Rental property

Refinancing isn’t just for your primary residence. If you’re a real estate investor, now may be a good time to think about saving interest on your rental properties as well.

By and large, refinancing a rental property is similar to doing so with your primary residential mortgage, but there are some differences to be aware of.

Read on to see how refinancing a rental is different, and some advice for real estate investing.

Expect stricter requirements

Borrowers have a little more flexibility to qualify for their primary mortgages, but lenders tend to be less lenient with investors.

While you may be able to finance as much as 96.5 percent of your primary home value, you’ll probably need to have much higher equity in a rental property or a higher loan-to-value ratio.

Banks may also look more carefully at your income and other financials. It’s also important to be able to prove that your units are not vacant. 

“There isn’t a lot of difference between rental property and personal property. The main one is getting that lease,” said Tom Schneider, head of Roofstock Academy, an investor education program run by the real estate investing marketplace, Roofstock.

The rest of your portfolio matters, too. If you own multiple rental properties, you may not be able to get financing through a traditional bank.

However if you do have a larger portfolio, that doesn’t mean you won’t be able to refinance, you probably just won’t be able to do it at your local retail bank.

“It’s called asset-based lending,” said Jason Haye, western director of sales at Velocity Commercial Capital. “There’s usually not as strict credit requirements, because the property doesn’t have credit,” he added. “At the bank, not only are you going to have the same property requirements, but you’ll also have personal income requirements. We’ll look at the property alone.”

Having tenants is crucial to a rental refi. “It seems basic, but make sure you have a renter in there,” he said. “It’s supposed to be an income-based property, and if it’s vacant, it’s generating zero. It doesn’t matter where you go, that’s not good.”

Expect higher mortgage rates

Lenders generally consider rental properties riskier investments than primary residences, so your new rental mortgage rate will probably be higher than what you could get on your main home.

“They’re not as great as you might be able to get for your personal property, but there’s not a huge delta,” Schneider said. He added that as traditional lenders, the average rental mortgage rate is usually about 50 basis points higher than that for a primary mortgage.

If you have to go through a more specialized lender like Velocity, Haye said you should expect even higher rates.

“On the investment side, you can do 4s,” he said, compared to rates on primary 30-year fixed mortgages, which are hovering around 3 percent.

On loans for which Velocity requires less documentation, Haye said, rates could be even higher, like 6 or 7 percent. But those loans are less likely to experience the same delays as mortgages from traditional banks, which are experiencing serious backlogs.

“More expensive money is generally faster,” he said.

Shop around and prepare your documents

As with pretty much all financial products, it’s a good idea to shop around and talk to a few lenders before you move ahead with a refinance. It’s important to compare terms and determine which offer works best in your situation.

“The vetting process of selecting your lender is really important and the two key things in identifying a lender is what is their origination cost,” Schneider said. “Lenders who have a higher origination cost sometimes have a lower interest rate and vice-versa,” he added. “Be sure to measure that tradeoff.”

Finding a lender will take more effort. This is where a mortgage broker who specializes in such loans can help. Once you’ve selected a lender, it’s a good idea to get your documentation in order well in advance.

The amount of documentation you’re going to need can be a headache, Schneider said. “Having that in order ahead of time, especially if you have multiple properties,” can really help smooth the process along.

He added that it’s a good idea for real estate investors to keep organized files for all their properties, that way you’ll avoid having to scramble for documents when the bank needs them.

Bottom line

The refinancing wave isn’t just for primary properties. Investors could stand to save if they’re able to find the right deal, so shop around, get your documents ready, and go into the process with eyes open about what to expect.

Refinance Your Mortgage

If 2020 taught us anything, even the most “secure” companies and industries are laying people off.  Those left behind regardless of position have been asked to do 2x or 3x as much with the same compensation.  Maybe now, you have the itch to do your own thing!

Smart Debt?

