Online Refinance Help: Consumer Advice to Consider When Refinancing


Many homeowners ask, "Where can I refinance online at the lowest interest rate and how do I know if I am getting a fair deal?" There is only one way to determine the answer to this question, and that happens to be that you understand all the facts about mortgage refinance and how it all really works on a large scale.

There are millions of Americans who are concerned about the value of refinance through an online mortgage company or at a local financial company. Before proceeding, understand that when online refinancing is your preference make sure of your right to privacy before ever submitting a form for an online mortgage quote. If dealing locally you generally need-not be as concerned with the company divulging your sensitive information.

Let's start by getting to the core. In this copy of our online mortgage help forum we attempt to answer some of the most common and important questions consumers ask frequently and will elaborate on the whole refi process and make suggestions. The information herein pertains primarily to those considering a cash out refinance mortgage, no cash out refinancing to lower monthly mortgage payments and to those who are seeking to get cash from liquidity in a home which is a considered a liquid asset (paid off). The latter is called a home equity loan.

First, allow us to explain what a refinance mortgage actually consists-of in the simplest manner possible. Very simply, refinancing allows a homeowner to utilize equity (home value differential over-and-above the amount owed on a mortgage) in the home as collateral to be considered by an online lender or brick-and-mortar (local) loan company. This collateral is used to guarantee value for which to loan money against.

There are numerous variants in types of refinancing programs. Among these are:

  1. Cash out refinance mortgage programs.
  2. Refinancing balance at a lower mortgage rate or term without receiving cash at closing.
  3. Debt consolidation to relieve financial pressure.
  4. Home equity to receive money from a property which is paid off.


Cash Out Refinance

  1. The mortgage holder may refinance their current mortgage at a lower interest rate and also receive cash money at escrow close. This can effectively lower the homeowner's overall monthly mortgage payment while at the same time providing cash money to spend.
  2. A borrower can receive cash to do with as they please. Generally the refinancing party will utilize cash received at closing to consolidate creditor obligations, or pay off credit cards or other note-payables completely. This means that after cash is received from the lender the borrower disperses cash to obligers or other entities owed for services at his or her own discretion.

The end result is that the person refinancing their mortgage with cash out ultimately winds-up  paying the lowest interest rate available for the merchandise or services they have at one time purchased through use of credit card or other revolving account finance.

When contrasted to high interest rates of revolving credit card accounts (typically between 11 percent for excellent credit  to slightly greater than 21 percent for poor credit), a borrower gains financial advantage by paying back those monies to a refinance company at interest rates between 5 percent and 6.5 percent, depending on current interest rates for mortgage loans in the marketplace.

Other uses of cash received when refinancing (aside from satisfying higher interest rate debt) is that leftover cash-out from your refi may be saved for a "rainy day." At the risk of over-elaborating the obvious, some examples of a "rainy day" could include unforeseen medical expense and myriad other emergencies. Perhaps a borrower suddenly requires cash for needed home repairs. Perhaps travel becomes a necessity or a needed luxury. In any case, having cash capital reserved is quite convenient in these and many other circumstances.

In other light, some borrowers receiving cash-out will option to use their capital for investing in potentially profitable ventures such as stock market or privately capitalized business.

One thing is synonymous with any refinance: They carry the same interest rates as a no cash out refinance mortgage does. This in mind, you can see that options for cash out can be an attractive option if you are currently paying back creditors who have high interest rates. For the past couple of years (and thus-far in 2005), refinance loans are offering very low mortgage rates. More good news is that cash out refinances are tax deductible. Compare this to car loans and credit card payments which cannot be deducted from taxable figures at the end of the year.

A refinance mortgage which allows you to consolidate money into one monthly payment for all debt is often a smart choice when budgeting your home financial's. Managing and paying bills in one foul swoop makes it much easier to organize repayment of debt, particularly if you have the payment for a mortgage automatically deducted from your bank account every month.

Refinance at a Lower Rate Without Receiving Cash

This type of loan is the simplest refinance with respect to the mechanics of the loan overall.

Say, for instance, your mortgage currently carries an interest rate which was locked prior to 2003 before refinance rates countrywide suddenly dived favorably to historical lows. Refinancing at a current lower interest rate will undoubtedly reduce monthly mortgage payment.

The two common reasons for mortgaging without receiving cash out are:

  1. To receive a lower interest rate which will reduce mortgage payments.
  2. To increase or decrease the amount of time (mortgage term) for which total repayment is due.

Here's two scenarios to make things crystal clear:

  • Scenario one: Assume that an individual is currently on a 15 year fixed rate conventional mortgage. The homeowner strategically refinances to increase his or her mortgage term by shifting to a 30 year fixed rate mortgage quote plan. Granted, the amount of interest actually paid over the course of the loan term increases significantly. However, monthly mortgage payments are reduced substantially because doubling the number of months in which the mortgage is to be satisfied forces the adjustment of monthly payments down. Using a mortgage payment calculator to determine potential benefits of the aforementioned strategy is a good idea. Our firm offers this mortgage calculation and estimation tool free.
  • Scenario two: Assume a homeowner wishes to do just the opposite of the previous example. He or she wishes to reduce their mortgage term from a 30 year fixed rate mortgage down to a 15 year fixed interest rate mortgage. Yes, the monthly payment will increase by reducing the amount of time in which the note is payable and due. However, the refinancing party will exhaust pressures of a mortgage payment twice as fast and at the same time pay much less interest over the long haul.

