OK so you have a mortgage, now what. You did your due diligence when you got the thing in the first place right? You made sure you had not only a competitive rate, but the right loan for you and your family. Wouldn’t it make sense to always have the best loan as the market and your personal situation changes? The problem is that there are no real “systems” or magic buttons you can push that will analyze if you can improve your loan.
Rates change daily… did you already miss the boat on short-term interest rate drop? Home values just peaked, did you miss the chance to drop or massively reduce PMI?
There are so many different criteria that go into true “mortgage planning” and the right times to act. So, I thought it would be prudent to lay out the main factors that affect not only your ability but the need to refinance. All should trigger you to have a look-see at your mortgage.
Here are the main factors that affect your ability or need to refinance
The LTV
AKA Loan-to-Value. Based on the value of your home, this is the percentage of how much you owe to the value of your home. Example: I owe $450,000 on my mortgage and my home is worth $500,000. The LTV is 90%. The lower the LTV the better your mortgage term and rate. If you see even only a 5% decrease in your LTV, have a look at your mortgage. The only time this 5% redux may not matter is when you were already below 60% LTV when you got your mortgage.
You can start by pulling your home value from Zillow. If your new LTV change is >= 5% (or if you aren’t sure) then schedule a call with a loan consultant.
Note that even if your home value does not appear to put you at a lower LTV, consider the amount you have paid down the mortgage. Sometime simple principal curtailment forces you into a better LTV which could mean qualifying for a better loan package.
Consumer Tip: A great resource I’ve used for years is Home Scout. This is a consumer-facing direct home search which gets you a bunch of information on what is selling around you. This will give you a much better idea of your true LTV as opposed to Zillow. It does much more than I can list here so check it out for yourself!
The Credit Score
Credit score is the #1 thing that affects what rate you get. Not only the interest rate, but the PMI rate. PMI is a nasty little thing everyone must pay when you have > 80% LTV. Even if you don’t have a monthly PMI in your total payment, be assured that you did pay for it, either with a higher rate or built it into the loan balance.
Just like with the LTV, there are break-points with credit score. What I’ve found is that for most all loans, every 20 points increase to your score puts you in a different “bucket” both for rates and PMI factors. What I would suggest is getting a free service to pull your score and report back to you. Once you have this in place and if new credit score improved by 20 pts from the time that you got your loan, then then schedule a call with a loan consultant.
Consumer Tip: PMI is the same regardless of your credit score for all FHA loans and there is NO PMI for VA Loans. If you are a Veteran or served in the military first off, thank you… secondly, please contact me and let’s see if using your VA loan could improve your mortgage (even if it’s tied up with another home).
Interest Rates
A lower rate means a lower payment. Simple. But I will say that I’ve never, after 20+ years in the mortgage business, seen rates be so volatile. The old rules of engagement are out the window and interest rates are more subject to the international stage than ever before. What moves interest rates doesn’t really matter, but what does matter is how you track them. It’s like a roller coaster… you need to get on when it dips down.
Rates go up and down. Media coverage stating how much less refinancing volume there is in our industry must reflect people’s inability to refinance right? Wrong. It’s that the world has convinced people that rates are higher and you’re stuck with what you have. Like I said… rates go up and down, so you just need to hit the dips. I’ve helped people refinance only with a minimal difference in rate when compounded with a better LTV and credit score. Things change, so no matter what everyone says, keep getting your mortgage looked at every year.
Rule of thumb, if you can improve your rate by .25% to .5% (this includes PMI reduction or removal) and keep your closing costs to a bare minimum, it’s probably worth it. I spent a lot of time developing a refinance worksheet that calculates the true savings if you were to refinance. You must look at more than just payment savings such as closing costs, interest savings as compared to the current loan, and how “starting over” affects your interest costs. Hit me up if you want to get the spreadsheet.
Consumer Tip: There sometimes arise new and fancy financing options. Depending on the lender’s appetite, you may see a new program or a stupid low rate for a limited time. All I’m saying is that rate in the news or paper and what your buddy at work just got is not what may be available to you now.
Shortening the term
Normally I’m not a big fan of shortening the team (i.e. going from a 30 Year Fixed to a 20 or 15 Year loan), but if you have already been in the home for 5, 10 years or more, then going to a shorter term may not even increase your payment much. 15 Year loans typically come with a rate much lower rate than the 30 Year Fixed. This could be huge interest savings. Request my Refinance EMA to calculate your exact refinance savings.