Debt without question is a natural course of doing business or being an entrepreneur.  Just like our personal lives, there is good debt vs. bad debt.  Let’s break it down:

  1. Credit card balances and cash advances:  No, never.
  2. Kabbage:  This service will lend based on accounts receivable. There are lengthy costs associated with it.
  3. Factoring:  Same concept as above, but even more expensive.
  4. Loan against 401k:  No, no, no.  Did we mention NO!
  5. Title loan on your car:  32% interest (varying by state) is a no-win situation.
  6. Borrowing from friends and family:  Only a good idea if you never want to talk with them again.
  7. SBA loan:  Sounds simple on paper.  In reality, it is very difficult to get.  You have to not “need” the loan to get it.

The above are perfect examples, and yet still more exist. Another risk is using the wrong assets to start your business.

Should I or Shouldn’t I?

Good debt, or smart debt, is about managing your risk and money. It is about taking the pressure off your business to have the ability to pay you immediately.  It allows you to have a low-interest rate and a long term that can be tax-deductible.  Good debt?  That is your home.

People would say never put your home on the line!  Well, the reality is your home is always on the line.  Whether you utilize smart debt, good debt, or refinance.  

Here are a couple of ways you can utilize a refinance:

  1. Your ability to pay off all your debt to a single payment.  Savings of a hundred, maybe even a thousand plus per month.
  2. Securing your best asset (your home) to the lowest possible payment with cash out!
  3. Keep your cash in the bank.  Let’s say you have $40,000 in savings and $40,000 in available equity.  Cash is king, keep that in your bank balance.  Borrow $40,000 in the form of a refinance to start and run your business.

Experts are experts.  There is smart risk vs high risk.  There is smart debt vs bad debt.  Refinancing your home for rate and term or cash out is the most powerful business tool you have (outside of yourself).  Use good debt smart debt to build your business and your dreams.

 

Refinance Your Mortgage

Most people don’t realize what an important financial step refinancing is. Circumstances change, and mortgages should too. If you’re wondering whether or not you’re a good candidate, here are some of the top reasons why refinancing could be right for you:

  • Your mortgage interest rate is higher than the current market interest rate.
  • You have other debt you need to reduce; such as credit cards & student loans.
  • You’re planning to stay in your home for several years.
  • You want to make home improvements.
  • You want to pay off your mortgage sooner — going from 30 to 15 in your term.
  • You have college tuition to pay.
  • You have an adjustable-rate mortgage and you want to lock in a fixed rate.
  • Your credit score has improved.

Whether you’re looking to get a better interest rate or take equity out of your home for renovations, we’ve put together a step-by-step guide on why you should refinance and how to do it.

Why Refinance?  Let’s Run Through the Top Reasons!

Your life changes and your mortgage should change with it. Whether you’re moving, staying put, have a lot of expenses, or experience a change in finances, making sure your home loan is keeping up with you is of the utmost importance. Your mortgage should always be your financial tool. It should always accomplish more than a roof over your head. 

Here are the most common reasons homeowners choose to refinance:

Your Mortgage Interest Rate Is Higher than the Current Market Interest Rate

Even a small reduction in your interest rate could save you a lot of money in the long run. A refinance can help you ensure you’re getting the lowest interest rate possible. The result? More money in your pocket, for you and your family.

You’re Planning to Stay in Your Home (This Matters)

There’s no better time than right now to evaluate the type of home loan you have. When you know you’re living in your current home for several years, refinancing is a great step toward setting long-term goals.

You Want to Pay Off Your Mortgage Sooner

When rates fall, you could refinance to a lower rate and a shorter term, helping you pay off your mortgage sooner.  You should never just default to a 30-year term.  You have options as aggressive as your finances and your goals.  What does your life look like at the end of your mortgage?

You Have an Adjustable Rate Mortgage and You Want to Lock In a Fixed Rate

If your payments are already fluctuating, it is time for a fixed-rate mortgage.  It will keep your payments steady. Your rate will stay constant in a rising-rate environment. Believe it or not, rates will rise!  It may be time to lock in for long term stability.

You Have Other Debt You Need to Reduce (Most Common!)

