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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?  The proverbial bubble about to burst?

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

Mortgage Data

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 were 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, installment credit was limited.  Yes, people had department store charges, but consumer spending and debt was 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 according to bankrate.com

This means that people are owing more and spending more and creating more debt today, than any time in history.  So what happens when interest rates rise (and they will)?

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?

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.

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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.  High lengthy costs.
  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.

Financial Planning

It seems like an obvious question, however, it is often overlooked.  When considering a refinance, what is the health of your finances?  Homeowners often wait until they are in a difficult position to begin making moves.  That could be too late for lenders and yourself!

Questions You Should be Asking:

  • Are my credit card balances above 30% of the available credit line?  For example, if you have a $5,000 credit card, do you owe more than $1500.00? Do you know what that does to your FICO score
  • Do you have student loans you are making minimum payments on with more than 5 years remaining?
  • Do you have auto loans in terms of 72 or 84 months?  Are payments becoming unmanageable?
  • Is your business running short on cash flow?  Your receivables are running longer than 90 days?  Considering an expensive loan from Kabbage?
  • Are you hearing rumblings or restructuring at work? The potential loss of time and income in the coming quarter or quarters?
  • Are you experiencing “too much month and not enough paycheck?” In short, the question is are you outpacing your income in expenses, bills, and payment?
  • Are you overpaying your single biggest expense?

A financial checkup is designed to give you a “30,000 foot look” at your money.  Too often individuals and families spend their time looking at their finances from the 1st through the 15th and 16th through the 31st! 

It’s Time to Take Action Now

If you fit any of the above scenarios or dozens of other potential financial pitfalls, the time to take action is now, not until the event of the financial situation overwhelms you.

Sit with a professional and talk about your financial situation.  Have an unbiased 3rd party look at your financial picture from a number perspective.  It will be the best smart money move you make!

Refinance Your Mortgage

Mortgage rates are around record lows. Is it time for you to refinance your home loan? The decision is not a simple slam dunk. Here are three questions to ask yourself first:

1. How long do you intend to be in your home?

Refinancing your mortgage costs money.  If you are planning to move in the next three years, the savings may be minimal. You may not live in your home long enough to cover the costs of getting the new loan. Instead, focus on getting in the best shape financially through paying bills on time, keeping other debt low and saving for the transition.  If you are going to be there for over 3 years, the cost makes sense both in the short & long term.

2. Where does your mortgage stand now?   

Beyond your current interest rate, consider your principal balance, payment amount and the time left on your loan. If your principal balance is low, you may not gain from a lower interest rate because most of your monthly payment is going to paying down the principal, not toward interest.

In the scenario above however, in taking advantage of a refinance you could pay off your home exponentially faster!  Lower rate, and converting your 30 year term to a 10 may make both short and loan term sense.

Flipside:

If your interest rate is significantly higher than what you’d get through refinancing — say 4% or 5 % — then a lower rate may save you money.

3. Do you have the money, time and credit history to refinance?

Closing costs are an integral part of the mortgage process. They are due when you finalize or “close” your loan. These fees include mortgage application fee, appraisal, attorney’s fee, title insurance and other charges. Closing fees vary by state, loan type and mortgage lender, but the average cost of refinancing is around $5,000(varies on lenders program.)  Run the numbers to see.

Refinancing is time-consuming. At the very least, you need to share up to three years of taxes, a current pay stub and a net worth statement. A mortgage provider may request even more paperwork. 

You need a good credit score. This may not be the year for you to refinance, even with low rates. The past year has wreaked havoc on many people’s finances. If your debt is high versus your income or you have been late with payments due to the pandemic, you may not qualify for great rates. Get your financial house in order and then apply for a new mortgage. 

These 3 questions should be leading to look at your entire financial picture.  When we look at our picture, it should lead us to set real, tangible goals.  You should ultimately be asking, what does my financial picture look like at the end of the mortgage?  That is a question that needs to be answered today!

Refinance Your Mortgage

Home prices are up — way up.

According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012, contingent on location.

