Posts Tagged ‘should I refinance’

Is It Time to Refinance An FHA Mortgage?

October 11, 2019

As discussed previously, using an FHA loan to buy a home makes sense for home buyers with relatively low credit scores and limited down payment funds. FHA loans offer very attractive pricing for these home buyers.

Interest rates have now fallen to their lowest level in three years, so it may be time for current FHA mortgage holders to consider a conventional mortgage refinance. The interest rate savings may not be huge, but changing from FHA mortgage insurance to private mortgage insurance could bring significant financial benefits.

I’m working with a couple now (we’ll call them Jack and Diane) who bought their home in 2017.  At that time, their qualifying credit score was in the mid-600’s and they had just enough cash for the FHA minimum down payment.  This was an ideal scenario for an FHA mortgage.

Fast forward to 2019 – their credit scores have increased and home appreciation in their neighborhood has given them more equity.  A conventional loan now makes sense for their updated situation.  They can refinance to a new interest rate that is just 0.25% less than their current rate.  Normally such a small monthly savings, by itself, does not justify the cost of refinancing.

In addition to the interest rate savings, they will also save money every month with lower mortgage insurance payments.  Switching from their FHA loan to a conventional loan will lower the mortgage insurance monthly premiums by about $120.  Their total monthly savings equal $160, and their refinance has a break-even point of just over two years.  Considering the interest rate savings plus the mortgage insurance savings makes their refinance worthwhile.

An added benefit is that their new private mortgage insurance will cancel in a few years (unlike the FHA insurance which is permanent), increasing their monthly savings to about $200. So, Jack and Diane will realize this bonus savings in just a few years.

Ultimately, home buyers who used an FHA loan two or three years ago may reap big rewards from a conventional refinance now, assuming their property value has increased.

Ron moved into your neighborhood in the last three years or so. At the neighborhood Halloween party, ask Ron if he has heard of an FHA mortgage. If he replies, “Yes, that’s the type of loan I have,” ask him if he would like to lower his monthly payment.  Then connect Ron with me.  We will quickly determine whether moving to a conventional mortgage can help Ron financially.

Home equity reaches all time high

October 8, 2019

The amount of equity in US homes now exceeds the levels seen before the housing crash. Available equity in the US is just over $6 trillion, which is 25% higher than the peaks seen during the housing boom.

Black Knight Inc uses data and analytics to provide forecasts for the mortgage and real estate industries. Their surveys indicate just over half of home owners have rates at 0.750% or higher than current rates. The average home owner has $140,000 in equity in their homes.

Meaning… homeowners have enough equity to avoid PMI (or get rid of PMI if currently on their loan) and lower their monthly payment by moving to a better interest rate.

With rates at yearly lows, and lots of equity in homes, it is the right environment for a refinance. So… should you refinance?

The main question I ask clients is “how much longer do you plan to remain in the home?”

  • If the homeowner is looking to move in the near future, then it rarely makes sense to refinance.
  • If the monthly savings begins to exceed $100 per month and a break-even point is around 2-3 years, then a refinances begins to make more sense.

Another question I get is “when should I consider refinancing?” It is a great question, and my answer is simple… if the current interest rate is 0.500% or higher than your rate, then at least have a conversation.

Own a home in Georgia and your interest rate is at or over 4.500%? Wondering if now is a good time to refinance? Contact me today. In just a few minutes, we’ll put together some numbers to see if a refinance could make sense. A credit pull isn’t required for this conversation.

Mortgage rates are as low as they’ve been in a couple of years. There is more equity than ever in US homes. If you are planning on remaining in your home for 2+ years, now may be a great time for a refinance.

Should I Refinance Now?

June 20, 2019

As recently reported in The Mortgage Blog, mortgage interest rates have dropped to their lowest level in over two years.  The last time rates were consistently this low was just before the 2016 Presidential election.  For people who purchased homes since then, it may make sense to refinance now.  So how do you decide if a refinance is right for you?

