refinance

Together we have moved through the difficult and sometimes overwhelming proposition of paying for your child’s college education.  If you haven’t we recommend starting at the beginning with part 1: https://refi.com/dont-mortgage-your-future-part-1/ and here is part 2: https://refi.com/dont-mortgage-your-future-part-2/. Spoiler alert: we have a solution!

In fact, we have seen the rising costs of college.  You know that college tuition cannot be something that just happens.  We talked about the current cost of money and what tomorrow’s money may cost for those that wait.  With that said, if your child is 1 year out, 2 years, or even 3 or more years, it is time to take action with today’s money.

Freddie Mac takes you on a history of mortgage interest rates since 1971.  After review of that chart, what is the big takeaway? We are historically low.  Unlike anything we have ever seen.  The natural question is then, “Will it stay this way?” Some economists believe it will for a period of time.  Other economists believe it will go up and up quickly to stabilize the economy from a long term perspective.  In the end, no one knows for sure that is the key.

In addition to the conundrum of interest rates, we have the market value of your home.  This is one element that we can all agree will fluctuate, and whether it is a buyer’s market or a seller’s market is not always easy to determine, nor recommended.  What you have to evaluate is what you know today, sitting right in front of you.

On this date, October 20th, 2020, is that the value of your home is high very high.  On this date, October 20th, 2020 interest rates are very low historically low.  Now is the time to take action.  When values are high and the cost of money is low, that is smart money!  Smart money takes advantage of market opportunities.

By sitting with a mortgage professional today and creating a plan to reduce debt, lower your rate, and ensure college is paid for, you will be ensuring the best possible financial outcome.  You may not have thought about that in 2020, however the timing could not be better.  Tomorrow’s money is never guaranteed, but the money of today is.  This is the time to set your financial plan in place and obtain peace of mind in that college, regardless of what happens in the economy or rate or housing values, you are secure. Let’s start by breaking down the number and getting a roadmap in place here: <NEXT STEP>.

business, finance, savings, property ladder or mortgage loan concept : wood house model on computer laptop

As homeowners and families, there are plenty of large financial decisions we are faced to make.  One of the biggest decisions?  College.  College (and the real cost of college) stare parents in the face of a huge six-figure investment they must be prepared to make.

Often parents realize the cost far too late in the process for traditional college savings.  Then when they have to borrow money, it becomes out of necessity instead of making the best financial decisions.  So, this begs the question:

With the cost of money being at its lowest level in a lifetime, is now the time to borrow?

You may be saying, “but my son or daughter isn’t ready yet!” They may be a year or two away. That is fair, however there are bigger questions to ask right now: 

  • What will your finances look like then?  
  • What will interest rates be?  
  • Value of your home? Will it be on the high end like today, or will values dip?
  • Employment. Could your employment change? Increase or decrease?  Loss of employment?
  • Counting on a scholarship? Don’t. In fact, due to COVID, universities are slashing scholarships by 40% over the next 5 years.
  • My business should be taking off, right? If you are counting on earning the money, that is great! However, what if?

There are questions abound in terms of what your financial status will be in the future.  Here is what you do know: you know exactly what it is like today!  The ability to refinance a mortgage is better done when there isn’t a sense of urgency when you are not on a strict timeline.

What is the next big part of the process?  The actual cost of college.  Fact: most families underestimate the true cost of college by 52%.  52%!  That is significant.  In our 3-part series, we will break down, by year, what you can expect to pay for college. Then in part 3, we will break down how you can start today in funding that college investment with ease!

Refinance

In the mortgage industry or personal finance industry, “experts” like to overcomplicate the process with insider terms, graphs, charts, and complicated products and services.  In the end, it is a hype machine to make things out to be more than what they are.

Albert Einstein once said, If you cannot explain it simply, you don’t understand it well enough yourself!”

Albert Einstein is 100% spot on.  A mortgage professional has two jobs: To understand your financial situation and goals, and keep it simple. Refinancing your mortgage is about keeping more of your own money.  Think about the lengths we will go to save money:

FACT: People love saving money!  Industries are built around this very concept. So it begs the question, why would you not take advantage of the same concept with your single biggest expense?  Outside of being self-employed, your home will likely be your biggest expense, so it needs to be the item that is financed properly!

Remember, it is about a goal, not a rate. If you have a rate of 3% or higher should you consider a refinance?  Yes, 100%, but not solely for the reasons you may think off the top of your head.  You single biggest expenses are:

  • Term? Instead of 30 years, you could save hundreds of thousands in changing your term.
  • PMI? If you pay mortgage insurance, you could be saving $100 a month. This is real money that is not going to your home.
  • FHA? Same deal, hundreds per month is being spent that is not a direct benefit.
  • Credit cards? The single biggest expense of your home is also your single biggest resource.  You can become debt-free, especially when rates and terms are historically low!