Do you have credit card debt, student loans, or any other high-interest debt? Non-Tax Deductible Debt? A cash-out refinance could help you reduce or eliminate your debt. Debt consolidation is one of the most popular reasons people refinance. 

It is all about the cost of money. When mortgage money is this low, you have to take advantage of today’s rates or cost of money.  Why pay a high interest rate, no tax deductibility, and lower your credit score?  Plus, you are paying more monthly.

You Want to Make Home Improvements

Would your home benefit from a new kitchen, new windows or an addition? A cash-out refinance is one of the most affordable ways you can fund home improvements.  Equity is power and the ability to create additional equity is driving long term value regardless of market conditions.  Especially if you are planning to stay long term.

You Have College Tuition to Pay

Refinancing with a cash-out option can help you or your loved ones reach their educational goals as well. Whether you’re returning to school or you’re paying for your child’s college tuition, refinancing could help make it happen. Student loans can be debilitating for your child; there is a better alternative.  This is often the second biggest expense in your lifetime!

Your Credit Score Has Improved

If you’ve worked hard to improve your financial situation by paying off credit accounts that were weighing down your score, it’s time to call your Home Loan Expert. You could qualify for a much lower interest rate if your score has substantially improved.  Credit score matters. If you paid the price to get into the home, it is now time to take advantage of “A” credit interest rates.  Why continue to overpay on your single biggest bill!

House photo

Home prices are up — way up.

According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012. Depending on your area, appreciation in homes is even greater!

This makes it a great time for real estate investors to utilize the equity in their rental properties. The cash can be used to:  

  • Buy another rental property
  • Make home improvements to drive higher rents
  • Payoff other real estate debt. Ensure you are running on the lowest possible cost.
  • Prepare cash reserves for the wave of homes that will inevitably come on the market.

With mortgage rates near record lows, it could be time for rental property owners to put their equity to work.

So How Do You Refinance Rental Properties?

Because investment properties are “non-owner-occupied,” there are special rules about refinancing and taking cash out. 

For instance, your credit score needs to be quite good, usually at least 680.

Plus, your cash-out refinance must leave you with at least 25% equity in the rental property and decent cash reserves in your bank account.

In addition, you can only use a conventional loan to complete a cash-out refinance on a rental property.

Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most mortgages. Don’t necessarily stress about how. Your mortgage professional will sort that for you!

Conventional refinance rules are in place making it possible for many landlords with investment equity to cash out on their rental properties. 

What About Rates?

As a property owner/investor you are in a unique position. You are concerned about cost, terms, and cash flows, for profit, which is different from the average homeowner.

Rates for a cash-out investment property loan tend to be on the high end for mortgage rates. 

Why? Because investment property rates are higher to begin with — about 0.5% to 0.75% above primary residence rates on average. 

Then, if you take cash out when refinancing, rates are usually a little higher still. This is because lenders take on more risk when a homeowner pulls equity out of their property. To be blunt, if something goes wrong with a property owner, they will ensure their primary mortgage is covered, not a rental property.

In the end, if you have been on the fence as a property investor, the rates today as you read this article are setting up to be the cheapest of your lifetime.  In turn, it is opening the door for real estate opportunities.  When money is cheap, the same line of thinking is in place when a property is under-valued.  You take action! 

Refinance Your Mortgage

Understand the pros and cons of each type of mortgage refinancing loan

When refinancing a mortgage, essentially, you have two choices. If you refinance your existing loan to get a lower interest rate or change the terms, it is called a rate-and-term refinance. If you want to extract some of the equity in your home—perhaps to do a renovation, pay down debts, or help pay college costs—you may take a cash-out loan.

But it’s important to understand how these two refinance options can affect your financial position.

Key Takeaways:

  • The basic options when refinancing a mortgage are a cash-out, or rate-and-term refinance.
  • You can extract some of the equity in your home with a cash-out refi.
  • In a rate-and-term refinance, you exchange the current loan for one with better terms.
  • Cash-out loans generally come with added fees, points, or a higher interest rate, because they carry a greater risk to the lender.
  • It may be possible to extract some cash from your refinance without incurring the extra fees of a cash-out loan by taking advantage of the overlap of funds at the end of one loan and the beginning of another.

