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Refinance a mortgage at the right time and for right reasons

Are you burdened with rising monthly payments and seeking better terms and conditions on your mortgage? Or, are you looking to consolidate your unpaid debts and get rid of them faster? All these mortgage scenarios and many more can be accomplished by mortgage refinancing. To get the basic idea on refinancing, go through these topics:

Do it yourself!



What is mortgage refinance?

With mortgage refinancing, you can replace your original mortgage with a new one with better terms and conditions but the new mortgage should be within your affordable limit. The same property that you used as collateral to secure the original mortgage is used to secure the new loan also. The new loan proceeds are utilized to pay off the existing mortgage. In case there is any remaining money after paying down the original mortgage, that amount can be used to meet other financial obligations.

Example: Suppose each of the two borrowers A and B took out mortgage loan worth of $500,000. Again, say after 5 years, both A and B paid down $250,000. So, for both these borrowers, remaining unpaid mortgage amount is $250,000.

Borrower A then took out another loan worth of $250,000, so as to repay the remaining balance on the existing mortgage. This depicts a case of simple refinance.

Borrower B then took out another loan worth of $350,000. Out of this new loan amount, B used $250,000 to pay down the original mortgage. B could use the remaining $100,000 to meet other financial obligations. This describes a case of cash out refinance.

The first scenario is a simple refinance while the second is that of a "cash-out refinance".


5 Reasons that make refinancing sensible

There are some strong reasons which make mortgage refinance a very sensible move. Here we delve upon 5 of those -
  • To reduce monthly payment:
    If the mortgage rate is lowered or if the mortgage term is extended, your monthly payment amount gets reduced. With reduced monthly payment, you can pay off your mortgage with more ease. In case the term of the loan is extended, you have to however pay more in interest during the whole life of the loan.
  • To switch from ARM to FRM:
    Fixed rate mortgage (FRM) offers you the certainty of making fixed payment over the term of the loan. Whereas, in case of adjustable rate mortgage (ARM), the monthly payment amount may rise or fall, depending upon the prevailing mortgage rate. So, in case of ARM, the monthly payment amount is not fixed; rather it is uncertain. If you are looking for certainty in payments, then you can convert your existing ARM to an FRM through mortgage refinance.
  • To repay mortgage faster:
    If you want to pay down the mortgage early, then you can shorten the term of the loan. However, here your monthly payment amount increases. Here, over the term of the loan, you save more in interest payments. You also attain property ownership early.
  • To combine two loans into one:
    If you have adequate equity in your property, you can then consolidate your first mortgage and the second mortgage into a single mortgage. The main advantage of this type of consolidation is that the monthly payment on the single loan is less than the combined payments on the 1st mortgage and the 2nd mortgage.
  • To pay off high interest debts:
    If you have sufficient equity in your home, you can opt for a cash out refinance. You can use the remaining money to pay high interest debts such as credit card bills, car loans, installment loans etc.


What is the best time to refinance?

You may not always be eligible for refinancing or the situation may not always be conducive for refinancing. You have to time your move correctly so as to reap its benefits. You need to check out these crucial things carefully before applying for mortgage refinancing -
  • If you have built up equity:
    You may be eligible for refinancing when you have built up equity of at least 10% in your home. However, for mortgages owned by Fannie Mae, the equity requirement is 5%. It is possible to get the refinance approval even with less than 5% equity, but in that case you may have to pay a certain sum of money to compensate for the deficiency in equity.
  • If the refinance rate is sufficiently low:
    If the current mortgage rate is sufficiently lower than the rate on the original mortgage, then it may be wise to opt for refinancing. Here, you need to follow the 2% Rule. As per the 2% Rule, refinancing is beneficial for you in case the refinance rate is 2% lower than the rate on the original loan. Here, the savings accrued from low rate outweigh the costs of the new loan after a certain period of time, which is called the break-even period. To get benefits of refinance, you have to stay in the house at least till the break-even period.
  • If you have removed negative items and paid off debts:
    Before plunging into refinancing, obtain your credit report from the credit bureaus and review it carefully. If you find some negative items such as collections or late payments, dispute those items immediately and get those items removed from your report. Prior to refinancing, pay down as much debts as possible. All these will work in your favor in getting the refinance approval.
  • If you have no late payments in past 1 year:
    If you have history of late payments in the past 1 year, then your refinance appeal may be rejected. So, before refinancing, make sure you don't have any late payments in the past 1 year.