Another cool thing you could use a shorter-term loan for is if you had plans of putting a huge lump-sum down on the home. This may be because of a home that just sold or the receipt of a big work bonus. Either way, dumping the money into the equity and flipping to a 20 or 15 year may not jack the payment up much at all given the lower rate and balance of the new mortgage.
Consumer Tip: Make sure that you are financially squared away for retirement, kid’s college and known future expenses before putting cash into the equity of your home. Money in your home is “dead equity” and will only save on interest costs. It will not grow and has a 0% return on investment. I see too many clients getting bad advice, opting for a 15 Year mortgage because they like the rate and can “afford the payment” only to be calling me in a few years to get some money for Johnny’s college or a Home Equity to pay off debt.
You Need Cash
Unless you have a rich uncle or hit the jackpot at MGM, the equity of your home is a great way to get cash. Could be to pay off debt or simply consolidate some higher interest rate loans. Whatever you need cash for, definitely look to your home equity as an option. Oh, and do not default to getting a home equity line of credit (HELOC). This is an option, but not what I’m getting at here. Always try to get the cash under just a first mortgage. It’s normally much cheaper that way over the long run.
Consumer Tip: Some government loan programs allow for much more flexible guidelines and better rates for accessing the equity in your home. In most cases, FHA allows you up to 85% of your home’s value and the VA will go to 100%. Talk to someone before just getting a consumer loan or home equity line of credit.
Situation has changed
Life happens and things change… some for good and some for bad. Here are some of the more typical situations that make it beneficial (or necessary) to refinance.
1. A little addition is on the way!
Kids are the primary reason people move. Correction, kids are the primary reason families feel that the home is now too small! Now I know that many moves are due to the desire for a better school district or neighborhood, but many times family move because they feel forced into the move due to the size restrictions of their home. Solution: Renovate your home! I’ve been saying for a long time that consumers should shop for location versus finding the perfect home. You can make any home your perfect home… yes, even the one you are living in now! If you have a great location and are just out of space, a renovation loan could allow you to refinance the current loan and get you money for renovations! (Even if that total is more than the home is worth now!)
2. Came into a bunch of money
Wouldn’t we all love to have this problem? Per the above thoughts on shortening the term, the same would go for just simply refinancing to improve your financial position. I’ve had people sell homes, get big cash bonuses or come into an inheritance. First thought is to pay down or pay off debt, right? In this case, it could be used for paying down the loan and refinancing to massively lower your payment.
Consumer Tip: I’ve told some of my clients to not buy an ice cream cone without talking to me first. Ok, maybe that’s a bit overboard, but when it comes to putting large amounts of money into an asset, please schedule some time to speak to a professional that will make sure the mortgage fits within your short and long-term financial objectives. A good answer sometimes is not to refinance, but to just put the money in savings or investments.
3. Only going to be in the home 5-7 more years
Many people miss this one. They come close to retirement or the job they have is going to have them relocating in a few years… yet they stick with their good old 30 Year Fixed mortgages because it feels “safe”. Although I understand the sentiment, it’s hogwash. If your tenure in the home is less than 7 years, you probably should be financing with an Adjustable Rate Mortgage (ARM). The ARMs of today are not the Dr. Doom of mortgage products or the equity sapping negative amortization loans that got people in trouble prior to the financial crisis. Rather, they are a safe way to guarantee your interest rate for the period you are staying in the home at a LOWER rate. That’s right, if you tell the lender that you only need the money for 5 years, you get a better rate than if you needed it for 30. Think about it, if you loaned your buddy some cash, would you rather him pay it back sooner or later?
Consumer Tip: Terms are always better the faster you repay your debt.
4. The divorce
Divorces typically come with a “spousal equity buyout”. One spouse keeps the house and then “pays off” the other spouse with cash from the home’s equity. Ask around or start shopping for mortgages and you’ll hear the term “cash out” and then a big fat NO because you may not have the equity position or you may be just getting charged more for this “cash”. A little-known trick is that getting cash out of your home for a spousal equity buyout is not considered cash out. This means better rates, and in many cases, you can get up to 96.5% of the home value for the needed cash.
Consumer Tip: Get the cash out in conjunction with a buydown loan. Normally in a divorce situation you have less income paying the mortgage on top of the higher mortgage amount. A buydown will lower the payments substantially for the first couple years of the loan.
Get some advice
I couldn’t leave you hanging without offering you some personal help and guidance. I’ve hit on many of the reasons why (or when) you should refinance or get a mortgage checkup, but every client is different. I would love the opportunity to look at your overall financial picture and make some recommendations. You can schedule some time with me here.