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Breaking Even

Your break-even point is when the your savings from your new loan equals the cost of getting the new loan. If you plan on selling your home or moving before the breakeven point is reached, you probably would not recover the closing costs incurred and should think carefully before moving forward with said refinance

For example:

$4,500 in closing costs ÷ $250 in monthly payment savings = 18 months to break even and cover the costs of the loan.

APR vs. Interest Rate

When refinancing your mortgage or buying a new home, keep in mind that an advertised rate isn’t the same as your loan’s (APR). What’s the difference?

  • The interest rate refers to the annual cost of a loan to a borrower and is expressed as a percentage.
  • The APR is the annual cost of a loan to a borrower -- including fees. Like an interest rate, the APR is expressed as a percentage. Unlike an interest rate, however, it includes other charges or fees (such as mortgage insurance, most closing costs including escrow and title fees and points and loan origination fees). The Federal Truth in Lending Act requires that every consumer loan agreement disclose the APR. Since all lenders must follow the same rules to ensure the accuracy of the APR, borrowers can use the APR as a good basis for comparing certain costs of loans.
Your monthly payment is not based on APR, it's based on the interest rate on your promissory note

Understanding your debt-to-income ratio

Your debt to income ratio (or DTI) will play an important part in refinancing or buying a home. Simply put, it is the percentage of your monthly income that is taken up by your total monthly debts.

Lenders look at your existing debt payments plus the projected payment for the new loan, and then calculate what percentage that represents of your income. This percentage is your debt-to-income ratio, which is one of the main factors lenders use to decide whether or not to extend you a loan. Generally, the lower your debt-to-income ratio is, the more likely you are to qualify.

How to calculate it

Lenders typically calculate your debt-to-income ratio by using these steps below:

  1. Add up the amount you pay each month for debt such as credit cards, car loans and leases, or student loans, as well as any home equity loan or line of credit payments. (payments like the following aren’t included- utility payments like phone, water and electric bills or living expenses like grocery bills.)
  2. Add your projected future mortgage payment (principal, interest, taxes, insurance, homeowners association or condo dues & PMI) to your debt total from step 1.
  3. Divide that total number by your gross monthly income. The resulting percentage is your debt-to-income ratio.

For example, if your monthly income is $9,500 and your monthly debts plus your monthly projected mortgage payment are $3,540, your debt-to-income ratio would be 37.3%.

Fixed Rate Loan

With a fixed-rate mortgage refinance, your interest rate and your monthly payment of principal and interest, will stay the same for the entire term of the loan. A fixed-rate mortgage tends to be the most popular because it is the most basic and secure type of mortgage available Whether you’re interested in possibly lowering your monthly mortgage payment or switching to the predictability of a fixed-rate loan, Rockland Financial can help you decide what will best suit your needs

30 year fixed-rate mortgages

The 30-year fixed-rate refinance mortgage is probably the most popular loan. Many people like the fixed interest rate, and payments are kept more affordable because they are extended over a longer period of time. But since the term of the loan is long, you’ll pay more interest over the life of the loan than you would on a shorter-term mortgage, and you build equity at a slower pace

20 year & 15 year fixed-rate mortgages

A 20 or 15 year fixed-rate refinance mortgage helps you pay off your home faster and build equity quicker than a longer-term fixed-rate mortgage. A 20 or 15 year fixed generally has a lower interest rate than longer-term loans but higher monthly payments. The lower the term the higher the payment typically.

Jumbo loans

If your mortgage will be for an amount higher than the conforming loan limits, a jumbo mortgage may be an option for you. Jumbo loans are available for primary residences, second or vacation homes and investment properties, and are also available in the same variety of terms and choices as conforming loans. Jumbo home loans typically have a higher interest rate than smaller home loans due to different underwriting and home equity requirements

Adjustable-Rate Mortgages (ARMS)

Adjustable-Rate Mortgages (ARMS)

An adjustable-rate mortgage (ARM) refinance typically provides a lower interest rate for an initial payment period, and for the most part making the initial monthly payments less than those of a fixed-rate mortgage

Many lenders today offer a (hybrid ARM), which features an initial fixed interest rate period, typically of 3, 5, 7 or 10 years. After the introductory fixed-rate period expires, the interest rate becomes adjustable for the remainder of the loan. The overall term for most hybrid ARMs is 30 years.

example, a 5/1 ARM, the “5” stands for a 5-year introductory period in which the interest rate remains fixed. The “1” shows the interest rate is subject to adjustment once per year after the introductory period expires.

Refinancing into an adjustable-rate mortgage could be a good way to lower your monthly payments in the short term, but there are other things to consider

Things you should consider

After the lower initial rate period, the ARM interest rate will adjust to a fully indexed rate and could increase your rate and payments. If the rate goes up, your monthly payments go up, so you want to be financially prepared to make larger payments.