When refinancing is not a good idea?

Despite the fact that refinance has several benefits, it is not always a good idea to go for mortgage refinancing. There are some cases when your refinance appeal is rejected by the lender or it may not fetch the desired returns. Here are some cases when refinancing is not a good idea at all-
  • If the property value has declined sharply:
    If the value of your property has declined appreciably, the remaining balance on your original loan may be higher than the refinance loan amount. In other words, with the new loan proceeds, you won't be able to pay down the original mortgage loan.
  • If you have already used up your equity:
    Your equity is the key to get approved for refinancing. If you have already used up your equity by taking out a home equity loan (HEL) or a home equity line of credit (HELOC), then going for refinancing would not be a good idea.
  • If you have only a few years left on the existing loan:
    It does not make good sense to go for refinancing if you have only a few years left on your existing loan. It is not rational to refinance the loan which you have almost paid off. If you have almost paid down a 30-year fixed rate mortgage, then it is unwise to opt for refinancing. After all, refinancing is just like taking out a new loan and all the costs associated with taking out a fresh loan are applicable here too.
If you have the right reasons and if the time is right, then you can surely seek for mortgage refinance. However, before making the final decision, do the necessary research, take quotes from different lenders, make a comparative analysis and choose your lender.
Related Readings
Related Forum Discussions
Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I just locked in a refi rate of 5.25 down from 6.25. they are rolling the UFMIP of 2700 into the loan amount bringing up my balance to 150,000 from 147,00 rounding off numbers—a 2.3 yr recovery time. Closing paid by lender. Is the streamline refi worth it?

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi mommie,

As you're 2 months delinquent on your mortgage payments, you won't be able to refinance the loan. Rather, you should apply for a loan modification in order to get a reduced interest rate which might make it affordable for you to pay off the loan.

Hi julia,

If you can afford the mortgage payments, you can go for it. If you're planning to stay in the property for a longer period of time, then it will help you in recovering the costs that you pay while refinancing the loan.

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We took bankruptcy 2 years ago due to medical issues with a big debt load. We filed Chapter 7 in Illinois, and have always paid bills on time. We have purchased 2 used vehicles since bankruptcy and now would like to refinance our ADR mortgage to lower payments only. Problem is no cash due to husbands continued health issues. Is there any hope for those of us who are good payors but just can't come up with cash. Current interest rate is 8.5%. our mortgage has a cap of 15%. but still scary when working so hard to live paycheck to paycheck. any words of wisdom.

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Guest,

If you want to refinance the loan, you will have to come up with some down payment. You should contact your friends and relatives and check out if they can help you by gifting you the money for down payment.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

We've been paying off our 30 year ARM for twenty years. The rate is currently around 4 % but we'd like to advantage the low rates on a fixed interest loan in order to lock in the rate. We have about 134k remaining on our current loan with about 200k equity. How do we find out if it would be worth it to refi?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Matt,

If you're planning to stay in the property for a long period of time, then it would be a good option to refinance the mortgage. Moreover, you should check out the type of interest rate you're getting. If it's affordable for you, then you should go for it.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

In April, my husband and I purchase our first home. Five months later, my husband is not working (Im a stay-home-mom of four) our savings are low, we are having trouble making our montly payments. We have been on time but are scare of the future. We are thinking of selling but with this economy, we don't know how soon we can sell. Don't know what to do? Please advice. Thank U.

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Lola,

If you don't want to keep the property, then you can apply for a deed in lieu of foreclosure. As you're facing financial hardship in paying the mortgage dues, the lender might consider your request. However, it will reduce your credit score by 250 points. Also, you won't be able to buy a property in the next 3-4 years.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can I refinance my house, even though I am planning on renting my house out in the next 2-3 months ?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Edel,

You can refinance the house though you're planning to rent it. However, your property should have equity in it. Unless there is equity, you won't be able to get a refinance.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can I apply for a credit card a few days before I close on my refinance? I've heard that a freeze gets put on your credit but wasn't sure if this is true.

