Home Refinance

With historically low interest rates, you’re probably seeing a fair share of news items declaring what a great time it is to refinance your home. After all, refinancing can be a smart financial move if it results in lowering monthly payments, reducing loan duration, or building home equity more quickly. But the bigger question lingers: How soon can you (or should you) refinance after buying a house or condo?

Before contacting a loan officer or mortgage servicer about refinancing, take a read through the next few sections of this post to see if refinancing is right for you.

What does it mean to refinance? 

Simply put, refinancing is replacing your current home loan with a brand new one. Here’s why that might be an option, even if you have a decent rate already: 

  • You want to reduce monthly payments with a lower interest rate or a longer-term (or both)
  • You’d like to pay off your mortgage faster by shortening the terms 
  • You’ve re-evaluated having an adjustable-rate mortgage (ARM) and want to convert it to a fixed-rate mortgage
  • You’ve got financial hardships, home improvements, or a major purchase on the horizon and you want to tap into your home equity
  • Your credit rating has improved making you eligible for a better rate
  • You want to get rid of PMI (private mortgage insurance) that came with your original loan
  • You’ve since gotten married or divorced, and you want to add or subtract someone from the loan

 How soon can you refinance a home after purchase?

The answer may be “sooner than you think,” although it depends on the refinance program you’re looking for, the loan type, and if any penalties apply. It may seem foolish to refinance soon after you went through the process and paid closing costs on your original mortgage, but in some cases, it could save you big money over the life of the loan. 

Although you can technically refinance immediately, some lenders may require you to wait months before refinancing with the same company. If taking advantage of better terms is your main consideration, the path may be clearer. Here are some mortgage refinance rules and time frames to consider: 

  • A cash-out refinance, in which you are borrowing extra funds against your home equity, typically has a six month waiting period (and you probably don’t have that much equity invested in that short timeframe anyway).
  • If you went into mortgage forbearance or had your original loan restructured to allow you to skip or temporarily reduce monthly payments, you may be required to wait up to 24 months before refinancing.
  • If your original mortgage was funded with an FHA loan and you want to refinance it with an FHA Streamline Refinance, you’ll be asked to wait 210 days from the original closing date.
  • It’s typically easier to qualify for a straightforward rate and term refinance as they rarely have a waiting period.
  • Even if your current mortgage rate is only slightly higher than today’s rate, a small drop could save you thousands of dollars over the life of your loan. You’ll reap more long-term benefits if you refinance sooner rather than later when rates might not be this good. 
  • Some loan products have penalties for pre-payment if you refinance your loan within the first three to five years. 

 How long are you planning to stay in your home? 

Answering this question will help you determine if refinancing will even make sense financially. Why? Like your original mortgage, refinancing will require an appraisal, an inspection, and closing costs — somewhere in the range of 2% to 5% of the loan value. Will you be in the home long enough to recoup those fees? 

Let’s look at a hypothetical situation: Imagine your current mortgage is $1500 a month, but you’re thinking of refinancing. Closing costs and other fees are estimated to come to $4800, but your monthly payment is expected to drop by $200 a month. With an annual savings of $2400, you’d only start to see real savings after two years. 

Do you intend to stay in your home for at least that long? Refinancing might make sense. If you are not planning to stay put for more than a couple of years, your potential savings may not cover the cost of refinancing. Obviously, your math will differ.

Consider your credit report
Taking out a mortgage can impact your credit report, and if you haven’t had your home for very long, you’ve probably not made enough monthly payments to boost your score yet. Applying for a refinance loan shortly afterward pings your credit report once again and could affect your eligibility. This could make it challenging to get a new loan to replace the old one or negatively impact the rate you’re offered. 

Is the time right?
Refinancing is totally worth it if the time is right, and it can be an easy, straightforward process when you work with an experienced local loan officer

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There seems to be a common misconception out there from financial gurus that refinancing your home, under any circumstance, is a bad idea.  However, what these TV “talking heads” fail to realize is, that is just not practical.

Financial pundits will tell you refinancing your mortgage means you have to start all over again.  While that may be true, the “cost of money” is a very real thing! You are not digging a deeper hole, in fact, you are most likely lifting yourself out of one!