I read one article from a major think tank stating you should refinance for a rate that is a specific amount lower than your current rate.  I believe that is a bit simplistic and you should crunch numbers in more detail.  I recommend comparing the financial benefits against the cost of refinancing – the total amount you can save each month versus the refinance cost.

With a rate / term refi, you will save by lowering your monthly interest payments and, possibly, by lowering or eliminating private mortgage insurance (PMI) payments.  I recommend you focus on the dollar savings.  A 0.5% interest rate change on a $100,000 loan will save you much less per month than the same interest rate change on a $400,000 mortgage.  Eliminating or reducing PMI payments can provide significantly lower monthly payments.  To eliminate PMI, you must must have 20% equity.  Perhaps your home’s value has increased since you bought it.  You can capture this higher value as equity in the new loan using a new appraisal value.  If the appraisal shows you have greater equity, even if it’s less than 20%, you may see your PMI payment reduced, perhaps substantially.

How do I analyze the savings?  I estimate a new monthly payment based on the lower interest rate and potential PMI changes and compare this rate versus their current payment.  Then I divide the refi closing cost by the monthly savings to get a “break even” point.  If the monthly savings break even on the closing costs in three years or less, I typically recommend that the client pursue the refinance.  Why three years?  It seems most people have a general idea of their plans for the next three years or so.  Anything further than that becomes a little murkier.  I’m currently working with a client who has a $335,000 loan.  I estimate a refinance will save her $150 per month and will “break even” in about 22 months.  That seems like a wise financial move to me.

 

Another option to consider is a cash out refinance.  Is there a home project you want to do?  Perhaps a kitchen or bathroom renovation?  I have clients using their home equity and lower interest rates to take cash out for a project, and still have the same payment (or even a better payment) than they have now.

Do you know someone who bought a Georgia home in 2017 or 2018?  Ask them what they would do with an extra $100 per month.  Then refer them to me.  I’ll run the numbers to determine whether refinancing is a wise move.

 

Interest rates move lower

June 18, 2019

Interest rates/Mortgage rates (same thing) moved to a two year low earlier in the month. While rates have since rose a bit, they are much lower than the start of the year.

Rates are well over a half point better since the start of the year. This decrease is beneficial for two reasons. First, it is helpful for those out looking to buy a home right now. Let’s say someone was looking to get a loan for $250,000. With the improvement in rates, a buyer can now get a loan for $265,000 and have the same payment. More buying power!

The other is for existing home owners. The Chief Economist at Freddie Mac said with rates dipping below 4%, “there are over $2 trillion of outstanding residential loans eligible to be refinanced – meaning the majority of what was originated in 2018 is now eligible”

So… should I refinance? A couple of questions you can ask yourself:

  1. Did I purchase a home in 2018? If yes, then rates are definitely lower than when you bought. It would be worth looking into what a new payment could be with a lower rate.
  2. Are current 30 year fixed rates of at/below 4% better than a half a point or more than your current rate? If yes, then it is worth looking at the numbers.
  3. Considering taking some equity out for a home project? I am working with several clients doing a cash out refinance. With the drop in rates, these clients are getting a lower rate, cash out for home maintenance, and keeping a similar payment to what they are making now.

Do you fit into any of those questions? If yes, it might be time to review the numbers for a potential refinance. If you are a homeowner in the state of Georgia, contact me today! In a short phone call, we can decide if the time is right for a refinance. If rates aren’t low enough for it to make sense, we can set a target rate and I’ll contact you when rates move lower. It is that easy. If nothing else, it is worth inquiring to make sure you don’t miss out on this drop in mortgage rates!

Trade wars and mortgage rates

May 14, 2019

Last week was to be the culmination of negotiations between the US and China about a trade deal. Then came some finger pointing, blaming, and honestly tactics you see as negotiations come to an end. What is all of this doing to the market? I’m glad you asked!

Stocks were all over the place last week and this week… down 500 points to open one day only to rebound and finish the day flat… down a few hundred points… down over 600 points Monday… up 350 points as I write this post. Stocks are all over the map.

Brace yourselves!

