Friday, December 06, 2019

You may be contemplating refinancing your mortgage now that rates dipped. Should you refinance again or wait? What you should consider is: Are current rates low enough for you to consider refinancing now?

I don’t predict the future because anything can happen. How low can rates go? “Who knows?” is my answer. My feeling is, and has always been, if you can benefit now and achieve your financial goals, either cash flow or equity builds up, then jump. I might suggest that you integrate another consideration into your refinancing decision known as the unpredictable ticking time bombs. These are the factors that can prevent you from taking advantage of refinancing:

  1. 1. Comp values—it takes one short sale or foreclosure on the block to possibly lower the value of your home. That can prevent you from refinancing, or put you in a program that still allows you to refinance, but not save as much. We have them and we can help you navigate through them and save you money.
  2. 2. Your credit can be great one day and then boom, identity theft, or one late payment, or a collection account causes your credit scores to drop. Terribly inconvenient and annoying, but more important costly because you can be prevented from refinancing and purchasing a property at the best rate possible. I know you are thinking “not me,” but based on our over 29 years of experience, it happens to people. Why can’t it be you? (Which is what we tell ourselves if we play the lottery, except winning the lottery is a good thing. Identity theft isn’t.)
  3. 3. Corporate downsizing happens, and your job can be lost, and if you’re self-employed, income can decrease, or you can get hurt and be out of work, or be a W-2 worker and decide that you want to be self-employed (but you need one to two years of self-employment income to count your income for underwriting purposes) etc.
  4. 4. Life events, daily family stress and kid management take a lot of our time away from managing our finances. We are busy and tired and have so many things to do that we just put off refinancing and the opportunity passes us by.

Of course no one thinks about these things, but believe me they are a reality. You can start the process, clear conditions, put yourself in a position to grab an opportunity, and if rates drop … home run!

Low rates are surely the low-hanging fruit to incentivize borrowers, but not necessarily the only reasons to refinance. Avoid the possible ticking time bombs—here are reasons why it may pay to refinance now or do some planning so you can refinance in the future:

Payments are higher than market. At the time people borrow, their existing rate and payment might be higher than the current market rate due to (a) rates dropping after the previous loan closed, (b) the premiums added to the interest rate due to a borrower’s derogatory credit profile, (c) not shopping for the most competitive rate, (d) having a first and second mortgage whose averaged rates are high or (e) taking lender paid or borrower monthly insurance. Real estate taxes have increased.

Paying off a balloon. Long-term loans having minimal or no amortization of the outstanding principal, and a due date (payoff date) earlier than the term are called balloon loans (or interest-only loans). The loan principal is not self amortizing; therefore, a lump sum principal payment is due at a point in time specified in the mortgage note agreement.

Stability: changing an adjustable to a fixed rate. Many people have taken adjustable rate mortgages because (a) qualifying is easier, (b) initial cash flow is better, (c) short term game plan use of the property. Generally when fixed rates drop, and the borrower plans to hold the property on a long-term basis, refinancing for stability may be prudent.

Cashing out on their property. Many borrowers refinance their first mortgages or take out a second mortgage to pull cash from the equity in their homes for a variety of reasons, such as paying for home improvements, tuition, starting a new business or investment opportunities.

In many cases, it is possible to refinance an existing mortgage, pull out additional cash, and wind up with a new monthly payment lower than before.

Plan now for these scenarios, to refinance in the future:

Decrease in property value. Equity diminishes in a market where property values decline. If the mortgage balance is greater than the property value, refinancing is not possible unless the borrower has the cash to pay down the mortgage. Try to make extra payments to build an equity buffer.

Change in job status. Continuity of earnings is deemed erratic when a borrower changes industries, takes a cut in pay, loses their job or switches from being an employee to starting a business (self-employment). A loan underwriter must establish predictability in earnings based on a borrower’s history. Before jumping ship as an employee, stay where you are until you close on your loan. Keep in mind you need two years history of filed tax returns in most cases as a self-employed borrower although they now have special programs for those who don’t have those returns.

Lack of cash for closing costs. If there is a diminution of equity in the home being refinanced, including closing costs in the new mortgage may not be possible. The borrowers may not be able to obtain a mortgage unless they have the ability
to obtain additional liquid savings for the closing costs and estimated real estate tax and insurance escrows. Make additional payments to create additional equity. If it makes sense financially, taking a higher rate may allow you to obtain a larger borrower credit to make up a shortfall and get you in the sweet spot.

Tax planning. Many times, a person does not want to lower their payments due to their tax situation. With the new tax laws, a review of your deductions may indicate that starting a new loan may give you a greater tax write-off. I’m not a big believer in creating debt specifically for a write-off, but if there is an alternative use of funds and a total financial benefit, explore.

Owner occupied to rental. When a borrower’s occupancy status changes from a primary resident to a non-owner occupied investor (renting out their property), they can many times cover their mortgage debt through the rent received. Rental property mortgage rates are usually higher. Refinancing might not be as advantageous as it would have been if the property was occupied by the owner. Consider refinancing before an occupancy change.

Debt consolidation. The initial debt position of the borrower might have increased substantially due to credit card debt, auto loans, student loans etc. If the income level has remained constant, debt-to-income ratios might be overexerted, reducing the chance for loan approval. Consolidating your debt may allow you to qualify into a better rate and lower monthly obligation.

Divorce or litigation breeds disaster. When co-borrowers are in litigation, disagreement as to who is responsible for the current debt is common. As a consequence of the circumstantial delays of payment, credit can be ruined and the ability to refinance curtailed. Easier said than done, but before going to battle, try and work on the financial aspects, at the very least, with respect to the house. In the end, lower payments are good for all.

Waiting for rates to fall. When the market causes mortgage rates to fall, it’s natural to see if the rates drop further, delaying the steps toward applying for a loan. They try to ride the market instead of capturing the current savings available. Don’t wait! As they say, “Strike while the iron is hot.”

By Carl Guzman

Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. He is a real estate mortgage banker and business financing expert with over 28 years’ experience. He currently has 175 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! www.greenbackcapital.com,  [email protected]