Adjustable-rate mortgage loans could be a good choice if you:
  • Are planning to move in the near future (before the end of the initial rate period)
  • Expect your income to rise enough in the coming years to cover any increase in payments
  • Want lower initial monthly payments than a fixed-rate mortgage if offering
  • Think rates may fall and put you in a position to refinance again
Disadvantages of adjustable-rate mortgages:
  • Interest rates will increase in a rising rate environment (obvious risk)
  • An increase in rates will increase your monthly payment amount
  • An increase in interest rate will reduce accumulation of equity
10/1 – 7/1 – 5/1 adjustable-rate mortgages

A 10/1 – 7/1 – 5/1 ARM has a fixed interest rate for the first 10, 7, or 5 years. After that fixed period, the rate can change once every year for the remaining term of the loan. When the rate changes, your monthly payments will increase if rates go up and decrease if rates fall.

ARM interest rate caps and indices

The rate you pay on an ARM after the initial rate is based on a fluctuating index plus a margin. Your monthly payments will increase and decrease depending on the rates rising or falling. Example, if the interest rate for the financial index is 4.5% and the margin is 2.00%, then your rate at the time of adjustment would be 6.50%. Keep in mind that different indexes go up and down faster than others, and both the index used and the margin can vary among lenders. How often your payments are adjusted are based on the index and on your loan terms.

ARM loans typically feature an adjustment cap which limits how much the interest rate can go up. However, many rate caps allow significant monthly payment increases that could result in “payment shock.” After the initial fixed-rate period, the monthly payment and interest rate for ARM loans adjusts once per year.

When finding out about ARM options, be sure to ask the following questions:
  • What is the rate cap?
  • How often does the rate change?
  • Are there any penalties for paying off your loan early, also called a prepayment fee? Being able to prepay your ARM will allow you to refinance again if rates go down.
Financial indices

Every ARM loan uses a money rate index to determine the loan rate for a set period. Lenders have no control over any of the money rate indices. You can track the performance of each index in The Wall Street Journal. The rate you pay is set at each adjustment period by adding the rate of the index plus your (your margin is fixed and won’t change). Some of the common indices are Treasury-Indexed ARMs (T-Bills) and the London Interbank Offered Rate ARMs (LIBOR)

Applying for your loan

Call us so we can take your application. You can apply for your mortgage by filling out an application in person or we are able to start over the phone or right here online. You’ll fill out an application, providing information on behalf of yourself and anyone else who is going to be listed as a co-borrower on the mortgage (like a spouse or partner). If we have already pre-approved you, you may have already filled out some of the application details by this point.

What you’ll need

We may require more documents, depending on your circumstances and the type of mortgage for which you’re applying. You can expect to get questions about your employment and financial history. With your permission, we will also run your credit as part of the loan process.

Because a mortgage is such an important financial commitment, be sure to be as honest and forthright as possible. Not disclosing credit problems up-front or holding back requested documents will only delay the process and potentially prevent approval of the mortgage, so it’s to your benefit to fully disclose everything about your finances.

To lock or not to lock, in the end, it’s a personal choice when to lock your rate. However the rate must be locked prior to the lender preparing your closing documents. Talk to your lender about the choice that best suits your needs and your preferences.

Renting vs. Owning

Both owning and renting have their advantages and disadvantages. Circumstances will dictate what is best for you. Here is some stuff to keep in mind when you weigh the benefits of renting against the benefits of owning.

Financial items to consider

Would I need to make changes in my budget to buy a home? Would it mean stretching to my financial limits? Would owning allow me to still maintain my other savings goals? Consider new expenses that owning a home would include that you don’t have when renting such as a gardener, pool man, typically higher utilities etc.

Renting

has both advantages and disadvantages. For instance, renting may provide you with more residual income each month, if your rent is less than a mortgage would be and as a tenant you get to call the landlord to fix a leaky faucet. On the other hand, renters typically cannot make any changes to their living space and are often subjected to rent increases.

Owning

Owning a home may provide you with some tax benefits (check with your tax advisor to see how owning would impact your personal situation). Owning a home also offers you the chance to increase your personal wealth as you pay off the on your loan over time and build what is known as equity. Of course, home values can rise or fall over time, so building equity isn’t guaranteed.

Personal things to consider

Owning a home is a financial commitment that requires you to plan ahead, think about where your life is headed and what you want your future goals are. Ask yourself: What financial goals do I want to accomplish as I make payments on a mortgage? What’s more important to me: the opportunity to build equity and possible value appreciation or perhaps having more cash available now is more important?

Renting usually makes it easier to relocate (new job opportunities or just new scenery, for example). And if the rent is cheaper than a mortgage, renting could allow you to contribute more toward specific savings goals, such as retirement, college, future travel, investments or even putting away money for a down payment for a home in the future.

Owning a home could make sense for you if you want to make the commitment of your monthly living costs going toward something you could eventually pay off and own outright. Buying may also make sense if you plan to stay in the area and would rather feel settled into a home that reflects your personal tastes.

Ultimately only you can make the choice of whether owning a home fits your current life’s circumstances


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    Woodland Hills, CA 91367
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