REFINANCING MORTGAGE

Refinancing risk

2008-02-06T19:53:00.001-08:00

Refinancing risk

In banking and finance, refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. Many types of commercial lending incorporate bullet payments at the point of final maturity; often, the intention or assumption is that the borrower take out a new loan to pay the existing lenders.

A borrower that cannot refinance its existing debt and does not have sufficient funds on hand to pay its lenders may have a liquidity problem. It may be considered technically insolvent: although its assets are greater than its liabilities, it cannot raise the liquid funds to pay its creditors. Insolvency may lead to bankruptcy, despite the fact that the company has a positive net worth.

Most large corporations and banks face this risk to some degree, as they may constantly borrow and repay loans. In general, refinancing risk is only considered to be substantial in cases of financial crisis, when borrowing funds may be extremely difficult.

Refinancing is also known as "rolling over" debt of various maturities, and may be referred to as rollover risk.

Mortgage planning

2008-02-06T19:50:00.000-08:00

Mortgage planning is the initial and ongoing strategic and mechanical integration of a mortgage loan structure to increase effectiveness of a long or short term financial plan or investment strategy; Ultimately limiting debt exposure, controlling tax liability, utilizing arbitrage strategies and managing liquidity to effect a greater net worth over a given period of time.

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This is effectively the same as financial planning but rather than being centered around securities and insurance management, mortgage planning is centered around real estate equity allocation and debt management[1].

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Just as of August 2006, the Chicago Federal Reserve released a study [2] on the very principles mortgage bankers and financial advisors have been practicing and preaching for years. The study, "The Tradeoff Between Mortgage Pre-payments and Tax-Deferred Retirement Savings", breaks apart the difference in tax arbitrage of pre-paying home equity compared with reinvesting those monies into TDA's. The missed opportunity iscompounded growth of monies of which the equity position in a home has no equivalent means of accumulating. The result of following these arbitrage concepts create 11%-17% greater cumulative net worth.

Unlike mortgage lending prior to year 2000, the loosening of credit markets and investor guidelines have supplied a vast array of products, structuring and debt instruments available today that complicate the "which way and how" variable. The various integration of 6+ types of mortgage insurance [3], infinite combination-loan scenarios, simple and deferred interest debt instruments and a borrower's financial portfolio of liquid assets, create a financial sludge to be waded through in determining mathematically the best outcome when purchasing or refinancing real estate. Typically, only designees holding CMPS, CMB, CFP, CCIM or some other equivalent certification are knowledgable experts of the fundamental principles of real estate finance i.e.; effective rates, taxation and leveraging, arbitrage strategies, velocity and time-value of money concepts.

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Mortgage planning concepts are utilized to help consumers with a large variety of needs. Some of the strategies include developing a cash flow priority model, increase personal cash flow, become debt free, profitably leverage real estate, capitalize on taxation benefits of income/capital gains/estate taxes, improve credit scores, maximize capital preservation in divorce situations, finance a child's education, financially care for elderly family, cushion job or career changes, preserve wealth when buying or refinancing real estate and so forth.

External links

http://www.chicagomortgagefinance.com/financing/mortgageplanning

Cash out refinancing

2008-02-06T19:47:00.000-08:00

Cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing liens, and related expenses.

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Definition

Strictly speaking all refinancing of debt is "cash-out", when funds retrieved are utilized for anything other than repaying an existing lien.

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In the case of common usage of the term, cash out refinancing refers to when equity is liquidated from a property above and beyond sum of the payoff of existing loans held in lien on the property, loan fees, costs associated with the loan, taxes, insurance, tax reserves, insurance reserves, and in the past any other non-lien debt held in the name of the owner being paid by loan proceeds.

Example of Cash Out Refinancing

A homeowner who owes $80,000 on a home valued at $200,000 has $120,000 in equity. That equity can be liquidated with a cash out refiance loan providing the loan is larger than $80,000. The owner could use the refiance loan to pay off the original mortgage and could then pocket whatever money is left over.

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The total amount of equity that can be withdrawn with a cash-out refinance is dependent on the mortgage lender, the cash-out refinance program, and other relative factors, such as the value of the home.