There are many factors to consider in a refinance of a mortgage.  Let’s consider a few questions:

  • Have you been making payments on a current credit card or credit cards only to see the balance stay the same or increase?
  • Have you recently or within the last 18 months did balance transfers from multiple credit cards to one?
  • Do you have a home equity line of credit or a home equity installment loan?
  • Do you have more than 2 years remaining on student loans?
  • Do you have multiple no payments finance deals getting ready to expire in 12 months?
  • Do you expect to move in the next 16 months?
  • Is this your “forever” home?

Now, did you answer yes to 3 of any of the above questions?  If so, then let’s talk about a refinance.  Before we do, let’s talk about the appreciation of your home.  Most homes in the United States appreciate in value year over year.  In fact, the nationwide average is 3% to 5% yearly.  This is a conservative estimate, especially in today’s real estate market.

If you have been in your home for 2 years now, let’s consider a scenario:

  1. The value of your home in August 2018 was $300,000.
  2. The value of your home (as an estimate) in March 2021 is approximately $340,750.
  3. You have built equity and that has nothing to do with your mortgage.  In essence, you are $40,000 to the plus!  You won’t be going backward.

Now let’s consider debt:

  1. $15,000 in credit card debt: average monthly payment is approximately $450.00 per month.
  2. $45,000 in student loan debt: the average monthly payment is $460.00.
  3. $275,000 mortgage payment for principal and interest and is approximately $1196.00 monthly.

Just these three above items total to $2100.00.  Plus, $910.00 per month may not be tax deductible.  However, for this post, let’s not complicate that calculation.

If you refinanced right now at today’s current rate, assuming good credit: $1,383.00  Your savings in real money is almost $850.00 per month! This is over $10,000 a year of real cash in your pocket.

Let us be clear, this is not an offer for a mortgage.  The calculations above are for illustration purposes only.  A mortgage professional will assist in helping you understand rates, terms, credit scenarios, and appraisals.  However, with that being said: are you starting over?

Imagine what your finances would like with an additional infusion of cash at a level of $600, $800 or $1000 dollars monthly!  It would be significant and would have an impact. You are not starting over.  In fact, in doing a refinance the proper way, you will be light years ahead in debt, savings, and the elimination of massive interest charges.  It’s time to meet with a mortgage pro!

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The decision to refinance your home depends on many factors, including the length of time you plan to live there, current interest rates, and how long it will take to recoup your closing costs. In some cases, refinancing is a wise decision. In others, it may not be worth it financially.

Because you already own the property, refinancing likely would be easier than securing a loan as a first-time buyer. Also, if you have owned your property or house for a long time and built up significant equity, that will make refinancing easier. However, if tapping that equity or consolidating debt is your reason for a refi, keep in mind that doing so can increase the number of years that you will owe on your mortgage—not the smartest of financial moves. 

Reasons to Refinance

So when does it make sense to refinance? The typical should-I-refinance-my-mortgage rule of thumb is that if you can reduce your current interest rate by 1% or more, it might make sense because of the money you’ll save. Refinancing to a lower interest rate also allows you to build equity in your home more quickly. If interest rates have dropped low enough, it might be possible to refinance to shorten the loan term—say, from a 30-year to a 15-year fixed-rate mortgage—without changing the monthly payment by much.

Consider How Long You Plan to Stay in Your Home

In deciding whether or not to refinance, you’ll want to calculate what your monthly savings will be when the refinance is complete. Let’s say, for example, that you have a 30-year mortgage loan for $200,000. When you first assumed the loan, your interest rate was fixed at 6.5%, and your monthly payment was $1,257. If interest rates fall to 5.5% fixed, this could reduce your monthly payment to $1,130—a savings of $127 per month, or $1,524 annually.

Your lender can calculate your total closing costs for the refinance should you decide to proceed. If your costs amount to approximately $2,300, you can divide that figure by your savings to determine your break-even point—in this case, the home for two years or longer, refinancing would make sense one-and-a-half years in the home [$2,300 ÷ $1,524 = 1.5]. If you plan to stay in the home for two years or longer, refinancing would make sense.

If you want to refinance with less than a 1% reduction, say 0.5%, the picture changes. Using the same example, your monthly payment would be reduced to $1,194, a savings of $63 per month, or $756 annually [$2,300 ÷ $756 = 3.0], so you would have to stay in the home for three years. If your closing costs were higher, say $4,000, that period would jump to nearly five-and-a-half years.

Consider Private Mortgage Insurance (PMI)

During periods when home values decline, many homes are appraised for much less than they had been appraised in the past. If this is the case when you are considering refinancing, the lower valuation of your home may mean that you now lack sufficient equity to satisfy a 20% down payment on the new mortgage.

