Delaware Business Lawyer Blog

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Unless you plan to move in the near future, it’s time to jump on the bandwagon. If you live in Delaware and you’re interested in starting the process of refinancing, your first step is to pick a mortgage company. Don’t make the mistake of thinking that your present mortgage company will give you the best deal. Believe me - it pays to shop around for rates.

You’ll need an attorney to handle your closing, and I always recommend contacting the attorney early on in the process to help with procedures and questions. Be sure to ask the attorney if there will be a fee charged if you don’t get approved for the mortgage.

This article is part of a series of articles I've written about refinancing in Delaware.

This right to choose your own attorney is so fundamental that if you are referred to an attorney by someone who works for your lender, that attorney is required to inform you, in writing, that you have the absolute right (regardless of any preference that the lender may have and regardless of who is to pay attorney's fees) to retain a lawyer of your own choice to represent you throughout the transaction, including the examination and certification of title, the preparation of documents, and the holding of settlement.

The attorney who you are referred to must also inform you of the identity of any other party having an interest in the transaction whom the lawyer may represent, including a statement that such other representation may be possibly conflicting and may adversely affect the exercise of the lawyer's professional judgment on your behalf in case of a dispute between the parties. In this connection, a lawyer is deemed to have a "possibly conflicting" representation if he represents the lender or has represented the lender on a continuing basis in the past.

The day before the closing, and sometimes the same day, the mortgage company calls to let us know that they’re not ready, and that the closing has to be postponed for a few days or even a few weeks. This is especially frustrating for those clients who are expecting to get cash back from their refinancing so they can pay bills. It's also a little worisome if you're facing the expiration of your rate lock.

Under these circumstances, my recommendation is to keep in touch with your loan officer on a regular basis. Email is really the best way. Each time you write, ask if there are any conditions that have not yet been met, and if there’s anything you can do to move matters along.

In order to get the most of this article, you need to understand the difference between a Note and a Mortgage. The Note is your written promise to pay back the money you're borrowing from your lender. The Mortgage, on the other hand, is a lien against your home which gives your lender collateral backing up your promise in the Note.

The Note is signed by the individual who has to pay back the loan. The Mortgage is signed by whoever owns the home.

When you apply with the mortgage company, let’s say they tell you that your spouse can’t be on the mortgage due to credit issues. What they really mean is that your spouse can’t be one of the “borrowers” whose credit determines whether the loan will be approved. Again, that's the person who will sign the Note. When your mortgage company says your spouse can’t be on the mortgage due to credit issues, they don't really mean that your spouse can't be on the mortgage document that gives then collateral backing up your promise to pay.

Let's take a look at two scenarios.

#1. Husband is the sole owner of the house. He signs the Note promissing to repay the loan. As the owner, he signs the Mortgage as collateral for his promise. On top of that protection, the mortgage company is also given title insurance.

#2. Husband and wife are both owners of the house. Husband signs the Note promissing to repay the loan. As the owners, both husband and wide sign the Mortgage as collateral for husband's promise. On top of that protection, the mortgage company is also given title insurance.

In both scenarios, the mortgage company has the husband's promise to pay back the loan, and it also has the house as collateral.

Here’s an example of how it works. Let’s assume you’re getting a mortgage in the amount of $260,000.00. For the first $100,000.00, it’s $2.50 per thousand. There are 250 thousands in $250,000.00 and so the cost for the first $100,000.00 is $250.00. For the remaining $160,000.00 ($260,000.00 - $100,000.00), you can see that there are 160 thousands in $160,000.00. Multiply 160 times $2.00, and you get $320.00. The final step is to add $250.00 and $320.00, and you end up with $570.00 as the total cost for lender’s title insurance for a mortgage of $260,000.00.

But there's something else to consider when deciding the right time to refinance. Many of my clients have been applying to mortgage companies whose settlement costs are so low that it makes sense to refinance now with the plan being that if rates go down further, they will refinance again. In fact, one client had a settlement last week where the mortgage broker paid 100% of the costs, so refinancing was a no-brainer for this client. On the way out of my office, my client said that he would do this again and again if rates keep dropping.

Some recent articles to read on the subject of when to refinance are:

"Time To refinance?"

