Refinance to Save Your Money and Your Home

By Ellen Hoffman
Spring 2008

Refinancing Tools Scam alert: Stealing home (AARP Bulletin Online) When You Can't Make the Mortgage Payments (AARP.org)

The paperwork’s signed—the home is your own. Now all you’ll have to do is make your monthly payments.

But wait. It may not be so simple. At some point, you may want or need to refinance, which basically involves replacing your mortgage with a new loan. In the best-case scenario, homeowners refinance when mortgage rates drop to escape their current higher rate and reduce their monthly payments. In the worst case, people need to refinance because they’re in jeopardy of losing their home.

Millions of homeowners are facing that danger now, many because they were given subprime loans: highly risky, expensive loans granted even though the borrower failed to meet the usual requirements for repaying them. More than 40 percent of home loans made to Hispanics in 2006 were subprime. Says Aracely Panameño, director of Latino Affairs for the Center for Responsible Lending, “About 90 percent of all subprime loans in 2006 included adjustable interest rates that in 2008 and 2009 could lead to skyrocketing payments that will leave many borrowers with only two options: to refinance or lose their homes.”

While the federal government’s recent move to freeze exploding subprime rates is a positive step for some borrowers, the Center estimates that only 145,000 homeowners would benefit. And, says Panameño, “Borrowers who were steered into subprime loans in 2005 to 2006 and beyond, who are behind with their mortgage payments, are disqualified.”

Whether you want to refinance to get a better rate or need to refinance to save your home, do your homework. To get the best deal, suggests Tino Diaz, who is on the board of the National Association of Hispanic Real Estate Professionals, ask relatives and friends to recommend a lender and compare offers from several lenders, such as a local bank, national bank, and mortgage broker who can arrange loans from different sources. He says, “Your home is the biggest investment in your life. You don’t just go to one place to buy a car, so…shop for the best refinancing deal.”

Steps to Consider

	Avoid interest-only mortgages as well as those where you pay low teaser rates or don’t need to verify income. Traditional 30-year fixed-rate mortgages are best.
	If you have an adjustable-rate mortgage, find out when, how much, and how often the interest rate will change; the likely amount of your new payment; and whether there’s a prepayment penalty. Start looking for a new loan months before your payments will rise, but don’t close before the prepayment penalty period expires. Ask if you qualify for a rate freeze under the voluntary program agreed to by the Bush administration and some lenders.
	Get advice from a housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD) to find a reliable lender or evaluate the terms of a loan.
	Ask three or four lenders to fill out a Good Faith Estimate of Settlement Costs, a HUD form showing all the expected costs of the mortgage. Compare lenders’ interest rates and fees, and check them against current market rates posted online or published in newspapers.
	Request the HUD-1 Settlement Statement—a required form listing fees charged on the loan—a day before the settlement. If the fees are higher than the estimate, complain and threaten to not go forward.
	If you have poor credit, you may be ineligible for lower-rate loans. See whether local housing authorities can help you avoid getting a subprime loan or losing your home.
	At the settlement, read the Truth in Lending Act disclosure, required by the government, which includes such data as the amount of the loan, finance charges, and payments. If you don’t agree with the terms, you can cancel the loan in three business days. If you’re asked to waive your right to cancel, don’t do it.
	If you’ve negotiated a loan in Spanish and get a contract in English, ask for a Spanish-language document or have a translator explain the details.

Refinancing Tools:
	Center for Responsible Lending: information on mortgages
	National Association of Hispanic Real Estate Professionals: code of ethics
	U.S. Department of Housing and Urban Development: counseling and assistance