Q & A with Dottie Herman

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Q - Are there any options similar to refinancing without the added costs?

A - There are no-cost refinance options out there, but when a lender says that there will be no closing costs, they generally give the borrower a higher interest rate.  Below I will explain what a no-cost mortgage refinance is.
Unfortunately, a no cost mortgage isn't really cheaper over the long term. Instead of paying fees out-of-pocket, closing costs, or other costs at the inception of the loan, the interest rate is .25 to .5 percent higher to cover the lender's costs and any third-party fees the lender promises you aren't paying. The lender isn't giving anything away for free.

No-Cost Mortgages Come in Three Scenarios:

• No points, but you pay lender fees and third-party fees (mortgage broker)
• Zero lender fees, but you pay third-party fees (mortgage broker)
• No cash up-front, but all the fees and costs are bundled into the loan's interest rate

A true no-cost mortgage would have the same interest rate as other loans and no payments to the lender or third parties. Understandably, these loans are nearly impossible to find.

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Q - How is a Short Sale different from a Deed in Lieu of Foreclosure?

A - Through a short sale the lender agrees to accept less than the balance owed on the mortgage at sale. The deficiency balance may be forgiven.

Mortgage companies ask borrowers to accept liability for the deficiency balance. The lesson here is if you are considering either a deed in lieu of foreclosure or a short sale, you must review the terms and conditions carefully and make certain you understand whether the deficiency balance will be forgiven.

Unlike a deed in lieu of foreclosure, the ownership of the property is not transferred to the mortgage holder, and remains with the owner.

Lenders choose short sales because they do not want to own distressed properties. They would much rather see the owner sell the property and lose the deficiency balance than be forced to take the property through foreclosure, as foreclosure is usually a costly and time-consuming process.

Whether the lender picks a deed in lieu of foreclosure or a short sale depends on how the lender balances its risks and how it wants the distressed properties to appear on their books. Local laws may have an impact on the decision, too.
One last point regarding short sales: Like deeds in lieu of foreclosure, a lender is required to file a 1099C if the debt forgiven exceeds $600. As mentioned with regard to the deed in lieu of foreclosure above, The Mortgage Forgiveness Debt Relief Act may offer former homeowners relief for forgiven debt.

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Q - What are Discount Points?

A - Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

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Q - How Does the Interest Rate Factor in Securing a Mortgage Loan?

A - A lower interest rate allows you to borrow more money than a higher rate, with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

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If you have a real estate question for Dottie, please send it to; Reporters@WorldPropertyChannel.com