The Basics of Mortgage Refinancing

Think of refinancing as replacing an existing mortgage with another or consolidating a pair of mortgages into a single loan. Out with the old (mortgage) and in with the new. After the refinance, the old loan(s) is paid off, and a new one replaces it.

There are plenty of reasons to consider refinancing. Saving money is the obvious one. In August 2008, the average 30-year fixed-rate mortgage had an interest rate of 6.48%. After the financial crisis, rates for the same sort of mortgage steadily declined. By December 2012, the 30-year fixed mortgage rate was slashed nearly in half from four years earlier, to 3.35%.

The average annual rate for 2017 edged up to 3.99%. It peaked in 2018 at 4.54%, then slid to 3.94% for 2019, and then fell further with an annual average of 3.11%, in 2020, according to Freddie Mac.

For most people, avoiding the added cost of a cash-out loan and taking a rate-and-term loan is the best financial move. However, if you have a specific reason for taking cash out of your home, then a cash-out loan may be valuable. Remember, though, that the extra money you’ll pay in interest over the life of the loan can make it a bad idea.

According to Mike Fratantoni, the Mortgage Banker Association (MBA) senior vice president and chief economist, the cause was “increasing concerns regarding the economic impact from the spread of the coronavirus, as well as the tremendous financial market volatility.”

Fratantoni added that “given the further drop in Treasury rates this week, we expect refinance activity will increase even more until fears subside and rates stabilize.” These low rates are an important reason for homeowners with older, higher-interest mortgages, those whose home equity has risen, and those who have much better credit ratings than when they originally financed their home to look at refinancing now. By December 2020, they had dropped even further, to 2.68%.

When rates are moving higher, refinancing can offer a chance to convert an adjustable-rate mortgage into a fixed-rate one, to lock in lower-interest payments before rates climb even higher. However, it’s often challenging to forecast the future direction of interest rates, even for the most seasoned economists.

Cash-out vs. Rate-and-Term Refi

The simplest and most straightforward option is rate-and-term refinance. No actual money changes hands in this case, except for the fees associated with the loan. The mortgage’s size remains the same; you trade your current mortgage terms for newer (presumably better) terms.

In contrast, in a cash-out refinance loan, the new mortgage is bigger than the old one. Along with new loan terms, you’re also advanced money—effectively taking equity out of your home in the form of cash.

You can qualify for a rate-and-term refinance with a higher loan-to-value ratio (the amount of the loan divided by the property’s appraised value). In other words, it’s easier to get the loan even if you’re a poorer credit risk because you’re borrowing a high percentage of what the home is worth.

Think carefully before obtaining a cash-out loan in order to invest, as it makes little sense to put your funds into a certificate of deposit (CD) that earns 1.58% or even 2.5% when your mortgage interest is 3.9%.

Cash-out Loans Are Pricier

Cash-out loans come with tougher terms. If you want back some of the equity you’ve built up in your home in the form of cash, it’s probably going to cost you—just how much depends on the amount of equity you have built up in your home along with your credit score.

For example, if your FICO score is 700, your loan-to-value ratio is 76%, and the loan is considered cash-out, the lender might add 0.750 basis points to the up-front cost of the loan. If the loan amount is $200,000, the lender would add $1,500 to the cost (though every lender is different). Alternatively, you could pay a higher interest rate—0.125% to 0.250% more, depending on market conditions.

One more reason to think twice about cash-outs: Doing a cash-out refinance can negatively affect your FICO score.

Special Considerations on Cash-Out Loans

In certain circumstances, however, cash-out loans may not have tougher terms. A higher credit score and lower loan-to-value ratio can shift the numbers substantially in your favor. If you have a credit score of 750 and a loan-to-value ratio of less than 60%, for example, you won’t be charged any additional cost for a cash-out loan. That’s because the lender would believe that you are no more likely to default on the loan than if doing a rate-and-term refi.