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Kristyn!

Welcome to forums!

Your query has been replied in the given page:
http://www.mortgagefit.com/refinance/apply-creditcard.html

Take a look at it. Hope it helps you.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I want to refinance for the amount of the balance left on the mortgage. Depending on when the loan closes my mortgage balance might go down since I am making payments. Will the loan amount be adjusted down or is the amount specified in the Uniform Residential Loan Application what I will get and any difference will be paid to me?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Tigger,

As far as I can understand, the loan amount will be adjusted when you get the refinance as you are making payments on your current mortgage.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What percentage of the appraised value can I borrow in South Dakota. It would be a conventional, fixed, 30 year loan

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi WKO!

Welcome to forums!

You will be able to borrow 80% of the appraised value of the property. You will have to give a down payment of 20% of the property value in order to get a conventional mortgage.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I want to talk with someone about refinancing my mortgage to lower my payment amount. I'm not sure but think my credit score is not so good. I really need to get my mortgage payment lower. Please say you might be able to help me?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can I go to another bank to refinance my first mortgage? Both are currently from B of A. Apparently I qualify to refinance the first one only.

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eric1's picture
eric1 | Joined: January 4, 2009 03:52 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

If I were you, I would try to refinance the whole thing into one loan. To answer your original question...it all depends on whether that first bank will allow the second loan with B of A to exist. Each bank will give you a different answer on that.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Are there any negative implications for refinancing after the 8K tax credit...? We also have ONLY been in our house for a year now

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

my house was currently appraised at 87,000 however my mortgage is for 120,000 and has been a payment of 1,100 i am a single mother with one job how do i refinance without getting money back and yet lower payment

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bizcheers's picture
bizcheers | Joined: October 3, 2010 02:40 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can My Mortgage Be Refinanced FHA's Revised Home Loan Modification Program?

With foreclosure bugging many of us out there, the government had previously come up with the Loan Modification Plan through the President's office to assist those facing this dilemma of how to salvage their homes. This plan however faced heavy criticism from almost all quarters for the lengthy application process attached to it, as well as the low approval rates for those applying for them, in addition to other complications.

The President and his office were quick to realize this issue, and rectified it by revising the Loan Modification Program to help struggling homeowner cope with foreclosure issues. The homeowners' bid to refinance home mortgage would in the future be approved more easily, and the program has also included newer features within it to help struggling homeowners further. Now even the unemployed are offered subsidies, and those who have borrowed more than the worth of their homes can also apply for subsidies to help them cope with refinancing.

The revised program would increase the amount of payment to creditors that modify or refinance second mortgages. This incentive is deemed to directly help homeowners as previously banks were reluctant to write down second mortgages, and this dampened the government's efforts to help homeowners fight foreclosure. Thus if you fall into this category, your [url=http://www.mortgagefit.com/second-mortgage.html]second mortgage[/url] can now be refinanced as more banks would come forward to accept your application! The applications would also fall into the FHA guarantee programs, giving the bankers more confidence to deal with those with bad credit scores. This means those with bad credit ratings can also apply for these loans successfully, and these packages serve as bad credit mortgage refinance deals!

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello. I have 262,600 left at 5:675 fixed 30 year which i refinanced next year. I considering to refinance again due to lower rate currently at 4.5. However, they told me the value of my house went down by 120000 and tus i might need to put anywhere fro 7 to 20 thousand more down. I do have the money but is this worth it? They said only way to find out is to do an appraisal for $350 to determine the value...ain

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome lala,

Your property is presently underwater. The lenders will not refinance the loan unless there is equity in your property. You will have to go for an appraisal in order to find out whether or not there's equity in your property. If you want to stay in the property for a longer period of time, then it will be a good option to refinance the mortgage.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I'm thinking about refinancing and taking out 50,000.00 more, my mortgage would be higher but the payment would be the same, because of the lower interest rates, what are your thoughts on this

thank you

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I'm thinking about refinancing and taking out 50,000.00 more, my mortgage would be higher but the payment would be the same, because of the lower interest rates, what are your thoughts on this

thank you

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

My thoughts, Ronnie, would be that if you have a need for the $50K, or if it will benefit you in any way (why wouldn't it?) and you can handle the payments because they're the same as what you pay now...why not go for it?