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

  • Buy another rental property
  • Make home improvements
  • Pay off other real estate loans
  • Reduce personal debt
  • Stash away emergency cash 

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

How to get a cash-out refinance on an investment property

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 (speak with an advisor to talk about qualifying criteria).

And 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.

That means you won’t be able to refinance using any government-backed loans like FHA, VA, or USDA. 

Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most U.S. mortgages. 

Luckily, conventional refinance rules are fairly lenient, making it possible for many landlords with investment equity to cash out on their rental properties. 

When to use a cash-out refinance on your investment property

Cashing out equity is one of the best ways to profit from your investment property. 

Unused equity in the home may look good on paper, and for many investors, that’s fine. They have cash flow and don’t want to increase their loan balance and payment.

But a cash-out refinance rental property loan can put a good portion of the home’s value to work.

For instance, you might use the cashed out equity to make improvements on a rental property. 

Home improvements can yield a double-return. They increase the home’s value while justifying higher rent. And, tenants feel great about staying in the property long-term.

Perhaps the best use — and highest return — for cash-out funds is to expand a real estate portfolio.

For example, say you have a property worth $250,000 with a loan of $150,000. 

You can get a cash-out loan up to 75% of the current value, netting about $37,000. This money could be used to put 20% down on another rental home worth around $200,000. 

In this way, a cash out investment property loan can help build your real estate portfolio and your earning power through new rental opportunities. 

Cash-out refinance waiting periods

Many home investors buy a run-down property with plans to fix it up. You may plan to fix-and-flip using a cash-out refinance to fund home improvements. 

While this is allowed, waiting periods apply.

You must wait at least six months between the home sale closing and the date you can close on a cash-out refinance. 

The exceptions to this rule are as follows:

  • The property was inherited
  • The home was legally awarded via divorce or other separation order
  • The cash-out refinance qualifies for the delayed financing exception

In addition, homes that have been on the market in the last six months have a lower allowable LTV for cash out refinancing, which maxes out at 70%. 

Rentals properties and the art of the cash out, is not a one-size-fits-all transaction!  It requires a financial expert to guide you through the process to ensure you get the max capabilities for your money!

Refinance

There are many reasons to refinance your mortgage, some obvious and some a bit more obscure and/or different.

I figured I’d compile a list of the many reasons I can think of to refinance.

Some of the situations are complete opposites of one another and will depend on your unique financial goals and/or risk appetite.

However most will be appealing at times when interest rates are low, as they are now.

1. To get a lower interest rate

This one is the no-brainer that everyone will agree on. If you want a lower interest rate then refinancing is the way to go, assuming mortgage rates are lower now than when you took out your original mortgage.

The classic rate and term refinance allows homeowners to reduce their interest rate so they can enjoy a lower monthly payment.

The potential downside to this is resetting the clock on your mortgage, though you can also go with a shorter term at the same time to avoid that, and save HUGE money over the term.

2. Because your borrower profile has improved

Another reason to refinance has to do with your unique borrower profile.

Say you improved your FICO scores over the past year and cleaned up some other negative stuff. Or perhaps your home value increased enough to push your LTV into a lower tier.

If your borrowing profile has improved significantly since you first took out your mortgage, you might be entitled to a much lower interest rate than what you previously qualified for.

This could be a good time to inquire about a refinance to save some money each month.

3. To change loan products (FHA to conventional)

It could also be that you started out with a loan product you weren’t too fond of because it was the only way to qualify.

But now that you’re a better borrower with more home equity you’ve got more options to choose from.

Instead of paying mortgage insurance for life on an FHA loan, you can refinance your mortgage into a conventional loan instead, thereby removing the lifetime MI and potentially snagging a lower interest rate at the same time.

4. To reduce the loan term

Then we’ve got the folks who want to aggressively pay down their mortgages, or at least not pay them down at a snail’s pace.

If this is you, there is a huge benefit to refinancing from a 30-year fixed into a shorter term loan such as the 15-year fixed.

These shorter term mortgages also come with lower interest rates so you can pay your mortgage off a lot faster without potentially breaking the bank, depending on the rate you had and where rates are today.

5. To increase the loan term

The exact opposite group might refinance to extend their loan term, which will cost them a lot more in interest but save them in monthly payment.