Two extremely interesting articles are "How to Add A Written Statement To Your Credit Report" and "Consumer Credit Report Statement Sample Letters."

There are also things you can do before you apply to improve your credit score. Check out:
"Increase Your Credit Score Before Refinancing That Mortgage"

"This Year, Resolve to Save More and Improve Your Credit Score"

Let’s take a close look at the concept of paying interest.

When you go to settlement, your new mortgage company will charge you interest from the date the loan disburses (after the 3 day rescission period) until the end of the month. Say you settle on Monday, January 26, 2008. Your loan would disburse on Friday, January 30, 2008, which means you’ll be charged interest for 2 days - from January 30th to January 31st. On the other hand, if you choose to settle on Monday, January 5, 2008, you’d be charged interest for 23 days - from January 9th to January 31st.

Okay, you’re now thinking to yourself, wouldn’t it be better to pay 2 days of interest rather than 23 days of interest? The answer would of course be “yes,” if the only interest that you’re paying at settlement is to your new mortgage company. But that’s not the case.

You have to remember that when you refinance, you’re using the new loan to pay off your old mortgage. And the payoff figure from your old mortgage company consists primarily of the principal balance after you made your last mortgage payment, and interest on that principal balance from the 1st of the month to the date your old mortgage company receives the payoff.

Let’s use the same dates we did in the previous example. You settle in January of 2008, which means you will have already made your January mortgage payment to your old mortgage company. If you choose to settle on January 5th, your Delaware real estate attorney will send out the payoff check on January 9th, and your old mortgage company will receive the check on January 12. This means you’ll be paying interest on the old mortgage for 12 days - from January 1st to January 12th. If, however, you settle on January 26th, your old mortgage company will receive the payoff on February 2, 2008, which means you’ll be paying interest to your old mortgage company for 33 days - from January 1st to February 2nd.

As you can see, when you refinance, you’re paying interest to your old mortgage company and your new mortgage company. Let’s see what happens when we combine the 2 examples used above.

If you settle on January 5th, you’ll pay interest to both mortgage companies for a total of 35 days (23 + 12). If you settle on January 26th, you’ll pay interest to both companies for 35 days (2 + 33). Either way, you’re paying interest for 35 days. The only question is how many days to the old, and how many days to the new. If you’re refinancing, the interest rate on your new mortgage is lower than the interest rate on your old mortgage. That being the case, would you rather pay interest at the lower rate for 23 days or for 2 days? As you can see, it can be better to settle closer to the beginning of the month.

To really know which is better, there’s one more calculation you need to do. That’s because we have to take into consideration that even though your new interest rate is lower, you may be borrowing more money on your new mortgage. Let’s assume that the principal balance on the old mortgage is $195,000, and the interest rate is 6.5%. Multiply $195,000 by 6.5%, and divide by 365. This gives you interest of $34.73 per day on the old loan. If your new mortgage is $200,000, and the interest rate is 5.5%, multiply $200,000 by 5.5% and divide by 365 days. The daily interest on the new mortgage is $30.14.

Using these figures, if you settle on January 5th, you’ll pay interest to both companies totaling $1,109.78, whereas if you settle on January 26, you’ll pay interest to both companies totaling $1,206.77. These figures, of course, change depending on the balance on the old mortgage, the amount of your new mortgage, and the interest rates on each.

The bottom line is that it’s not necessarily cheaper to settle at the end of the month.

One word of caution. If your old mortgage is an FHA mortgage, the rules are different. On an FHA mortgage, you can only pay off the loan on the 1st of the month. This means that regardless of whether the old mortgage company receives the payoff in the beginning of the month or the end of the month, you’re still going to pay interest for all 31 days in January. Therefore, you should settle closer to the end of the month so at least you’ll pay fewer days interest on the new loan. Also, using the example above, make sure you settle before the 26th so that the payoff is received before the end of January. If you settle on the 26th, the payoff check wouldn’t be received until February 2nd, and you’ll be charged interest on your old mortgage from January 1st to February 28th.