We recommend calculating mortgage payments using both the above mentioned options and numeric values before asking for a mortgage quote so that you are educated in what is most affordable and compliant to your specific needs. We offer a free mortgage calculation tool so that our visitors are educated.

Debt Consolidation Loans


Acquiring a mortgage to consolidate debt is in essence conceptually and mechanically identical to the descriptive we gave for cash out refinance. The major difference is that there generally is some company who serves as a medium who organizes the borrower's financial obligations (credit card debts, etc) and actively communicates with the lender to coordinate things. This medium ultimately distributes cash from the funded refinance to your creditors. A debt consolidation approach is popular with those who have poor credit or bad credit and perhaps are inundated with financial pressures of bill payment.

Home Equity Mortgage


Many Americans have worked hard to become a position to where they own real property "free-and-clear." This is also commonly called having property which is a "liquid asset." To categorically be in this situation your home must be completely paid off, with no loan due any lender and the sole lien holder being you.

Provided the home is liquid, an owner can finance a home equity loan or HELOC (home equity line of credit) mortgage. This means simply that you are mortgaging the property for an amount which satisfies your need for a specific amount of cash which is less than the appraised value.  Some home equity loan borrowers get cash for remodeling, general improvements, home repair, purchase of another home or investing in a rental property / secondary residence among many other possibilities. Because the borrower is at an advantage of having total liquidity in the home, the bank / lender offering a mortgage quote is under pressure to offer a highly competitive rate in order to earn the business. Most times home equity loan candidates have excellent credit or (at very minimum) credit which is considered "good" based upon FICO and BEACON scores. These figures can be seen on your credit report.

General Advice When Seeking a Low Interest Rate Mortgage Online or Locally


Hopefully this article sheds light on the often shadowy refinance mortgage process and educates you in a thumbnail sketch as to the many intricacies of such. The best advice to those seeking refinance solutions is to be cognizant of facts enveloped within the mortgage as a whole. Mainly we mean to pay close attention to all of the numbers. Check to see if the mortgage rate quote you receive carries incremental fees, origination fees or any other masked or hidden fees. This requires reading documents carefully.

Realize there are many figures and calculations in loan documents. These documents are presented to the mortgager at the time in which they are ready to lock mortgage rate and proceed with processing. All of the many numbers shown may appear to "run together," and can easily overwhelm a borrower to the point where they overlook fees and costs added to the loan.  Appraisal fees, pestilence inspection and some other costs are necessary. Paying these costs or building them into the loan is quite fair for refinancing and HELOC loans (and other mortgages as well). But always remember that "The Devil is in the details," (to quote an old adage). This in mind, take the time to analyze numbers. Be bold enough to question all mortgage costs and fees outlined in the documents when you review them with the online mortgage broker or lending professional.

Here's another valuable tip: Many fees and costs can be absorbed by the mortgage broker or lender if you simply ask. Earning your business is important to any financial institution. This includes online mortgage companies who offer the lowest rates as well as your typical hometown bank or lender, no matter where in America you live. The professional coordinating home mortgage financing always has ability to barter with certain fees and costs.

Another thing to realize is that many loan programs charge additional fees for cash-back on a refinance. This comes into play often when the "loan to value" ratio, or "LTV" of the property is in excess of 85%. Determining the LTV of your home is simple so allow us to educate you:

Most homeowners know the approximate market value of their property (ask around or search local listings and recent sales for similar properties in the neighborhood if you do not have a ballpark).

Divide the amount you wish to borrow by the value of your property. The sum of this equation will appear as a percentage. This is your LTV. Below is a more clear example:
  • Home value is $150,000
  • Amount you wish to borrow is $105,000.
    105,000 / 150,000 = .70. That means the LTV is 70 percent. Make sense?

The Bottom Line to Refinance and Home Equity Mortgages


If considering refinancing your home mortgage make sure to be smart and examine all documentation thoroughly, especially if requesting a sizable sum of cash from the equity in the property (cash-out refinance) or if the actual equity in your home is low (LTV is high, above 80 percent). If loan fees appear for some reason high or there are fees that appear masked or  hidden in the mass of information contained in the paperwork do yourself a favor and ask questions and certainly ask for discounts or the total elimination of these extra fees which may have been included. There's one simple rule to follow in this situation: "If you don't ask, you receive an automatic 'no'."

A refinance may or may not make financial sense to you based upon individual circumstances. Possible benefit to your particular situation is hinged greatly upon market factors (prime rate) at the time of refinancing as well as what the actual lowest interest rate for which you will be eligible based on your credit, etc.

Be aware that very few refinance loans have a real "no closing costs" option, although a cornucopia of online mortgage companies and local banks and brokerages advertise "no cost" or "zero closing cost" mortgages. If advertised this way it generally means that the lender has reduced or eliminated application fees, appraisal costs, title fees or other miscellaneous money factors which will allow them to label it a "no closing cost mortgage". This is fine and dandy, but bear in mind sometimes these lenders may attempt to charge higher interest rates or bury fees in the overall costs of the mortgage which are hard to pinpoint. Again, check the fine print before making a decision.

Article by Stockton Marquette
Economic Analyst and Mortgage Industry Advisor/Forecaster


© 2006 CMR. All rights reserved.