Not everyone wants to pay down their mortgage in three years and for some it’s very difficult to make large monthly payments.

Perhaps a change in circumstance means a 30-year term is more sustainable moving forward.

6. To switch to a fixed-rate mortgage

We’ll put this in the common reasons to refinance. Just about everyone will suggest that you refinance out of an ARM and into a fixed mortgage if you think rates are rising.

The same is true if your hybrid ARM that was fixed for X amount of years is about to hit its first rate adjustment.

To avoid the costly rate reset you can move to a FRM before that happens. And with rates so low today, you might even get a lower fixed rate than what you had on your ARM.

7. To go adjustable instead

Of course, things also move the other way. It’s entirely possible to switch from a boring old 30-year fixed mortgage to an ARM if you want some payment relief, or simply feel you’re overpaying.

It’s also possible to refinance out of one ARM and into another ARM to not only obtain a new (hopefully lower) rate but also restart your fixed-rate period on the new ARM.

Plenty of wealthy individuals move from ARM to ARM to take advantage of cheap short-term rates while they put their money to work elsewhere.

8. To go fully-amortized

Another common scenario might be a borrower with an interest-only mortgage who is facing a recast. The IO period typically only lasts 10 years before the mortgage must be paid back in full.

To avoid a steep monthly payment increase, a homeowner might opt to refinance out of the IO product and into something fully-amortizing. Or perhaps even another IO product to extend that benefit.

9. To go interest-only

Conversely, a borrower sitting on a lot of home equity might decide it’s time to make interest-only payments to improve monthly cash flow.

This can also free up cash for other expenditures or investments the homeowner may be looking at.

After all, you don’t always want all your eggs in one basket if you’ve already got a ton of them in your house.

10. To get cash

Speaking of cash flow, you might refinance simply to get cash out of your home.

The age-old cash out refinance is a great way to free up your home equity and put it to work.

Perhaps you want to make some home improvements, or buy a second home or an investment property. Maybe you want to diversify and move your cash out of your home and into the stock market instead.

11. To buy someone out

In certain situations, you may need/want to add or remove someone from title and/or the mortgage. If this is the case, a refinance can be an appropriate vehicle to do.

Maybe there was a divorce and you’re buying someone out. Or maybe you’re ready to fly solo and remove mom and dad as co-signers.

Again, this could be a good time to snag a lower interest rate and/or make a loan product change too.

12. To protect your investment

You might also refinance to tap some of the equity you’ve gained over the years. Home values are known to seesaw over time and it could be a good opportunity now to get some of that cash for the future.

It doesn’t hurt to put aside some dry powder, especially when interest rates are low. And if you can do so while home values are high and your property is owner-occupied, that cash can be put to work elsewhere. Diversify.

13. To drop PMI

I spoke about switching loan products to drop mortgage insurance, but you can also dump private mortgage insurance by refinancing if you’ve got a low enough LTV.

If your home increased in value and/or you paid it down enough to ditch the PMI, a refinance might save you a lot of money via both a lower interest rate and from the absence of said PMI. It’s a one-two punch!

14. To apply a lump sum to lower your LTV

Similarly, you might have come across some money recently and as such have the ability to take a big chunk out of your mortgage balance.

If you’re one of those people who likes to pay down the mortgage as quickly as possible, applying a lump sum to lower the balance (and the LTV) will lead to a lower monthly payment, assuming you refinance (or recast).

A lower interest rate and/or shorter loan term could apply here as well to really speed up the loan payoff.

15. To consolidate multiple mortgages

Here’s a classic reason to refinance. You’ve got multiple mortgages (hopefully just two) and want to consolidate them into a single loan.

A refinance is often a great way to accomplish this, especially if you wind up with a lower interest rate to boot.

Many second mortgages have sky-high interest rates or are adjustable (hello HELOC), so this can be a conservative money-saving move.

16. To consolidate other debt

Another typical reason to refinance is to consolidate other non-mortgage debt, such as credit cards and other higher-APR debt.

Mortgages tend to have the lowest interest rates around, and they allow you to pay the debt very slowly, which makes it easier to manage.