Your loan may be a cash-out loan, even if you don’t receive any cash. If you’re paying off credit cards, auto loans, or anything else that wasn’t originally part of your mortgage, the lender probably considers it a cash-out loan. If you’re consolidating two mortgages into one—and one was originally a cash-out loan—the new consolidated loan will also be classified as cash-out. 

Americans Split on Cash-out Refinance

Although many personal finance experts would advise against stripping your home of its equity in a cash-out refinance, data shows that nearly half of Americans choose this loan type.

An Interesting Mortgage-Refinancing Loophole

With the help of your mortgage broker, you may be able to generate a little cash from your refinancing without it being considered a cash-out loan.

Basically, it works by taking advantage of the overlap of funds at the end of one loan and the beginning of another. If you consider this option, it may be wise to consult with a mortgage expert because it is a complicated process that will affect any escrow accounts.

The Bottom Line

Your responsibility as a borrower is to have enough knowledge to discuss options with your lender. For most people, avoiding the added cost of a cash-out loan is the best financial move. If you have a specific reason for taking cash out of your home, a cash-out loan may be valuable, but remember that the extra amount of money you will pay in interest over the life of the loan can make it a bad idea.

When it comes to determining your mortgage rate, your credit score is a critical factor.

Think about it from the bank’s perspective. They are lending you money for 30 years. Over that time frame, you’ll likely change jobs, face tough times, watch your neighborhood change, and go through multiple market cycles. Your current financial picture – including down payment, assets, and income – are important. But a credit score gives the bank an idea about whether you’re likely to make payments responsibly even if things change.

Yet, it isn’t just low credit score borrowers that pay the price. The difference between a good and great score can still add up over the life of a loan. Assuming nothing in a mortgage application changes except the credit score, someone with a score in the 680-699 range would have a mortgage rate approximately 0.399 percentage points higher than a person with a 760-850 score. That’s a difference that may sound minuscule but isn’t.

In 20-years, someone with a 680-699 score will still pay over $20,000 more in interest on a $244,000 mortgage than a person with a high score.

So, what score do you need to consider before applying for a mortgage?

Understanding Which Credit Score Matters Most

One confusing aspect of credit scores for consumers is that we each have multiple scores. And the FICO score you pull through your credit card company probably isn’t the same one your mortgage lender will consider. Here’s why.

Most people have information at each of the three major credit bureaus – TransUnion, Equifax, and Experian. While they all calculate FICO credit scores, their data might be slightly different, which can lead to variations in scores.

Also, FICO updates its scoring methodology over time, resulting in many potential scoring models for lenders to consider. In fact, the Consumer Financial Protection Bureau states that FICO has offered more than 60 scoring models since 2011.

Before you start to worry about pulling dozens of different credit scores, there is one saving grace. Fannie Mae and Freddie Mac, the government-sponsored enterprises that purchase many of the mortgages originated in the U.S., set rules for the loans they buy. So, while your bank may have their own policies for particular types of loans, they likely comply with the standards set by Fannie and Freddie in case they want to sell loans off their balance sheet (they almost all do).

Fannie and Freddie actually require much older versions of the FICO credit score. Since the score pulled by your credit card company is a newer version, it might not be the same as the older version. To get a copy of the right score, you would have to purchase it from myFICO.com.

However, I wouldn’t run out to purchase your score just yet.

If the score pulled by your credit card company or free credit score websites like Credit Karma is excellent, the older version of your score probably is as well. If your score is low, you can use the newer version of your credit report to make changes to improve your score before paying for an older version.

But if your score is borderline, it might be worth the money to purchase your credit scores as calculated by data from all three credit bureaus. The myFICO reports will note which scores are most widely used in mortgages so you can easily compare.

When purchasing your FICO scores, always opt for all three bureaus unless you know which agency your lender plans to use. Otherwise, if a lender pulls two scores, they will take the lowest. Or the middle, if they pull all three. And you want to know what those scores could be.

How Much Can a Good Credit Score Save You?

When comparing the difference in mortgage rates, the impact can look small. Without context, the difference between 4.55% and 4.76% seems negligible. But over 30 years, that little difference can add up.

