Saving Thousands with Robert Palmer.

Good morning and welcome to today's show. One great way to save thousands is by lowering the cost of your mortgage. Mortgage interest can easily cost over $10,000 per year. And when rates are low, existing homeowners can take advantage of these lower rates and easily save thousands. You just have to know a few key points to making sure that refinancing is right for you and that you're getting the best deal.

One of the main barriers to many homeowners refinancing is a lack of equity. So later in the show, we'll take a look at a program designed to help underwater homeowners called HARP-- which stands for the Home Affordable Refinance Program-- and its most recent version dubbed HARP 2.0.

But before we get into the HARP program, let's look at the general rules of the road when it comes to deciding if refinancing is right for you, and the steps involved in refinancing any mortgage loan. The first step is deciding if refinancing is right for you. That is, to decide if the investment of your time and the cost of the new loan are worth the amount of long-term savings you'll gain from a lower interest rate.

There are a lot of myths and misconceptions about when it's right to refinance your mortgage. Some people say you need to be able to save at least 1% on your rate. Others say 2%. Well, we'll get to the truth and I'll show you how to calculate the minimum rate you would need to save. Because it's actually different for everyone's situation.

There are three factors that go into determining if a refinance is right for you. The cost of the refinance, the interest rate savings, and the time you'll remain in the home.

The cost of the refinance is a primary factor to consider. If you could refinance with no cost, then any and all interest savings would be realized instantly. But unfortunately, there are costs involved in refinancing. So before we can determine how much interest rate savings we need to justify the refinance, we need to understand the upfront costs.

The costs of the refinance can be broken down into four categories, lender fees, title company charges, government charges, and third party costs. Most mortgage shoppers are focused solely on the lender fees. And while this is very important, you cannot neglect the other costs of the loan. The other costs are not controlled by the lender and have to be shopped for separately after a lender has been selected.

In order to get the best lender fees, you have to shop around. There are a number of lenders in today's market who do not charge or are willing to waive all lender fees in order to earn your business. I've covered shopping for a mortgage in other shows, so I don't want to get too much into detail here. Just remember when you're considering the cost benefit of refinancing, that zero lender fees is available with a little bit of work.

The next and most overlooked cost is the title company charges. These have to be shopped for separately because they're not controlled by the lender. You must do your shopping directly with the title insurance agencies.

It's a good idea to contact the title insurance agency who closed your original loan. Also your chosen lender will most likely recommend a title company. And then I would recommend selecting at least one additional company to compare.

One pitfall to watch out for. Some lenders actually own their own title companies because they know this is an often overlooked piece of the mortgage shopping experience. They will quote you very low mortgage costs, but then make up the difference with overinflated title charges. The best course of action is to shop for your own title company. The savings can be significant and as a consumer, the ultimate choice is yours.

A couple of other tips when it comes to title insurance. Provide the title company with a copy of your prior owner's policy. This is the policy you received when you originally purchased the home. And this will allow them to offer you what's called a reissue credit, which will reduce the cost of title insurance significantly.

The other fees that make up title company charges are closing fees, notary fees, and endorsements. So make sure you're comparing the total cost between each company.

Finally, we have the third party costs, which include items like surveys and termite inspections. Make sure you always select your own providers. If you let the title company or the lender choose the surveyor or termite inspector for you, you may not get the best deal. You can also avoid the need for new surveys or termite inspections if you have a current survey on your home, or if your home is covered by termite bond or warranty.

When we're considering refinancing, it's important to cut the cost down as much as possible. When we get back, I'm going to show you the actual cost you could expect to pay on a $200,000 refinance. And the amount you can save with a little shopping around will shock you.

Welcome back. It's time to take a look at an actual example of closing costs. We'll use a refinance of a $200,000 mortgage in the state of Florida. I'm going to show you the average cost that most consumers pay for each of these services, and then what a smart shopper pays with a little bit of legwork and some shopping around. Let's start with the lender fees.

The average lender fee charged today for a $200,000 loan is around $1,600. So how much can you reduce this $1,600 to with a little shopping around? Zero.