Mortgage rates are in a similar position. The talk toward the end of the year (slowing economy, trade wars, bad economic news) pushed mortgage rates lower. In fact, rates are well over a half a point lower today than they were this time last year. The many months of tariffs and speculation pushed stocks lower and rates higher.

What happens with the trade negotiations:

  • If a trade deal is reached, one would expect stocks to rebound back to their all-time highs. Obviously this depends on the final details of the trade agreement, but overall expect to see rates get a little worse.
  • If both sides walk away from the negotiating table, then expect stocks to get worse and mortgage rates continue to improve.

What to do? If considering a refinance, this is a good time to move forward. Mortgage rates are as low as they’ve been in over a year. If considering a refinance to lower one’s rate OR take equity out of a home, there hasn’t been a better time in quite some time to do it. If you’ve been sitting on the fence about buying a home hoping rates could go lower, this angle is trickier. On the one hand, sure, mortgage rates could improve should trade negotiations fail. On the other hand, rates were much higher than they are now when stocks were at all-time highs. If a trade deal is finalized, we could see stocks jump back up to or surpass the all-time high. If that happens, expect mortgage rates to rise. It’s no coincidence that mortgage rates improved towards the end of 2018 as stock values fell. The same will happen should stocks take off again.

With rates sitting as low as they’ve been in over a year, now is the time to take advantage of them whether you are looking to purchase or refinance. If you are in need of a mortgage in the state of Georgia, contact me today. I can have you ready to move forward on a purchase or refinance is a little over 10 minutes. It’s that easy!

Recasting a mortgage

February 25, 2019

My recent post discussed ways in which a buyer can make a non-contingent offer on a home in this competitive seller’s market. I mentioned recasting as an option to consider if a buyer could only make a minimum down payment on the new home if they don’t sell their current home. Having the mortgage recast later is a good way to get around not making a large down payment when going through the buying/selling process in reverse order (buying the new home and then selling the current home instead of selling then buying). What does recast mean?

A recast is a feature most loan servicers allow where remaining payments are recalculated based on the new principal balance. This is often done after a significant principal reduction takes place on the loan. A recast is a cheaper alternative than simply refinancing. If today’s mortgage rates are higher than the rate on the home owners current mortgage, then a recast would be a very good option should one make a large principal reduction and want to lower the monthly payment.

Here is an example of recasting. My client wants to purchase a new home without selling her current home. This way she makes a non-contingent offer to buy her new home. Ideally, my client would love to make a 20% down payment, but the money for the down payment is tied up as equity in her current home. All she could afford to do right now is 5% down. The purchase price is $400,000 with 5% down, so the loan amount is $380,000. This makes a monthly mortgage payment of $1,870 (not including taxes/insurance/PMI). My client buys the new home, then sells the current home. She now has an extra $100,000 to pay down the mortgage balance on her new home.

The new loan amount is $280,000, which is great! But… since this is a fixed rate loan, the monthly payment is still $1,870. Now she contacts her loan servicer and requests a recast of mortgage. The rate is the same, but the principal balance is much lower. When the loan is recast, now the payment drops to $1,377. This is how my client can purchase her new home without selling her current home first AND eventually get the payment to reflect the new loan amount.

Looking to buy a home in the state of Georgia, want to make a non-contingent offer, and recast later, contact me today. In just a few minutes, I can have you well on your way to make an offer on a home.

Also, a note to existing home owners who want to recast their loan. Be sure to contact your loan servicer before making the large principal reduction. You want to make sure the loan servicer will allow a recast. You also want to know the steps they want you to take to complete it. Perhaps they want you to complete a form and start the recast request prior to making the large principal reduction. Every loan servicer is different, so be sure to contact them to know exactly how they want you to go about it.

Mortgage rates continue to improve

December 20, 2018

The federal reserve completed their fourth rate hike of the Federal Funds Rate this week. Guess that means mortgage rates are up? Nope! They are not. Mortgage rates have improved.

In fact, mortgage rates improved by over a half a point better coming off their 2018 highs in early November. Why? This blog covers the topic often, but not often enough as a lot of people believe mortgage rates flow with the actions of the Federal Reserve.