Related topics

The opposite, "Rate-and-term" refinancing occurs when a better note rate, better loan terms, or both become available to an owner which restructures their debt portfolio as it relates to liens held against a subject property. Consolidating multiple loans into one loan without extracting cash is also a rate-and-term.

Loan-to-value limits, and other factors in loan approval determine how much cash can be taken out from the equity of any one property.

Refinancing mortgage

2007-09-05T23:19:00.000-07:00

Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage.

Advantages

Refinancing may be undertaken to reduce interest costs (by refinancing at a lower rate), to extend the repayment time, to pay off other debts, to reduce one's periodic payment obligations (sometimes by taking a longer-term loan), to reduce risk (such as by refinancing from a variable-rate to a fixed-rate loan), and/or to liquidate some or all of the equity that has accumulated in real property during the tenure of ownership.

In essence, refinancing a mortgage or other type of loan can lower the monthly payments owed on the loan either by changing the loan to a lower interest rate, or by extending the period of loan, so as to spread the re-payment out over a long period of time. The money saved can be used to pay down the principal of the loan, thus further reducing payments. Alternately, refinancing can be used to transform available equity in one's house into ready cash, available for other purposes or expenses.[1]

Another use of refinancing is to reduce the risk associated with an existing loan. Interest rates on adjustable-rate loans and mortgages shift up and down based on the movements of the various prime rates used to calculate them. By refinancing an adjustable-rate mortgage into a fixed-rate one, the risk of interest rates increasing dramatically is removed, thus ensuring a steady interest rate over time.

Refinancing a loan or a series of debts can assist in paying off high-interest debt such as credit card debt, with lower-interest debt such as that of a fixed-rate home mortgage. The net savings between the two interest rates can then be applied either towards further paying down the debt, or other purposes. In addition, non-tax deductible debt, such as credit card or car loan debt, can be transformed into tax-deductible debt such as home mortgage debt, potentially lowering one's taxes or shifting one into a more advantageous tax bracket. This type of arrangement is often associated with a Cash-Out Refinance. [2]

Risks

Certain types of loans contain penalty clauses triggered by an early payment of the loan, either in its entirety or a specified portion. In addition, there are also closing and transaction fees typically associated with refinancing a loan or mortgage. In some cases, these fees may outweigh any savings generated through refinancing the loan itself. Typically, one should only consider refinancing if one stands to save a substantial amount of money from doing so, either in the short or long-term, or if there is a need to extend the loan in order to pay for unexpected costs such as medical expenses.

In addition some refinanced loans, while having lower initial payments, may result in larger total interest costs over the life of the loan, or expose the borrower to greater risks than the existing loan, depending on the type of loan used to refinance the existing debt. Calculating the up-front, ongoing, and potentially variable costs of refinancing is an important part of the decision on whether or not to refinance.

Points

Refinancing lenders often require an upfront payment of a certain percentage of the total loan amount as part of the process of refinancing debt. Typically, this amount is expressed in "points" (also sometimes called "premiums"), with each "point" being equivalent to 1% of the total loan amount. Therefore, if the refinance option selected involves paying three points, then the borrower will need to pay 3% of the total loan amount upfront. Most refinancing lenders offer a variety of combinations points and interest rates. Paying more points typically allows one to get a lower interest rate than one would be capable of getting if one paid fewer or no points. Alternately, some lenders will offer to finance parts of the loan themselves, thus generating so-called "Negative points" (also called discounts).

The decision of whether or not to pay points, and how many points to pay, should be taken in consideration of the fact that with points, one tends to trade a higher upfront cost in exchange for a lower monthly premium later on. Points can be paid out of the cash saved by refinancing the loan in the first place.

Types

No-Closing Cost refinances: This refinance option reduces greatly upfront fees. You will pay few upfront fees to get your new mortgage loan. In fact as long as the prevailing market rate is lower than your existing rate by 1.5 percentage point or more, it is financially beneficial to refinance because there is little or no cost in doing so.

Cash-Out Refinance: This type refinance may not help you lower the monthly payment or shorter your mortgage periods. It can be used for home improvement, credit card and other debt consolidation if you qualify with your current home equity; you can refinance with a loan amount larger than your current mortgage and keep the cash difference.

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