Make it simple.  You have the opportunity to keep more of your own money.  Create and commit to a financial goal that will eliminate debt and provide more retirement and college savings all done through a simple refinance. 

man hand notepad and house model on wooden table

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 left over when the bills have been paid.  Your assessment of your financial need 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 in 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.

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Nearly 18 million homeowners (or more) are potentially missing out on mortgage refinance savings, according to a recent report from Black Knight, a data analytics firm. That saving comes in the form of interest savings, payment savings, or debt consolidation.

Mortgage rates have stayed near historic lows for the past few months, and refinance rates have bloomed as a result, thus, making now a great time to refinance your existing home loan. If you’re wondering if that is you, read on!

Reasons to refinance:

  • You can cut your interest rate: If you can slash your current interest rates by at least 0.75% by refinancing, then you should consider a refinance. (For example, if your old interest rate was 4.75%, you would want to qualify for a new loan rate of at least 4.0%.)  Right now, some homeowners are in the 2’s.
  • You have at least 20% home equity: You’ve paid down your home loan to 80% of your home’s value or less. Even more, than paying down, the value of your home has skyrocketed!
  • You have a good credit score: You have or a FICO credit score of 700 or above. Don’t let that number scare you.  There are solutions for all credit scores.  Plus, most homeowners are truly unaware of their current credit score.

Time is of the Essence!

That said, if you’re thinking of taking advantage of real estate’s lower rates, it’s best to act now. In response to the wave of refinances that have taken place over the last few months, Fannie Mae and Freddie Mac have decided to charge a new 0.5% surcharge on mortgages over $125,000 that become part of their portfolio.

This fee was originally intended to have a September 1st start date, but mortgage rates soared in response to an outcry (market pushback from you, the homeowner) following the announcement. As a result, the fee was delayed until December 1, 2020.

Look, in the end, 0.50% is a significant increase potentially for no good reason.  However, your goal is not simply about rate.  Your goal is a financial goal.  What are you achieving?  What would a new mortgage look like for cash-flow?  For debt reduction?  Now is a good time for a financial check-up.  Each day you wait, you continue to pay more than you should.  Take action and contact us today!

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Refinancing your existing mortgage may provide you with the opportunity to lower your interest rate, reduce your mortgage payment and adjust your loan term. For those homeowners who have lived in their home for more than a few years, pulling equity out of the property for everything from a luxurious vacation to making home improvements is a tempting potential benefit.

However, with property values and interest rates adjusting frequently, you may wonder if now is the best time to refinance your mortgage.

Using Equity From Your Refinance

One factor to consider when debating between refinancing now and waiting relates to pulling equity out of your home. If you need access to the cash now for home improvements or other purposes, refinancing now may be ideal. Even if you do not need access to your equity for several months or longer, you can lock in today’s rates and invest the money in other vehicles, such as CDs or bonds, until you need the cash.

Anticipating Market Changes

You may have heard that the interest rates for home mortgages remain close to historic lows. When are they projected to continue to rise? Nobody can predict with certainty how interest rates will adjust in the next few months and years, and locking in today’s rates may be beneficial. Keep in mind that if rates decline in the near future, you can always look into refinancing again.

Reducing Your Principal

If you have a higher interest rate on your existing mortgage, your principal balance may be reduced at a slower rate than if you refinance to a lower interest rate. In addition, if you refinance from a 30-year term to a shorter-term length, your principal balance will also be reduced more quickly in most cases. In many situations, refinancing your home mortgage today may establish a more efficient repayment schedule that allows you to accrue equity at a faster rate.

Each homeowner has unique factors to consider when refinancing based on property value, credit rating, existing loan terms and other factors. While many will benefit by refinancing an existing mortgage today, it is all based upon your financial plan.

Taking advantage of interest rate for interest rate sake, is not what smart money homeowners do.  A refinance is done with a strategic objective in mind.  Debt reduction. Mortgage reduction.  401k funding.  Business funding.  College funding.  What is your objective?  Take advantage of our mortgage team to help in creating a plan.  A plan that achieves your financial goals, beyond the mortgage.  That is the power in your home.

Serious mature couple calculating bills to pay, checking domestic finances, middle aged family managing, planning budget, expenses, grey haired man and woman reading bank loan documents at home

This is becoming a question amongst many retirees today.  Should you refinance even though you are retired?  As more Americans have bucked conventional wisdom in recent years and retired while still carrying a home mortgage, the market upheaval has created an opening to consider refinancing.