That's right, with a little bit of legwork and some shopping around, you can find lenders who are willing to waive all of their origination fees, dropping this to zero. You'll be amazed at how quickly lenders start dropping costs when you let them know you're one of the few consumers who is shopping around. Remember, this is an industry where less than 1/3 of consumers shop around.

Second of all is some third party services chosen by the lender. We have the appraisal fee. Appraisals can be quoted as high as $550 because many lenders pay a third party company for coordinating the appraisal process. With a little bit of shopping around, $350, a $200 savings.

Next we have the tax service fees, roughly $80. Again, this can be zero with a little shopping around.

And credit report fees. Usually $20, and again, zero with a little bit of shopping around. So savings so far, $1,900. And we're just getting started.

Now we move on to the title charges. And this is a big one, because even less people shop for their title charges. The average title charges for a $200,000 loan would be around $2,025. But for a smart shopper with a prior title policy, $895. A savings of $1,130, over 50% off.

Now there's a set formula for calculating the cost of title insurance in the state of Florida. The base cost is $5.75 per $1,000 borrowed. But if you provide your previous owner's policy, you receive what's called a reissue credit. Many companies don't want you to know this because it cuts into their profits. And everyone who is refinancing has a prior title policy from when they originally financed the house.

In addition to the savings from providing a prior title policy and receiving the reissue credit, title companies have junk fees just like the mortgage industry. This is the closing fees, notary fees, the padded endorsements. You also got to keep an eye out for wire fees, overnight fees. They'll make up all kind of stuff.

All of these fees are up for negotiation. And while few title companies can charge zero the way lenders can, you can easily negotiate an additional $400 to $500 off these fees. So just by shopping around for our lender and our title insurance separately, we've saved over $3,000.

The next section of costs in a refinance is the government fees. Well, in the state of Florida on a $200,000 loan, this would be $1,215. You see, in the state of Florida we pay these government fees because we don't have a state income tax. Because of the large number of vacation homes in Florida, the state decided taxing real estate transactions would be more advantageous than a state income tax.

And finally the other third party costs. This could be a survey, which would be $275, which again can be waived. If you have an existing survey on your property that's less than 10 years old, you can provide that to the lender and in most cases avoid the expense of a new survey.

Termite inspections. Many lenders want to make sure your home is termite free before making a new loan. But if you've had treatments recently or an inspection recently, you can avoid this cost as well.

Average cost for a $200,000 loan, $5,765. Our total cost as a smart consumer who shopped for their lender, shopped for their title insurance company separately, provided a prior title policy and provided a survey, only $2,460 for a $200,000 loan. Just over 1%, and this is over $3,000 lower than the average costs.

One last section we need to look at is the escrows. When you receive quotes from lenders they will include the escrow cost. That is the collection of your taxes and insurance, but this is not an actual cost of the refinance. Whether you have a mortgage or not, you're required to pay your property taxes and your homeowner's insurance. Some borrowers count the initial escrow deposit in the cost of the refinance.

Please understand this is not a cost at all, and should not be factored into your benefit calculation for the refinance. In fact, if you have an existing escrow account with your old lender, the amount in that account will be refunded to you within 30 days of your refinance.

So you can see, with a little bit of shopping around you can easily save thousands on the closing costs associated with a mortgage loan. And by reducing these costs, you better take advantage of low interest rates through refinancing your loan.

When we get back, we'll take a look at the next factor, and possibly the most important that you have to consider when deciding to refinance. And that's time. So stay tuned.

We'll be right back with more Saving Thousands with Robert Palmer.

Welcome back. The most important factor in deciding to refinance your mortgage could quite possibly be time. The amount of time you think you'll continue to live in the home. Basically, how much longer you would keep your mortgage.

Now while it's impossible to know for sure, we all have a pretty good idea of how much longer we plan on staying in our home. If you have plans to increase your family size, or downsize your household in the future, these factors will play into the determination.