To refinance, you will be required to provide a larger cash deposit than you had expected, or you may need to carry PMI, which will ultimately increase your monthly payment. It could mean that, even with a drop in interest rates, your real savings might not amount to much.

Conversely, a refinance that will remove your PMI would save you money and might be worth doing for that reason alone. If your house has 20% or more equity, you will not need to pay PMI unless you have an FHA mortgage loan or you are considered a high-risk borrower. If you currently pay PMI, have at least 20% equity, and your current lender will not remove the PMI, you should refinance.

Debt

This is the number 1 reason to refinance a mortgage for many homeowners!  Look at these shocking numbers across the boards:

Americans may have a love-hate relationship with their credit cards, but that’s not preventing them from piling on debt.

The country’s outstanding credit card and other types of revolving debt have jumped almost 20% from a decade ago, reaching an all-time high of about $1.1 trillion, according to a recent study from CompareCards.

The average balance on a credit card is now almost $6,200, and the typical American holds four credit cards, according to the credit bureau Experian. Credit card issuers are also giving Americans more room to run up debt, boosting the typical credit limit by 20% over the last decade to $31,000.

If this is you, this is the very reason to consolidate and get rid of this debt.  You must be proactive in the process, not reactive in the debt process.  The cycle above will never end on its own.  No job, no stimulus, no bonus will shed the average amount of debt above.  However, your home can.  Interest will go up, not down.  There is no more down.  We cannot get lower than we have been.  The window to become financially stable is open right now for you.

 

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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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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.

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!

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!

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It seems that you couldn’t go online, read the paper (if that is still a thing), or watch the news without hearing about the historically low interest rates.  Yet, with all the news and noise around mortgage interest rates, maybe you have not taken advantage of this opportunity.

According to Bankrate, a leading consumer and industry website, 8 out 10 homeowners have not refinanced.  However, to take it a step further:  27% of current mortgage holders have no idea what their interest rate is!  Maybe that is you.  If it is, here is what you need to know.

Payment

Do not fall in love with your payment.  Payments are deceiving.  Too often when it comes to cars and homes, people settle in on a payment that is comfortable to their lifestyle.  However, that “payment” could be costing you a fortune, and you end up losing real dollars day in and day out.

Rate

If you have been a reader to our site and socials for some time, you may hear say, interest rate doesn’t matter.  In a sense, we still hold that to be true.  We believe as a financial tool, the interest doesn’t matter, as your mortgage needs to be achieving a financial goal for you.  If it is, then the rate is irrelevant.

On the other hand, if your mortgage is simply just a mortgage for you and you have no idea what you are paying, then the interest rate becomes critical.  Why “donate” money to a bank or mortgage company.  Even if your mortgage will never be used to help save for retirement, college, or debt reduction, then you should have the cheapest possible rate and mortgage you can get.

Example would be: Say you were buying the new iPhone.  One store had a brand new iPhone for $3,000 and another had the iPhone for $1,000.  They were both precisely the same. Would you spend $3,000?  Of course not, as that would be foolish.  In the case of your mortgage we are not talking about $1000 or $2000, we could be talking about $100,000+ dollars!

Experience

Was your first experience in getting a mortgage a nightmare?  We understand.  However, that should never stop you from getting yourself a better deal.  In fact, for every 10 mortgages, only 1 ends up being challenging.  Chances are whatever the issue was in your prior mortgage will not rear its ugly head again.

In fact, mortgages through technology have become streamlined, making the process simple and easy.  Most are now being done online, through email, and without all the paperwork and endless hours of conversations.  Smart money lenders are in place to make that happen!

There are many reasons why people don’t refinance their mortgage.  The above should not fall into that category.  In the end, there has never been a better time to get the “cheapest money” that has been offered in history.  You could be passing up on cutting years off your mortgage and up to $100,000 dollars in mortgage savings.  Take that information and imagine not knowing your interest rate or your terms. 

If you have a mortgage with an interest rate of 4 percent or more, which about a third of mortgage holders do, you should almost certainly refinance soon. Even if your mortgage rate is between 3 and 3.99 percent (29 percent of mortgage holders based on the survey), it’s probably worth at least getting quotes for a refi, because current interest rates are below 3 percent on average, before factoring in fees and points.

It is time to know your financial situation!