Mortgage Refinancing Loan Options - First Internet Bank

Mortgage Loan Options

Fixed Rate Loans

It makes sense to refinance into a fixed rate home loan when rates are low and you plan to live in your home for a long time. Conventional fixed rate loans require that you have a minimum of 5% equity in your home. If you have less than 20% equity, please read more about our low down payment options, below.

The most popular form of mortgage is a 30 year fixed rate program, although First Internet Bank also offers 25, 20, 15, and 10 year fixed rate home loan terms. Shorter terms typically have lower rates. Additionally, the shorter the term, the less interest you will pay during the life of the loan, and the faster you will build equity in your home. However, your monthly payment will be higher with a shorter term loan because the amount of the loan is amortized over a shorter period of time (divided by fewer months).

Adjustable Rate Loans

An adjustable rate mortgage (ARM) loan might be a better option for you if fixed rates are high or if you plan to live in your home for a short time. ARMs are typically expressed in terms of the fixed portion of the loan, followed by the reset period. For example, the rate on a 5/1 ARM is fixed for the first five years of the loan and then adjusts/resets each year. Generally, these changes are determined by a margin and an index so that interest rate changes, up or down, are based on market conditions at the time of the change. Most often, these interest rate changes are limited by a rate change cap and a lifetime cap.

Example: If you plan to live in your home for no more than 5 years, you may consider a 5 year adjustable rate mortgage program. Rates on 5 year adjustable rate programs are normally lower than a 30-year fixed rate program. The rate on the 5 year ARM is fixed for the first 5 years and then adjusts annually. If you sell the home and pay off the mortgage before the end of the fifth year, you would not have been there long enough to see a rate or payment change. Your interest savings over the first five years, compared to a fixed rate, could be significant.

Adjustable rate mortgages loans are not for everyone. The potential for significant rate and payment increases exist if you end up living in the home for a long time. Please contact a First IB Mortgage Loan Officer for additional information and guidance.

Refinance Options with Minimal Equity

If you are a current or past member of the United States military (Army, Navy, Air Force, Marines, Reserves, or National Guard) you may be eligible for a VA mortgage and be able to refinance with little or no equity. VA loans have restrictions on the amount of money you can borrow.

If you do not qualify for VA you can refinance your mortgage with as little as a 3.50% equity using a Federal Housing Administration (FHA) mortgage.There are restrictions on the amount of money you can borrow using an FHA mortgage. The amount varies depending on where the home is located.

For example: If the purchase price is $100,000, your minimum equity is $3,500.

100,000 x .035 = 3,500

Special Considerations for Condos

The quality of mortgages secured by units located in a condominium project can be influenced by the project as a whole Why? The value and marketability of condominium properties is dependent on items that don't apply to single-family homes. Therefore, mortgage rates and fees offered on condominiums can be higher than those offered on single-family homes. Additionally, equity requirements on condos can be higher than single family homes.

One of the most important factors is determining if the project that the condominium is located in is complete. In many cases, it will be necessary for the project, or at least the phase that your unit is located in, to be complete before First Internet Bank can provide financing. Until the project is complete, lenders cannot be certain that the remaining units will be of the same quality as the existing units. This could affect the marketability of your home.

In addition, we will consider the ratio of non-owner occupied units to owner-occupied units. This could also affect future marketability since many people would prefer to live in a project that is occupied by owners rather than renters.

We will also carefully review the appraisal to insure that it includes comparable sales of properties within the project, as well as some from outside the project. Our experience has found that using comparable sales from both the same project as well as other projects gives us a better idea of the condominium project's marketability.

Depending on the percentage of the property's value you'd like to finance, other items may also need to be reviewed. A First IB mortgage expert can help you through the process.

Special Considerations for Second and Vacation Homes

Mortgage rates offered on Second / Vacation Homes are usually the same as rates offered on primary residence mortgages. However, down payment requirements can be higher on Second / Vacation homes.

The following is a list of requirements for us to be able to finance your second / vacation home:

  1. Must be located a reasonable distance away from your primary residence (usually a minimum of 50 miles)
  2. Must be occupied by you for some portion of the year
  3. Must be a one-unit dwelling
  4. Must be suitable for year-round occupancy
  5. Must not be a rental property or timeshare arrangement
  6. Cannot be subject to any agreements that give a management firm control over the occupancy of the property

Additionally, you must have exclusive control over the property.

"Paying" Points

Discount points are considered a form of interest. Each point is equal to one percent of the loan amount. You pay points upfront, at your loan closing, in exchange for a lower interest rate over the life of your loan. (Paying points can also be called “buying down your rate.”) This means more money will be required at closing; however, you will have lower monthly payments over the term of your loan.

For example: If the purchase price is $100,000, and your interest rate offer requires you to pay 1.6 points, you would pay $1,600 in addition to closing costs.

100,000 x .016 = 1,600

To determine whether it makes sense for you to pay discount points, you should compare the cost of the discount points to the monthly payments savings created by the lower interest rate. First IB offers a calculator to help you consider: Does it make sense to pay points to get a lower interest rate?

Escrow

In broad terms, “escrow” refers to funds paid by one party to another to hold until a specific date when the funds are released to a designated individual. Escrow refers to funds that are held by a third party to ensure the completion of repairs or improvements that must be completed on the property but that cannot be done prior to closing.

After the closing, an escrow account generally refers to the funds you pay to the lender for the payment of real estate taxes and hazard insurance in addition to your principal and interest payments. This is also referred to as impounds. The money is held by the lender to make payments when they are due.

You are not always required to establish an escrow account – you would instead be responsible for making your own tax and insurance payments – but doing so can increase the cost of your mortgage.

Comparing Offers

If you are shopping for mortgage rates, comparing APRs is one way, but not the only way, to decide which lender has the lowest rates and fees.

The federal Truth in Lending law requires that all financial institutions disclose the APR when they advertise a rate. The APR is designed to present the actual cost of obtaining financing, by requiring that some, but not all, closing fees are included in the APR calculation. These fees, in addition to the interest rate, determine the estimated cost of financing over the full term of the loan (30 years, for instance).

  • Since most people do not keep the mortgage for the entire loan term, it may be misleading to spread the effect of some of these upfront costs over the entire loan term.
  • Also, unfortunately, the APR doesn't include all the closing fees. When lenders disclose an APR, they have some latitude to interpret which fees they include. Fees for things like appraisals, title work, and document preparation are often not included, even though you'll probably have to pay them.
  • For adjustable rate mortgages, the APR can be even more confusing. Since no one knows exactly what market conditions will be in the future, assumptions must be made regarding future rate adjustments.

You can use the APR as a guideline to shop for loans, but we advise against depending solely on the APR in choosing the loan program that's best for you. Look at total fees, possible rate adjustments in the future if you're comparing adjustable rate mortgages, and consider the length of time that you plan on having the mortgage. A First IB mortgage expert can help you understand various offers with your specific situation in mind.

Keep in mind the APR is an effective interest rate, not the actual interest rate. Your monthly payments will be based on the actual interest rate, the amount you borrow, and the term of your loan.

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