Just be careful not to go on a spending spree because you still haven’t paid off the old debt, you’ve merely transferred it.

Best place to start?  Use a calculator so you can see for yourself the power of a refinance.  Go here and see the money you can save and financial goal you can achieve: <CLICK HERE>

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Ask 100 people and you will most likely get 95 different answers. A mortgage, specifically a refinance, is not a “one size fits all” solution. Here are 7 steps that will help you:

Step 1: Decide what you want to get out of the refinance?  Sound easy? If you have a financial plan it may very well be. However, you should have a clear definition. It cannot be broad. It is not just a lower rate. It is not just a lower payment.  It is not a new term. What are you achieving? This is the key to your refinance success.

Step 2: Assess where you are financially.  Often we assess our financial state from the 1st through the 15th and the 16th through the 30th.  In short, when we get paid.  Where we are financially is what we have leftover when the bills have been paid.  Your assessment of your financial situation needs to include:

  • What is my credit score?
  • What is my debt to income ratio? Total income versus total outstanding debt payments.
  • What is my LTV loan to value? How much has my home appreciated or gone up in value?  How can I use that to my advantage in achieving my goals?

Step 3: Shop the best terms. Now you will hear the “talking heads” on TV say “find the best rate.” Shop the best rate. The rate can be an illusion. You are looking at the entire package.  How will that help you achieve your stated goals?

Step 4: Apply to one single source for your refinance. Applying to multiple lenders and those hard credit pulls can drive your credit score. Have conversations with a few, choose one.  Choose the one that is in alignment with your financial plan.

Step 5: Prepare all of the documentation.  All the tax returns, pay stubs, assets, credit explanation letters, savings, etc.  This will help the lender and ultimately help you in moving the process along.

Step 6: Next up the appraisal.  This is an exciting time.  Most homeowners have under-valued the worth of their home. You may be surprised by the market.  Do not allow yourself to think any improvements made will have a huge increase in value.  Unless you did total kitchen or bathroom remodels, you may be surprised at what drives up the value of your home.

Step 7: Close. Close and stick to the plan, no matter what. If you did a debt consolidation, ensure you stop using those cards and resist the temptation of acquiring new debt. It is a financial plan for a reason.

Don’t overcomplicate the process. Do not be overwhelmed. Those initial conversations without credit being pulled will tell you a great deal about the function and flow of a company or individual. It is how you connect together to ensure you achieve those goals that matter.

Financial Outlook

It seems like an obvious question, however, it is often overlooked.  When considering a refinance, what is the health of your finances?  Homeowners often wait until they are in a difficult position to begin making moves.  That could be too late for lenders and yourself!

Questions You Should be Asking:

  • Are my credit card balances above 30% of the available credit line?  For example, if you have a $5,000 credit card, do you owe more than $1500.00? Do you know what that does to your FICO score
  • Do you have student loans you are making minimum payments on with more than 5 years remaining?
  • Do you have auto loans in terms of 72 or 84 months?  Are payments becoming unmanageable?
  • Is your business running short on cash flow?  Are your receivables running longer than 90 days?  Considering an expensive loan from Kabbage?
  • Are you hearing rumblings or restructuring at work? The potential loss of time and income in the coming quarter or quarters?
  • Are you experiencing “too much month and not enough paycheck?” In short, the question is are you outpacing your income in expenses, bills, and payment?
  • Are you overpaying your single biggest expense?

A financial checkup is designed to give you a “30,000 foot look” at your money.  Too often individuals and families spend their time looking at their finances from the 1st through the 15th and 16th through the 31st! — essentially living in the moment.  It is time to break that cycle once and for all.

It’s Time to Take Action Now

If you fit any of the above scenarios or dozens of other potential financial pitfalls, the time to take action is now, and not wait until the event of the financial situation overwhelms you.

Sit with a professional and talk about your financial situation.  Have an unbiased 3rd party look at your financial picture from a number perspective.  It will be the best smart money move you make!

refinance

Smart money is a term used in many financial circles.  Depending on your age range; baby boomer, Gen Y and YES Gen Z, the understanding the power of a mortgage will have many different meanings.  The one notion that seems to prevail amongst all age brackets is, they don’t want a mortgage!  This is where being “smart money savvy” comes into play.