Using the Loan Savings Calculator from myFICO, you can compare the interest rates, monthly payment, and total interest cost of a mortgage based on your state and mortgage size.

We used this tool to estimate the national average interest rate and total cost of a $244,000 mortgage – a $305,000 single-family home with 20% down. This is equal to the current average new mortgage balance in the U.S.

The difference between good and excellent is significant. A person with a 760-850 FICO score could secure a 30-year fixed mortgage with a 4.147% interest rate. This rate is more than 0.6 percentage points lower than the 4.76% interest rate for a person with a 660-679 score.

This results in a monthly mortgage payment that is $88 a month higher at $1,274 and a total interest cost over the life of the loan of $214,745. That’s $31,905 more in interest cost than the person with an excellent score for the exact same house.

Knowing what your credit score is, how to improve it, can save you thousands, maybe even tens of thousands over the lifetime of your mortgage.

 

going over debt and rates

Does the rate even matter anymore?  As a homeowner, it is a fair question to ask.  We are in many respects in unchartered waters in terms of interest rates.  It can give the industry this feeling that it will last forever.  As the English author, Geoffrey Chaucer once said “All good things must come to an end.”  If that is the case, are we on borrowed time?  Is the proverbial bubble about to burst?

Let’s go back in time to 1971.  Many homeowners do not remember the time when getting a mortgage at a high double-digit interest rate was the norm (it was).  To offset that, you could also get a savings account or CD (certificate of deposit) at 15% to 20% as well. However, when you look at the apex to today, you will notice two important items:

Mortgage Rates since 1971

First, the data does not include where we are today.  Right now, some have the ability to get a mortgage in the 2% range!  This will be on the opposite end of 1982 when you were staring at 18%.  What can we ascertain from these two points of data?  Simple they are on the extreme.  Neither of these was the “new norm” for getting a mortgage during these periods of time.  Fair point right?  Is there much difference between the two?  Yes, and it is extreme.

In 1982 and through the entire 1980s, consumer spending was very controlled.  Credit cards, personal loans, and installment credit were limited.  Yes, people had department store charges, but consumer spending and debt were in alignment.  Today?  

Their average consumer debt was $78,396 in 2019, a 58 percent increase from $49,722 in 2015. Millennials also carry an average mortgage balance of $224,500, the second-highest after Gen Xers, who have an average mortgage balance of $238,344. In terms of credit card debt, millennials’ balances are expected to climb.” This is according to bankrate.com.

This means that people are owing more, spending more and creating more debt today, than at any time in history.  Is this just a fluke?  So what happens when interest rates rise (and they will)?  Worlds collide again.  

Look at your own situation.  Ask yourself, are your debts being eliminated or rising?  Savings increasing or decreasing?  Is the equity in your home at an all-time high?  Do you know?  What will your financial picture look like when the rates do rise?  Will it make sense to refinance then?  Remember the old adage that it is better to be proactive than reactive?  This is just what they mean.

We are on borrowed time.  Not because of some geo-political reason.  It is a math reason.  Nothing stays flat, low, high, or the same forever.  When something is historically high like a stock, it is time to look to sell. When something is historically low, like mortgage interest rates while maybe your personal debt is at a historical high, it is time to refinance your mortgage!  Time is of the essence, take action today.

Refi Refinancing

A recent article found on MarketWatch implies you can better deals during certain times of the year in regards to interest rates:

“If you’re playing the waiting game with mortgage rates, you may not want to wait much longer.

A new study from Haus, the home-finance startup created by Uber co-founder Garrett Camp, examined what role seasonality, loan size, credit scores and other factors play in the mortgage rates that lenders offer borrowers.

The study found that much like the housing market itself the mortgage market ebbs and flows with the seasons. And January, as it turns out, is the best time of year to get a new home loan on average.

In January, lenders offer a discount of nearly 20 basis points compared to the time period between June and October when rates are typically the highest for the year. The cooler weather, in general, brings out lower mortgage rates, with December and February being the next-cheapest months based on the Haus study.