For more articles on refinancing, see:

Refinance Your Mortgage In Delaware

Should You Pay Points When You Refinance Your Delaware Mortgage

Refinancing Your Delaware Mortgage? Be Aware Of The 3-Day Rule

Will The Appraisal On Your Delaware Home Keep You From Refinancing?

In Delaware, the amount you’ll be charged at settlement for lender’s title insurance depends on the amount of your new mortgage. Here’s how it’s calculated. On the first $100,000 of your new mortgage, the premium is $2.50 per thousand. For everything over $100,000, the rate is $2.00 per thousand. Let’s look at the following example.

Say your new mortgage will be $220,000. On the first $100,000, you’ll pay $250 ($2.50 x 100). On the next $150,000, you’ll pay $300 ($2.00 x 150). The total cost will be $550 ($200 + $300).

There’s no question that the interest rates being offered today are very attractive, and that you probably could reduce your payments of principal and interest each month by refinancing. Unfortunately, there are 2 stumbling blocks that have to be overcome in order to move forward.

Because of the collapse of our economy, it’s not as easy as it used to be to qualify for a mortgage. Your credit score and your income will be scrutinized carefully before a lender approves your mortgage application.

But even if you qualify, the numbers might not work out because of the decline in home values. If you borrowed 80% of the value of your home when you bought it (or the last time you refinanced), it’s very possible that the principal balance you owe on your old mortgage is more than 80% of the current value of your home. If that’s true in your case, then you can expect your new mortgage to have pmi (private mortgage insurance) each month. And if you have to pay pmi, that amount could easily wipe out the monthly savings you’re hoping to get by refinancing.

When you refinance the mortgage on your home, federal law requires your mortgage company to give you 3 days after settlement to cancel (or rescind) the transaction, without any cost to you. Why would a person cancel? Here are the 2 most common reasons. The terms of the new mortgage might not be what you were promised by your loan officer. Or, you might find out that you can get a lower rate elsewhere. If you decide to cancel, you’re required to do so within three business days from the date of your refinancing settlement. Although federal law states that Saturday should be treated as a business day, not all mortgage companies include Saturday when calculating the 3 days.

If you cancel, the law also states that within 20 calendar days after your mortgage company receives your notice, they have to take the steps necessary to reflect the fact that the new mortgage on your home has been cancelled. They also have to return to you any money you gave to them or to anyone else in connection with this transaction.

You can use any written statement that’s signed and dated by you and states your intention to cancel. You can also use a cancellation form that you’ll receive at settlement.

A point is a dollar amount you pay your mortgage company at the time of settlement. One point is a one percent of your mortgage amount. So if you borrow $200,000, one point equals $2,000. Paying points is, in effect, paying interest up front. The more up front interest you pay, the lower interest rate you can get.

But the question is whether it makes sense for you to pay points. The monthly payment (of principal and interest) on a 30-year $200,000 mortgage would be $1,167 if the interest rate is 5.75%. Let’s say you’re told that if you pay one point, you could lower the interest rate to 5.125%. Your monthly principal and interest would then be $1,089 instead of $1,167. That’s a savings of $78 a month. The cost of one point is $2,000, and if you divide $2,000 by $78 per month, you’ll see it takes 25.6 months (just over 2 years) before you break even.

Another factor to consider is whether you have to borrow the extra $2,000 in order to pay the points. In that case, you’d be borrowing $202,000, so you’d have $2,000 less equity in your home, and your monthly payments would be based on a $202,000 loan rather than a $200,000 loan. Your monthly payment on a $202,000 loan at 5.125% would be $1,100. Your monthly savings would be $67 ($1,167 - $1,100), and it would take 29.8 months before you break even.

There are some excellent online calculators available that help you decide whether it makes sense for you to refinance. These calculators also allow you to compare a mortgage with 1 or more points with a mortgage with no points, so you can see which is the better deal for you. Here are a few:

A refinancing settlement involves replacing your old mortgage with a new mortgage. There are a lot of options. Some people borrow just enough money to pay off their old mortgage and to cover their closing costs. Some people borrow a lot more, and use the extra cash they get back to pay off other debt that carries a higher interest rate. Others replace their 30 year mortgage with a 15 year mortgage. In each case, there's a question of whether to pay points to get a lower interest rate. I'll address this in my next article.