For retirees, however, the decision to refinance a mortgage isn’t simply a matter of weighing upfront costs against monthly savings to calculate how long it takes to break even. Older homeowners need to have a clear understanding of what they hope to get out of a refi, and what it means for the big picture of their planning.  Yes, the monthly savings may mean a great deal in cashflow.  It also may allow you to defer bigger withdrawals from overall savings.  It is the planning we want to focus on.

If saving money over time is your primary objective, first do the math to see if that pans out. For one thing, costs.  Which typically ranges from 2% to 5% of the principal. Depending on how much time you have left to pay, that money might be better used prepaying your mortgage by putting additional funds toward the principal each month.  This should be a major consideration for your financial plan.

What many people also overlook is that refinancing restarts the clock on amortization.  Does that really matter? If you’re 20 years into a 30-year loan, refinancing can reduce your monthly payment, but you could pay more in total interest over the life of the loan. That is unless you refinance to a lower rate but apply the savings to the principal each month to prepay your mortgage.  However, contingent about estate planning, taking the infusion of cash now, or monthly cash flow savings, will offset future costs.  In reality, the question becomes today’s money or tomorrow’s money. Which means more?

If You Can, Pay It Off

Even though financial advisors are no longer dogmatic about making sure retirees burn their mortgages before retirement, there is still tremendous value in doing so.  Meaning, this can be an “in the pocket” strategic asset.  One that can be called upon if needed for future cash. IE, long term home healthcare.  The question once again is the value of your plan relating to today’s money.

As a retiree, you are faced with a unique opportunity.  The overall cost of mortgage money.  In your lifetime, the cost of mortgage money has never been cheaper.  You can now weigh taking advantage of the money now when effective rates are something you have never experienced.  In short, your access to tax-deductible money has never been cheaper from a pure rate perspective.

Cash Flow Is Key

If downsizing isn’t an immediate option and cash flow is a concern, paying off a mortgage might not be the first priority. The fact is if you’re 60, have a mortgage, and are worried about cash flow, the focus should be on reducing the size of your payment.  In retirement cash flow is key and king!  Why? Simple, you do not want the emphasis on your core investment income or social security.  If you are facing a cash crunch, you do not want to refinance at that point.  Forecasting and planning are the key right now.

Even in retirement, the most powerful financial tool at your disposal is your mortgage.  It can protect income and assets.  It can also allow you to pay off unnecessary debt, installment loans, and assist your children.  Now is the time to take action.  Sit with a qualified advisor and review the options available to you.  Retirement can become stressful but know there are many options available to you.  This mortgage market is made for you.

 

simple house exterior with tile roof. front porch with curb appeal

Being an Airbnb host or VRBO host is no longer abnormal. In fact, it is the new normal for many property owners.  When you are a host with such a service, there are some hidden benefits beyond their platform that you might have never known about.

Now, the income from your short-term rental can be used if you’re looking to qualify for a refinance of your second home and/or rental properties. We also go over the ways a couple of the major home rental platforms work.

Using Short-Term Rental Income To Refinance

Short-term rental income has posed a challenge in the past when it came to using it for mortgage qualification because you don’t have a lease agreement. That’s changed with services like Airbnb, HomeAway®, and VRBO™ because they keep a record of each time your property is rented out. Now, all major conventional mortgage investors accept this short-term rental income.  Their recording keeping has helped more property owners get the favorable financing they deserve!

As a good entrepreneur, the more you can document, the better.  Recordkeeping is not only paramount for taxes, but it is also for financing as well!  In order to qualify for short-term rental income, records like the payout history and income or host report are necessary. You will need records for at least the last year, but having 2 years’ worth of records is helpful.

If you’re using short-term rental income to qualify, up to the last 2 years worth of tax returns will be helpful in terms of documentation. The returns should include Schedule C or E, depending on how the income is reported.  There is always a balance between reporting income and deductions.  Be sure you are able to leverage the income you make.  Not every write-off is a good write-off. Having the ability to refinance and solid financial records are worth more than just maximizing a deduction.

The major conventional mortgage investors Fannie Mae and Freddie Mac have different requirements, but below are some things you should expect.

You may need a certain number of months worth of mortgage payments so you can show that you’ll be able to cover your mortgage payment in the event of a short-term loss of income or another event that adversely impacts your finances (COVID-19). If you click on the link to the left, you will see a report that Forbes did on the effect of COVID-19 and Airbnb properties.  Why is this important? If Forbes knows it, banks know it.  Your business will be held to a different standard.  Documentation, financial reserves are your friends.

The requirements vary, but 2 months with the principal payment, interest, property taxes, homeowners insurance, and homeowners association dues (if applicable) is a good starting point.