While mortgage rates may get worse when the Federal Reserve raises the Federal Funds Rate, mortgage rates themselves are actually determined by the value of mortgage backed security bonds. As these bond prices go up, mortgage rates go down (and vice versa). The Federal Funds rate impacts rates on car loans, credit cards, and home equity lines (second mortgages). We’ve seen those rates get higher this year as the Fed raised rates a full point in 2018.

What is causing mortgage rates to improve? It’s the usual suspects:

  • When mortgage rates were at their yearly high, stocks were at an all time high. Since the Dow his 26,800, it has lost 4,000 points (15% of its value) as of this blog post. Money is coming out of stocks and going into bonds. As bond prices go up, mortgage rates go down. It’s no coincidence rates were at their highest point of 2018 when the Dow was just like rates are now improving as the Dow pulls back.
  • Stocks are slowing their historic run due to bad economic news. There are signs the economy is potentially headed toward a recession (some believe it will happen in 2019). Bad economic news sends investors from higher risk/higher reward stocks into the safer investment/less reward bond market.
  • The Federal Funds Rate itself – as it moves higher, inflation is slowed. Mortgage rates hate inflation, and combating inflation is a way to help mortgage rates improve.

What to do with this rate improvement? If buying a home, rates are still low and headed back near their levels at the start of 2018. Purchasing a home with these improved rates gives the buyer a 6% increase on their purchase price. Now is a great time to start looking. The spring market for buyers/buying power is already upon us. If you’ve considered doing a refinance to pay off an equity line whose rate is going up and up this year, now is a much better time to consider making this move.

Owning or buying a home in Georgia? Ready for that mortgage conversation? Contact me today, and we’ll get started!

Cash Out Refi or HELOC – Key Questions

October 25, 2018


 

 

In the last post we covered the fact that American households have over $6 trillion of accessible home equity and described the two main ways home owners can access that equity – a cash out mortgage refinance and a home equity line of credit (HELOC).  I promised to make my recommendations on which option is best for a home owner, based on a set of questions.  You will find my recommendations below:

Question #1:  Do I want a fixed payment, or can I live with changing interest rates and payments?  Recent economic conditions show rising interest rates.   HELOC accounts typically carry a variable interest rate that increases as market interest rates increase and decrease as the market decreases.  Borrowers obtaining a cash out mortgage refinance often secure fixed rate mortgages, so the payments do not change over time.  Which do you prefer?

Question #2:  Am I disciplined to proactively pay down my loan over time, or will I only make minimum payments?  HELOC accounts typically require interest-only payments.  If you only plan to make the minimum payments, you may be surprised in a few years when your HELOC account matures and the bank expects you to pay off the remaining account balance.  If you will proactively pay down the balance, you will not have this surprise.  Refi mortgage payments fully amortize over the loan term, so your monthly payment always includes a principal component.  And when you make the last payment, your original loan balance will be fully repaid.  Which option is best for you?

Question #3:  How much money do I need, $100,000 for a home renovation or $10,000 for a home repair?  In short, if you do make extra principle payments, how long will it take you to repay the loan balance?  The lower the amount and the faster you repay it, the less likely increasing interest rates will burst your budget.  If you need a renovation amount of cash, selecting the long-term fixed mortgage rate may be a better option since it provides a fixed payment over a long time period.

Question #4:  Why do I need access to my home’s equity?  In my opinion, home renovations, repairs, and debt consolidations serve as good reasons to tap home equity.  These are steps that ultimately increase your equity or improve your overall financial position.  To me, that’s a wise use of your home equity.  On the other hand, tapping home equity for expendable items or vacations may not be the best use of a home’s equity.

Do you have a friend pondering whether to access their home’s equity?  Please refer them to me.  I will ask them these questions (and more) and coach them to make the best decision for their own unique circumstances.

Is Your Home Your Piggy Bank?

October 18, 2018

A recent study shows that for the first time ever, accessible (or “tappable,” the term used by the study) US home owner equity has exceeded $6 trillion.  The number of home owners with equity that they can access has reached about 44 million.  In the first half of 2018, this tappable home equity increased by about $636 billion.