Let's look at some questions you should consider when determining how much longer you'll stay in the home. One, will you have any significant changes in family size, either smaller or larger in the near future that could cause you to need to change your housing situation? This could include having additional children, taking on the care of elderly parents, or children leaving the home for college. Changes in household size have a major impact on the need to sell your home.

Second is geographic changes. Are you planning on retirement or any type of career change that may cause you to relocate to another area? Again, causing you to sell your home.

Third is income changes. Are you expecting a significant increase or decrease in your income in the near future? Again, this can cause a change in your housing wants and needs that would cause you to leave your current home. When you refinance your home, the upfront costs we discussed are incurred immediately, while the interest savings occurs over time. This creates a situation where the less time you plan on being in your home, the less advantageous the refinance will be.

Let's look at an extreme example. You refinance your $200,000 home from our example above without shopping around, at a cost of $5,765 in closing costs, and a savings of 2% on the interest rate. Most people believe that if they can save 2%, they should always refinance.

But what if you sold your home just four months later? Think about it. You would have incurred the full $5,765 in closing costs, and only saved $1,333 in interest, for a loss of $4,432.

So in this example, while extreme, it shows that even the age-old rule of a 2% savings is flawed if you're going to stay in the home for a very short period of time. Even if you did shop around to get a good deal on the closing costs, you would still lose money by refinancing and then selling the home in such a short period of time. This example makes it easy to see how properly gauging the time you plan remaining in the home is very important when it comes to deciding to refinance.

There's one other time-related factor we have to consider as well. And that's what's your time worth? All of this shopping around and going through the refinance process is time consuming. So you have to decide the minimum amount of savings you need to feel like it was all worth it.

I think for most people, a savings of $2,500 would be considered worth it. But you have to make your own decision.

So let's look at our $200,000 example. $2,460 in closing costs because we shopped around. And $2,500 in required savings to feel like it's worth it. So we need to save a total of $4,960 in interest in order to both recoup the closing costs and save our target of $2,500 to make the transaction worthwhile.

If we think we'll stay in the home for two years, we would need to save $4,960 divided by the two years, equals $2,480 per year in savings. If we take that $2,480 per year and divided it by the loan amount of $200,000, we can see that we would need 1.24% reduction in interest rate to hit our goal. So if you currently had a 5% interest rate, you would need to refinance to a 3.75% rate to recoup the upfront costs and reach our savings goal in the two year period.

If you think you would stay in the home for three years, the calculation would be $4,960 divided by 3 years, which is only $1,653 per year. Divide that by our $200,000 loan amount, and you only need to reduce your rate by 0.82%.

At four years, we take the $4,960 divided by 4, divided by $200,000. We only need to save 0.62%. And finally at five years, $4,960 divided by 5, divided by $200,000 is less than a 0.5% reduction in interest rate.

So based on our example, you can see that at two years in a home, you need to lower your rate by roughly 1.2% percent. And the longer you stay in the home, the less rate reduction you need to make it worthwhile. Also this covers the cost of refinancing, plus that minimum savings target we set of $2,500.

The important keys to remember are that you have to shop for both the lender and the title insurance company separately to ensure the lowest possible cost, and make sure you don't plan on moving any time soon. If you think you will keep your home for less than two years, it rarely makes sense to refinance your mortgage. When we get back, we'll take a look at the new HARP program and what it could mean for underwater homeowners.

We'll be right back with more Saving Thousands with Robert Palmer.

Welcome back. Let's take a look at the HARP program and what it could mean for you.

The HARP program, or Home Affordable Refinance Program was designed to help homeowners who have a loan that is currently guaranteed by Fannie Mae or Freddie Mac refinance their home loans without having the required equity. In order to refinance these loans, homeowners traditionally needed 20% equity in their homes. But unfortunately, with the decline in home values caused by the real estate crisis, many homebuyers do not have this required equity.

Since Fannie Mae and Freddie Mac are currently under government control, the Federal Housing Finance Agency-- or FHFA-- wanted to help these homeowners take advantage of today's low rates, so they created the HARP. This program allows borrowers who do not have the required 20% equity to refinance their loan as long as the loan they currently have is guaranteed by Fannie Mae or Freddie Mac. So to find out of your loan is, you can visit one of these sites, Fannie Mae at Fanniemae.com/loanlookup, or Freddie Mac at Freddiemac.com/mymortgage.