It seems to make sense...you apparently already feel that way.

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dp45712's picture
dp45712 | Joined: October 15, 2010 09:58 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am being told by my Mortgage CO that refinancing my current mortgage on my manufactured home is going to be more difficult because it is a manufactured home. I have a double wide on a full basement. Credit score of 804 and they're saying they can only find financing at 5%. I'm already at 5.5%!! Any lenders in WI that will finance at the current lower rates??

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

how much of the value of your home can be refinanced?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I owe 104K and I put it up in 2002 new. I'm waiting for appraiser but last year it appraised at 135K

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dp45712's picture
dp45712 | Joined: October 15, 2010 09:58 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

I owe 112K with a 2nd. It was appraised at 135k in 2009 and they wouldn't refinance it. NOw I'm trying to find someone other than my credit union to refin. But I have to have it reappraised!

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

dp, you will always find it more difficult to refinance mobile homes. There are limited numbers of lenders willing to assist; there is a limited secondary market, which drives all the interest rates; there is a reluctance due to the old mobile home markets, which too often consisted of trailers that were driven away before payment in full.

Lenders are nervous about them, in general.

I have to think that 5% is not a bad rate, inasmuch as they're willing to lend at all.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a 30 year mortgage and have about 22 years left on the term. I would like to refinance for a lower interest rate. If I refinance does the term remainging remain the same, i.e. 22 years - or does the new mortgage term start over at 30 years?

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Franko, you can choose from a variety of terms: 15-year, 20-year, 25-year and, of course, 30-year.

If you've got the ability to pay a larger payment, it is always advisable to go for the shorter term. Just be certain you can live with it for that entire period.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can i refinance my house if i bought the house under the 8000 rebate from the goverment i had the house for a year six months

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

John, the tax credit has no relevance whatsoever to your option of refinancing. Go ahead and do it if it makes sense. You won't encounter any difficulties other than the usual folderol.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

How much do I refinance?

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Nancy if you don't know how much you need to borrow, I don't anticipate any one of us on the forum to have any knowledge about it.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

If I purchase a home cash, is there a waiting period before I can apply for a mortgage in New York state?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Rick,

If you purchase a home for cash, you won't have to wait for a certain period of time to get a mortgage on that property. You can apply for a loan now and check out whether or not you qualify for it.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Jessica,

I currently have a mortgage of 240K as loan at Prime plus 1
I am being offered two options
1. 2.35% for 2 years fixed with an Amort. of 8 years
2 . 3.45 % for 5 years fixed with an Amort. of 8 years

I like the 5 years but because in 5 years I think rates might be higher. what would you suggest?

thanks

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gmakerley's picture
gmakerley | Joined: November 9, 2007 07:36 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

"Refinance" - if your amortization is for 8 years, then your only risk is the last 3 years. Rates may well go up, but presumably the lender you're working with will provide a maximum cap on your rate, won't they? What is your maximum rate over time? That's the key to knowing what to do.

What kind of lending institution makes 8 year loans?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks for your response. I just asked the institution am working with the two questions you asked.

It's not a new mortgage, I was in a 25 years before and each time I refinance I choose a lower term. This time around it's 8 years.

I will let you know their response

thanks again

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Under -- Bad Time to Refinance -- it says if your house value has gone down, then it's a bad time to refinance. My question is ... hasn't EVEYRBODY'S house value gone down recently? Does this bullet point still hold true?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Earle,

This point still holds value. Moreover, unless you have equity in your property, lenders will not be ready to refinance your mortgage.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I bought out my mom loan when she passed it was with country wide now bank america bought out they alway tell me I am behind would another company refinance me

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Guest!

Welcome to forums!

If you're current on your mortgage payments and have equity in your property, then you will be able to [url=http://www.mortgagefit.com/Mortgage-Basics/do-i-qualify-for-a-mortgage.h... for a mortgage[/url] refinance with some other bank.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

When refinancing a mortgage is it possible to waive escrow fees?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi jpeeples!

Welcome to forums!

I don't think you will be able to waive off the escrow fees.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am in situation where property value has depreciated and I owe wore than 90% of the mortagage. What can be possibly done.

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