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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>.

College tuition

In part 1, if you missed it, start here at https://refi.com/dont-mortgage-your-future-part-1/.  We began to walk through the current cost of money and spending tomorrow’s money today.  We began to unpack the rising cost of college tuition.  Also, the best way for family’s to prepare for college in today’s rate and value environment.

Average Cost of College by Degree Type

The average cost of college for public colleges and universities is similar for bachelor’s, masters, and doctoral degrees. The greatest differences lie in private nonprofit schools, which illustrates how costly a doctoral degree is compared to a master’s and bachelors.

Research has found that the average cost of college for the 2017–2018 school year was $20,770 for public schools (in-state) and $46,950 for nonprofit private schools, only including tuition, fees, and room and board. Each year, school costs have continued to increase, even accounting for inflation. 

Each year expect to see public in-state or private tuition to increase an average of 6%!  That is a smart money term for tomorrow’s money.  College tuition should never be left to a “we will figure it out when we get there” moment.  Often it is too difficult to quickly navigate those waters.  Why?  Simply remember these questions from part 1:

  • 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?

Taking the value of today and assuming your child graduates in 4 years, how are you going to tackle the $187,800 investment?  $46,950 x 4.  Please note this covers tuition, room, and board.  Not fees (lab fees as an example) and books.  That can move the cost another 4% per semester.

So what is the solution?  Can you reasonably achieve your goal?  Will your child need loans? Will they need to get a job while going to school?  Will it involve retirement money?  Credit cards?  Second job?  Putting your business on hold?  The answer is none of the above!  We live in a historical moment of time that allows you access to money at a level so cheap, that we have never seen it before. In part 3 we will break down for you on how college and paying for college is right in front of you. 

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!

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.

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.

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

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.

house images

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!

Are we on borrowed time?  As a homeowner it is a fair question to ask.  We are in many respects in uncharted 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?

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:

Freddie Mac

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.

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.

house photo

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!