Under the original HARP program, homeowners could be as much as 25% upside down on their home, making their loan to value 125%. Loan to value is calculated by dividing the amount you owe by the value of the home. So if you owed $250,000 on your home and it was worth $200,000, we would divide this and see that our loan to value is 125%. Under the original HARP program, this was the maximum loan to value allowed.

In 2012, the government decided they needed to do more and removed this maximum cap for loan to value in order to help more borrowers who have Fannie Mae and Freddie Mac loans and who are upside down on their property. Unfortunately as of today, there's still a lot of uncertainty about the new program. There's a software upgrade that has to take place at Fannie and Freddie before they can allow the new loans to be underwritten that are further upside down. They're also adding in waivers for some homebuyers on the appraisal, and reducing costs associated with the new HARP loans.

Another important factor to consider is that your payments have to have been made on time to be eligible. This program is not designed to help homeowners who are past due who have been delinquent on their mortgage. So if you've made your payments on time and the only thing stopping you from refinancing has been this lack of equity, HARP 2.0 may be a solution for you.

You should shop around for a HARP loan the same way you would shop for a normal refinance, and make sure you're getting multiple quotes so you can make sure you're getting a good deal. While not every lender will offer the HARP loans, there should be enough lenders participating in the program to create competition and give you, as a consumer, the ability to shop around.

I think as with any government program, there will be companies who try to take advantage of homeowners in need of HARP. For this reason you should be wary of any lender who tries to charge you a nonrefundable upfront fee to apply for the program. You should not have to pay for anything upfront out of pocket but an appraisal, and that's only if the appraisal is required for your HARP loan. Many homeowners will be able to take advantage of HARP without a new appraisal.

So make sure you do your homework and research any company you consider working with on a HARP refinance. As more information is released about this program, and once the software upgrades are made at Fannie and Freddie so lenders can finally begin to offer the new version, I'll cover this topic again and give more detailed information.

So you can see there's a lot of options when it comes to refinancing your home loan. But we have to make sure as consumers we're doing our homework and shopping around to get the best deal. With the addition of the new HARP program, a record number of homeowners should be able to take advantage of today's low rates. So just remember, the same principles apply whether you're getting a HARP refinance or a traditional refinance loan.

I hope you've enjoyed today's show. And I hope you can take the tips and tricks when it comes to refinancing, as well as the illustration of how much money you can really save when it comes to closing costs by shopping around, and apply it to your next refinance.

We've got an exciting event coming up on March 3rd I'd like to share with you. My company, RP Funding, is sponsoring the Orlando Chili Cook-Off in Baldwin Park to benefit Special Olympics.

The event will be held on March 3rd in Baldwin Park, and it's going to be a great time. We need cooks, we need participants. Last year there were 7,000 people there, and this year we hope to have even more.

So if you've got a great chili recipe, we'd love for you to come out and participate. The cost to be a cook is only $15. There's also spots still available for vendors.

And of course, we need lots of people to come out, taste the chili, and have a great day with their family. Tickets at the door are $12.

To get more information on the Orlando Chili Cook-Off, you can visit their website. And in fact, you can save a couple bucks by purchasing your tickets in advance. Ticket pre-sales are $5 off, for only $7.

Again, this is going to be a great event to benefit Special Olympics Florida. And it's going to take place in Baldwin Park on March 3rd. So come out and enjoy some chili and enjoy a great day of fun with your family.

Again, thanks for tuning into today's show. It's been great as always. And I hope I've helped you see how you can save thousands by refinancing your mortgage if you do it in the right way, by shopping around. Tune in next week and I'll have more tips on how you can be a smart consumer and save thousands.

Be sure to join us again next week as Robert Palmer shares more ideas on how you can save thousands while making everyday decisions. That's next Saturday at 10:00 AM right here on central Florida's TV 27.