Ultimately this means that many Americans can utilize their home equity to fund home renovation projects, cover education costs, consolidate higher-interest debt, or fund other household needs.  Americans typically access their home equity in one of two ways, a home equity line of credit (HELOC) or doing a cash out refinance on their entire mortgage.  Here are some costs and benefits of each option:

Cash Out Refinance:

  • Interest rate is typically fixed.
  • Fully amortizing – some of each monthly payment is principal.
  • Pays off existing mortgage so borrower starts with a new loan term and interest rate.

HELOC:

  • Variable interest rate.
  • Interest only payments – balloon due at end of loan term, often 10 years
  • Lower closing costs than a cash out refinance.
  • Does not change your current mortgage interest rate or amortization term.

So which option is best you ask?  Well, that depends considerably on the home owner’s circumstances.  As a mortgage lender, here are some questions I think a home owner should ask him / herself to help determine which option is right:

  • Do I want a fixed payment or can I live with changing interest rates and payments?
  • Am I disciplined enough to proactively pay down my loan quickly, or will I only make minimum payments?
  • How much do I need?  $100,000 for a home renovation or $10,000 for a home repair?
  • Why do I need to access my home’s equity?  Is the reason really worth tapping my equity?

Answers to these questions form the basis for a home owner’s decision.  In the next post, I will opine on my preferred options based on these questions, and give a recent client scenario.

Do you have a friend considering a renovation or needing funds for a child’s education in the next 3 months?  Please refer them to me.  I will ask them these questions and coach them to make the best decision for their own unique circumstances. 

 

Tools to Access Your Home’s Equity

January 11, 2018

Home owners often seek to use their home equity as a source of cash.  They can use this cash for renovations, paying off other high interest debt, funding college educations, etc.

Owners typically access their equity by either (1) paying off their current mortgage and obtaining a new, higher-balance mortgage using a “cash out” refinance or (2) obtaining a home equity line of credit (HELOC).  Each option has some pros and cons.  The new federal tax law somewhat changes the pro / con dynamic.

Under the 2017 tax law, mortgage interest paid on loan balances up to $750,000 remains deductible on your federal taxes.  However, the tax law eliminated the mortgage interest deduction on new home equity loans and lines of credit.  But note that this only affects home owners who itemize their taxes.  And with the doubling of the standard deduction under the new tax law, the number of households that itemize deductions is expected to drop from 34 million to 14 million.

So, if you are considering accessing your home equity, first think through whether this tax change will affect you.  If you are a single filer and your itemized deductions including mortgage interest would be less than $12,000, the interest deductibility will not affect your decision.  If you file jointly and your itemized deductions would be less than $24,000, interest deductibility will again not affect your decision.

Here is my list of benefits for each option:

Cash Out Refi:

·        You can obtain a fixed rate loan.  The monthly principal and interest payment will never change.  HELOC rates are variable and your payments will increase when market interest rates increase.

·        You can deduct all interest (on loan balances up to $750,000) as part of your federal tax calculations as described above.

·        You reduce your outstanding loan principal with every payment.  The monthly payments reduce your outstanding principal every month.  HELOC payments are interest only.  For people who don’t have the financial discipline to pay down HELOC balances, the cash out refi forces you to reduce the loan balance monthly.

HELOC:

·        You can access more of your home’s equity.  HELOC’s typically allow up to 85% loan balance (first mortgage plus HELOC) to home value or loan to value “LTV.”  Cash out refis only allow a maximum 80% LTV.

·        You pay less for the loan itself.  Closing costs are typically lower for a HELOC than for a mortgage.

·        You can pay less each month.  Required HELOC payments are interest only.  By not paying down part of the principal each month, your monthly payments will likely be lower with a HELOC versus a traditional  mortgage.   

Next post, we will cover some “rules of thumb” when choosing between a refi and a HELOC.  Own a home in Georgia and want to access some equity?  Give me a call at Dunwoody Mortgage and let’s review your options.  We can consider the advantages of each as we guide you to the best solution for your situation.