shoudl garner all the info you need. He also lists what he calld Endorsed local Providers who are very good my last refi was through one and it took less than 3 weeks and I never even met the guy.

In a nutshell this is how I have opened all my refis;

I wont pay points
I wont accept Adjustable rates
I want my Property Taxes and Homeowners Insurance paid out of escrow.
I want $0 out of my pocket at close
Ballons are for kids, not my refi so keep those too.

@amuro98: @amuro98: You are writing as if all ARMs let you pay only interest until the rate is adjusted. This is not correct!
My wife and I have a 5/1 ARM and we are paying about 25% of our monthly payment towards the principal, the rest is interest.

Be aware of declining gas prices and other declining rretail item proces - this might pre-sage a bout with stagflation - read your history of the late 70's, early 80's. Didn't mortage rates execced 10%?

In this environment, don't get caught with an ARM that can take you that high

You might want to look into recourse/non-recourse laws in your state. In some states, a purchase-money loan (the first loan you took when you bought the house), it is non-recourse, meaning that if you default the lender can foreclose and take your home, and that's the end of it, while refis are recourse.

If your state classifies refinance loans as recourse loans, then if you default the lender can go after you for whatever the difference is between what you owe and what they get for your house. With falling real estate prices, you might want to consider whether the lower monthly payment is worth the risk. Example: you refinance for $200k, and two years from now you default. The bank forecloses, but can only get $150k for the house since the market is still crappy. They can come after you for the remaining $50k if it's a recourse loan. If it's a non-recourse loan then they would have to eat the difference.

So, you might want to check out how the laws operate in your state.

@kiltman:

I got a call from our loan officer last week telling me exactly this.
We have a fixed 5.5% but that is one heck of a drop.

@amuro98:

IO does not equal ARM. There are fixed rate IO loans, floating rate IO loans, fixed rate normal amort loans, and IO ARMs. The two have nothing to do with one another.

Saying that an ARM is necessarily an IO loan is like saying that, because some pickup trucks are blue, then all blue vehicles are pickup trucks.

My word of advice would be....Stay away from interest only loans. Make sure you understand the terms of your loan and don't let anyone push you into making a decision you are not comfortable with. Good Luck!

@falc: I totally discount ARMs because of the risk involved.

Many of the people who are fighting to stay in their homes now have ARMs they can't refinance. An ARM requires the assumption that: 1) You'll be able to refinance in a few years, and 2) Rates will be as good or better than when you start.

Imagine you have paid off 15% of your mortgage, and your ARM is about to adjust. However, your property value dropped 20% in that same time period due the economic turbulence - you won't be able to refinance, and you'll be stuck with your adjusting mortgage.

Did we not learn ANYTHING from this mess?

I prefer not to work off risky assumptions in my personal finances...I consider the premise of an ARM to be a risky assumption. Most of those who are losing their houses right now would agree.

@Red_Eye: $0 out of pocket at closing? Do you also buy your cars only during $ign And Drive Days at your local car dealer, where "THE ONLY THING YOU NEED TO BRING IS A PEN!?"

When you fold your closing costs into your mortgage you're paying interest on your closing costs. Pay out of pocket if you can, that way you won't let the extra few hundred dollars slide by at the closing. It will feel like real money.