You can refinance primary properties with up to four units as well as second homes. Depending on the investor in the mortgage, you may need to have a certain amount of existing equity, but one of our Home Loan Experts will help you find the right option for you.

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Like many homeowners, your first mortgage may have been a loan with the Federal Housing Administration (FHA). These loans are backed by the FHA and are attractive to first-time homebuyers.  Why? It’s because FHA loans make it easier to obtain financing, requiring only minimal down payments and fair-to-good credit scores.  However with that, comes real cost that you already know about.

FHA loans require certain provisions which sometimes place a heavy burden on a homeowner’s budget, often in the form of premiums paid for mortgage insurance. In such cases, you may want to consider refinancing your FHA loan into a conventional mortgage.  That could very well be you.  It may be time to act and refinance out of costs that do not pay your mortgage balance down. We are also currently in an environment where rates are low and equity (home values) are rising.

So, Should You Refinance Your FHA to a Conventional Loan?

Here are the basics: You can refinance an FHA loan to a conventional loan, but it requires meeting minimum requirements. It’s especially beneficial to refinance your FHA if you have 20% equity in your home and so you can remove the lifetime private mortgage insurance (PMI). If you don’t meet the equity minimum for a conventional loan, you’ll also need to account for continued private mortgage insurance (PMI) costs until you’ve reached 78% in the loan-to-value ratio.  

In relation to your mortgage, there still is a concept of good debt vs. bad debt.  PMI private mortgage insurance, although is a necessary evil, can easily be remedied during these times.  Don’t assume the value of your home.  This is a mistake that many homeowners make, usually undervaluing.  Homeowners — especially first-time homeowners — believe that value comes from making changes.  The truth is that it comes from the market.  

One last item is your credit.  The FHA mortgage afforded you some bruises that they looked over along the way.  Now that you have a 1, 2, or maybe even a 3-year history of successful payments on your mortgage — this can drastically change your credit score!

Smart money homeowners in FHA mortgages are taking the time right now to evaluate their current financial situation.  The market is ripe with opportunity in rate and term.  You may just be able to seize those advantages now!

When a mortgage lender meets with a potential homebuyer, here’s what they’re hoping to see: A big, steady paycheck at a full-time job.  Sorry “Mr. Banker,” this is not the reality of today’s homeowner.

For years, the US has been shifting gradually towards a gig economy — a term that refers to the legions of freelancers, contractors, and self-employed who don’t necessarily have a 9-to-5 job and a weekly paycheck.

In fact, 57 million Americans freelanced last year, or about 35% of the entire U.S. workforce, according to a 2019 “Freelancing in America” study by the Freelancers Union.

Let’s take it one step further, from May 30th, 2020 Forbes Magazine nearly 30% of Americans are self-employed.  Those that are not a part of the “gig” economy.  This may include you, owning a construction company, bakery, real estate agent, artist, architect, and everything else in-between.

What does all this mean?  Contrary to what you may read online, being self-employed does not mean it is harder to do a refinance.  It is just different.  Does this mean your local bank or credit union is equipped to provide such a mortgage?  Most likely not.  Not to put down your local bank, but they thrive in a “cookie-cutter” scenario.  It takes a mortgage or refinance professional to get the job done.

Here are a few items to help the process:

Documentation is your friend

Even if freelancers have up and down months, you want to show lenders your long-term averages. That means furnishing at least a couple of years of documentation, which will let lenders see the numbers in black-and-white and help them breathe easier. In general, a lender will want to see a two-year history of earnings to establish an income pattern.  Documentation will be 1099’s, merchant statements, bank statements, contracts, accounts receivable, if you can demonstrate more than that, even better.

Clean Up Your Balance Sheet

Be cautious and lower your credit utilization rate. The percentage of your total credit limit that you are currently using, as low as possible, preferably 30% or below. Pay your bills on time, every month, and pay down any revolving debt. Don’t open a flurry of new credit cards or loans. This is of key importance, you don’t want to have the perception that you are cash poor or your business is struggling.

When it comes to taxes, there is a constant caveat.  Self-employed workers generally try to write off as much business expenses as they legally can. That reduces taxable income, which helps come April 15.  However in terms of banks looking at a potential borrower, the higher income, the better. The moral of the story: Don’t go crazy with deductions.  In reality, you can always amend a return though a licensed CPA or financial professional.  Let them know you are considering a refinance and have them assist in putting your tax returns in a different light.

In the end, the best course of action?  A strong seasoned mortgage professional.  A partner that understands the industry and is well versed in self-employed mortgages.  It starts with a plan.  Let’s get that plan started here.