“While we can’t say for exact certainty why rates are lower in January than in the summer months, we can speculate that competition for customers matter,” Ralph McLaughlin, chief economist and senior vice president of analytics at Haus, said in the report.

“Since home buying and refinancing is seasonal, there is less mortgage origination in winter months, so it could be that lenders must lower their rates to stay competitive and attract business,” he added.”

What are the other factors that may go into playing the rate game?

“Nowadays, scoring the lowest rate possible can be akin to finding a needle in a haystack, McLaughlin noted. Although mortgage rates have risen from the record low set right before the New Year, they remain extremely low by historical standards. However, economists have warned that as the year goes on rates could rise, depending on the trajectory of the pandemic and the related economic recovery.

But the timing of when a prospective borrower applies for a new mortgage is just one factor that can save them money. The size of the loan is another consideration. Loans with balances between $350,000 and $450,000 typically fetch a 23-basis-point discount on the mortgage rate compared to mortgages under $100,000, Haus found.

The savings is actually a reflection of the cost for the lender to originate a loan. “The cost of paying someone to originate a loan is the same for a $500,000 mortgage as it is for a $100,000 mortgage, but the latter provides less of a return to the mortgage originator than the former,” McLaughlin said. “In order to help cover this fixed cost, lenders likely increase their rates for lower balance mortgages to compensate.”

However, while this may sound like a good idea in theory, practice is a totally different matter.  Trying to play the “rate game” is never good for the individual consumer.  Making a decision on a mortgage has much bigger consequences than merely rate and term.  In fact, whether you are a first time home buyer seeking to refinance or near your retirement, the question you need to be asking is:

“What will this mortgage do for my overall finances?”

Unfortunately, the wrong questions are being asked by homeowner and mortgage professionals.  A mortgage is a means to an end.  That end is different for everyone.  A mortgage should never be a “one size fits all solution.”  In fact, for it to be a value to you as the homeowner, it should be customized to your life, never a program.

Should you continue to play the waiting game?  Short answer for many is no.  Your finances deserve a mortgage that will pay off debt, save for college, leverage a business, pay for senior healthcare expenses, and fully fund retirement.  Each day you wait hoping for an 1/8 point drop  you are losing money in every other aspect of your life!  Next step is yours!

Saving money, home loan, mortgage, a property investment for fut

Most people don’t realize what an important financial step refinancing is. Circumstances change, and mortgages should too. If you’re wondering whether or not you’re a good candidate, here are some of the top reasons why refinancing could be right for you:

  • Your mortgage interest rate is higher than the current market interest rate.
  • You have other debt you need to reduce; such as credit cards & student loans.
  • You’re planning to stay in your home for several years.
  • You want to make home improvements.
  • You want to pay off your mortgage sooner — going from 30 to 15 in your term.
  • You have college tuition to pay.
  • You have an adjustable-rate mortgage and you want to lock in a fixed rate.
  • Your credit score has improved.

Whether you’re looking to get a better interest rate or take equity out of your home for renovations, we’ve put together a step-by-step guide on why you should refinance and how to do it.

Why Refinance?  Let’s Run through the Top Reasons!

Your life changes and your mortgage should change with it. Whether you’re moving, staying put, have a lot of expenses, or experience a change in finances, making sure your home loan is keeping up with you is of the utmost importance. Your mortgage should always be your financial tool. It should always accomplish more than a roof over your head. 

Here are the most common reasons homeowners choose to refinance:

Your Mortgage Interest Rate Is Higher than the Current Market Interest Rate

Even a small reduction in your interest rate could save you a lot of money in the long run. A refinance can help you ensure you’re getting the lowest interest rate possible. The result? More money in your pocket, for you and your family.

You’re Planning to Stay in Your Home (This Matters)

There’s no better time than right now to evaluate the type of home loan you have. When you know you’re living in your current home for several years, refinancing is a great step toward setting long-term goals.