Life beyond a mortgage simply means your financial goals.  Outside of being self-employed, there may be no bigger decision an individual or couple will make.  Not to simply have a mortgage, it is how your mortgage will help you achieve your financial goals.

Large Sum of Money

For many American homeowners, they now have the ability to tap into a large sum of money.  Money that isn’t tied up in a retirement account, 401k, or long term investment.  Money that is appreciating and giving you the ability to tap into upon command!  Where else would you have access to this type of money?

Many Americans today have seen market appreciation unlike any other time over the course of the last 3+ years.  What does this mean?

  • The ability to be debt-free. Trading in 19% money for 2.5% money.
  • Pay off high payment student loans.  Trading in $400, $600, $800 payments into monthly cash flow.
  • Fully fund your retirement.  Contrary to popular belief, getting free money by fully funding your 401k is not a bad thing!  Retirement happens faster than you think Gen Y, and you never get back the days you lose by not having money in the market.
  • Starting a business?  Some experts say you never take a loan when you start a business. We agree If you are paying 10% or more interest to start that business. How is 2.5% or 3.5% tax deductible interest?  That is a smart money move.

These are four of literally hundreds of financial objectives a person or family should consider.  Yet, only a few things in today’s money will let you get there, outside of your mortgage. Your life beyond a mortgage starts by having a financial plan.  Understanding your debt.  Understanding the cost of money.  Understanding what 5, 10, 20 years from now may look like.  

Let’s talk.  Not about a mortgage anyone can do that.  Let’s talk about your goals.  Let’s talk about your life beyond a mortgage.

Primary Mortgage Insurance

Private mortgage insurance was an amazing idea, it in fact helped you get into the home you love today! However, what was once necessary is now potentially eating up your monthly budget.  In fact, many homeowners are unaware that they are paying hundreds per month for something they may no longer need.

Do you have PMI or private mortgage insurance?  Do you know if you even have it on your mortgage?  Even so, what can you do if you are paying PMI?  Let’s break it down.

Private Mortgage Insurance

PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.

That is the clinical side.  What is the practical side to you, the homeowner? What is the cost of PMI?  PMI typically costs between 0.5% to 1% of the entire loan amount on an annual basis. That means you could pay as much as $1,000 a year—or $83.33 per month—on a $100,000 loan, assuming a 1% PMI fee.  Use that same $83.33 per every one hundred thousand you borrowed!  That is a huge amount of money.

Example: $300,000 = $250.00 a month. That goes to nothing. No equity, no balance reduction. Nothing. This was the cost of doing business!

Now that you understand private mortgage insurance better, how do you get rid of it?  In most cases, you must be at an 80% LTV with your current lender.  On the surface you may say, well I have only had my mortgage for two years, and all the payments basically go to interest.  While that is true, you forget one key factor:

Market appreciation.  Although it may not seem like it if you watch the news, the real estate market is hot.  Red hot! When it is a seller’s market (meaning less inventory available), prices move up.  For every home that’s comparable to yours and sells in your neighborhood or area, it drives up the value of your home.

Now you may say “How does this help me, I don’t want to sell!” Nor should you.  However, by doing a refinance you can take advantage of lower rates, and YES in many cases you will be able to lose that PMI forever.

Imagine refinancing right now, and saving $400 or $500 a month due to losing PMI and a lower rate?  Many people are not getting a $6,000 net raise in their job.  You can.  That is significant and real.

In addition to the PMI you may be able to save 1%, 2% or even 3%!  Not only can you save off the PMI, you could save hundreds in rate savings as well!

Now we know some of you out there are saying “I took the mortgage that didn’t have PMI.”  Great, that was offset by the lender at a higher rate.  So if you choose to refinance, although you are not having to eliminate PMI, guess what?  You are saving monthly in payment and overall on cost.

Your house doesn’t need two insurance policies.  One is homeowners insurance that protects you.  One is far more expensive and protects the bank.  Let’s take back the money in your monthly mortgage and put it to work for you!