You Want to Pay Off Your Mortgage Sooner

When rates fall, you could refinance to a lower rate and a shorter term, helping you pay off your mortgage sooner.  You should never just default to a 30-year term.  You have options as aggressive as your finances and your goals.  What does your life look like at the end of your mortgage?

You Have an Adjustable Rate Mortgage and You Want to Lock In a Fixed Rate

If your payments are already fluctuating, it is time for a fixed-rate mortgage.  It will keep your payments steady. Your rate will stay constant in a rising-rate environment. Believe it or not, rates will rise!  It may be time to lock in for long term stability.

You Have Other Debt You Need to Reduce (Most Common!)

Do you have credit card debt, student loans, or any other high-interest debt? Non-Tax Deductible Debt? A cash-out refinance could help you reduce or eliminate your debt. Debt consolidation is one of the most popular reasons people refinance. 

It is all about the cost of money. When mortgage money is this low, you have to take advantage of today’s rates or cost of money.  Why pay a high interest rate, no tax deductibility, and lower your credit score?  Plus, you are paying more monthly.

You Want to Make Home Improvements

Would your home benefit from a new kitchen, new windows or an addition? A cash-out refinance is one of the most affordable ways you can fund home improvements.  Equity is power and the ability to create additional equity is driving long term value regardless of market conditions.  Especially if you are planning to stay long term.

You Have College Tuition to Pay

Refinancing with a cash-out option can help you or your loved ones reach their educational goals as well. Whether you’re returning to school or you’re paying for your child’s college tuition, refinancing could help make it happen. Student loans can be debilitating for your child, there is a better alternative.  Second biggest expense in your lifetime!

Your Credit Score Has Improved

If you’ve worked hard to improve your financial situation by paying off credit accounts that were weighing down your score, it’s time to call your Home Loan Expert. You could qualify for a much lower interest rate if your score has substantially improved.  Credit score matters. If you paid the price to get into the home, it is now time to take advantage of “A” credit interest rates.  Why continue to overpay on your single biggest bill!

House

The Federal Housing Finance Agency announced recently the mortgage limit that will apply to conforming conventional and VA loans in 2021. We’ll cut to the chase and tell you that they’re increasing. The limit for 2021 is $548,250 for a 1-unit property, an increase of more than 7.4% compared to last year.

The rest of this post will go over what this means if you’re in the market for a mortgage, whether it’s a purchase or refinance.

The Change for 2021!

The $548,250 conforming loan limit applies to single-family homes located in the lower 48 states. In Alaska and Hawaii, the limit is $822,375. The limits for 1-unit properties in high-cost counties will have their own loan limits set on a local basis, which could be up to $822,375.

You’ll also have a higher conforming loan limit for multifamily properties between 2 and 4 units.

  • 2 units: $702,000
  • 3 units: $848,500
  • 4 units: $1,054,500

The VA also follows these guidelines when setting limits for their loans. For the VA, these changes are effective for loans closing after January 1, 2021.

These limits don’t apply to FHA loans. In contrast to the nationwide limits for conventional and VA loans, FHA sets limits on a county-by-county basis. FHA loan limits will be set at a later date and applied to loans made after the new year.

Increased conforming loan limits put more power into the consumer’s hands. It allows individuals who already own a home to take more cash out of their home’s equity. It also allows buyers to borrow a higher loan amount and in return bring less down, in some cases as little as 3% down. While that’s not an insignificant amount, it doesn’t have to be your life savings and you can reach your homeownership goal that much faster. With a VA loan, there’s no down payment required.

Conforming Vs. Jumbo Loans

If you need a mortgage that goes beyond conforming limits, you’ll need a jumbo loan. Because of the bigger loan amount, you’re going to have to meet some additional requirements to mitigate the increased risk taken on by the lender or investor in the mortgage.

This deals with a purchase and refinance side of the mortgage transaction.  For many homeowners who have been waiting to refinance, due to the conforming versus jumbo issue, now have the opportunity to do so with the new limits.  New limits offer homeowners a unique opportunity on the refinance side.  That, culminated with historically low interest rates, means the time may be now!