When to Refinance

The best time to refinance is either when rates are remaining the same or when they are dropping. Depending on when you purchased your home, the interest rate on your mortgage may be higher than the historic lows of the past several years. If that is the case, then there are many strong incentives to refinance.

The general rule of thumb is that if you can shave off at least 1 percentage point on your interest rate with a refinance, then it’s worth it to refinance. Interest rates have been just above 4% on 30-year fixed rate mortgages for a good amount of time.

What’s important to keep in mind also is where rates are likely to be heading. Most mortgage experts expect rates to climb in the second half of the year. The Federal Reserve’s decision to tapper its bond buying program has a lot to with this. This means that in some sense the window of time for many homeowners to refinance is closing.

Another important factor in determining when to refinance is the nature of the interest rate that you have on your loan. Variable interest rates can change with market conditions and therefore can be risky. You should ask yourself whether you will be able to continue making mortgage payments if your rate were to go up significantly. It may be worth your time to switch to a low 30-year fixed interest rate so that even if rates go up in the future your payments won’t be affected.

When to Buy or Sell Your Home

Falling or stagnant interest rates also indicate a good time to sell or buy a new home. A borrower’s buying power has been historically strong at times when rates either remain the same or are dropping. However, this assumes that you have good credit and are therefore able to qualify for a low interest loan.

If, for example, you want to buy a house for $300,000 with a conventional loan at 20% down on a 30-year fixed interest rate at 4% this would cost you %1,145.00 per month. Should you wait for an extended period of time when rates are hovering around 6% then your monthly payments would go up nearly $300. Over the course of one year alone, that’s nearly an extra $3,600.

What you should also consider is where home prices are heading. If you own a home in a large metropolitan area, then chances are you’re in luck if you want to sell. Home prices have been on the rise in many areas of the country. But there are some less densely populated cities where home prices have actually fallen. If you want to know approximately what your home is worth, try to find similar homes where you live and see what they are selling for.

Erin Gorman, managing director at Bank of New York Mellon Corp, said that she has seen more borrowers looking to take out $2 million dollars loans than at any time in the past. Some of the borrowers are even taking out loans to purchase second properties.

“These high-net-worth borrowers do act differently than first-time buyers, who borrow because they have to,” said Gorman, who serves as the national mortgage sales director. “High-net-worth borrowers don’t have to borrow. They choose to, so they’re very strategic about what, why, and when they borrow.”

Jumbo Loans on the Rise

The number of Americans who took out a home loan from $1 to $10 million in the most densely populated cities of America stood at more than 15,000 in the second quarter of 2014. That is the highest number ever recorded according to property data firm Corelogic.

There are a number of potential reasons why there is a sharp increase in high volume loans. Many wealthy buyers are looking to capitalize on their investments as the stock market rises and home prices surge upwards. The goal in many instances is to sell these homes for more than their purchasing price and thus turn a profit.

Many of these high end borrowers don’t even necessarily have to borrow in order to come up with the money they need. They do so strategically. At the same time, first time buyers are finding it hard to enter into the market. These buyers simply don’t have the credit scores that many lenders are looking for.

Right before the collapse of the housing market back in 2008, first time buyers made up about 35% of all borrowers. In June of this year, they only made up about 28% of existing home sales. Though many of the new first time buyers entering the market may not qualify for conventional loans, they may qualify for FHA loans. These have lower credit requirements than most loans which makes them especially attractive to first time buyers.

Credit Availability Increases with New Jumbo Loans

Mortgage credit availability has been increasing slightly ever month and that has continued from June to July, according to a report from the Mortgage Bankers Association. The increase was primarily due to a rise in the number of adjustable rate jumbo loans. Jumbo loans are simply loans that are above conforming loan limits. This limit may be higher or lower depending on where one lives.

Whenever credit availability decreases that means that lending standards are tightening. Whenever credit availability increases, that means lending standards are loosening. So, if you were not able to get a loan several months ago, this means that your chances of getting a loan now have improved slightly. Lending standards still aren’t as loose as they were back in 2008 before sub-prime mortgage crisis. But there is still an upward trajectory meaning more and more people will eventually be able to qualify for a loan as time goes by.  

However, this is actually a decrease from where prices where one year ago. Last year at this time home prices were at a 7 year high and had advanced 11.4% on a year-over-year basis. The slowdown in home prices is partially due to the sale of homes that are in foreclosure.

Foreclosed homes typically sell for less and thus reduce the average selling price of other homes in a given area. For example, when the sale of distressed properties rose sharply in 2009, home prices fell dramatically.

Good News for Buyers

The slowdown in home prices is good news for news for new buyers looking to enter the market. Last year buyers witness a sharply increase in home prices as well as mortgage rates. This came at the same time that wages remained stagnant for many workers. Paychecks for the average worker rose about 2% per year since the recession ended. This is about the same rate as inflation.
So, if you were one of the millions of people who was priced out last year because home sales were too high, now is an excellent time to reconsider buying a home. If you’re selling your home it may be worth holding onto it for a while longer.

Even if you’ve already purchased your home years ago, the drop in mortgage interest rates can still work in your favor. Refinancing to a new low rate can end up saving you thousands of dollars in interest payments over the life of your loan. Whether you’ve taken out a VA loan, FHA loan or conventional loan, there is likely a way for you to cut down your mortgage interest rate.
Closing costs remain low at many mortgage banks and there are still a number of places that are quoting interest rates in the 3% range. If it’s been a while since you’ve refinanced or you shave off at least 1% point from your interest rate, then it’s absolutely worth looking into a refinance loan.

The good news is that the qualifications for refinancing have gotten lower and lower over the years. If you’re unable to get traditional refinancing currently because the value of your home has declined, then you may be eligible to refinance through programs like the Home Affordable Refinancing Program (HARP).

Of course, if you’re looking to buy a home, not all areas of the country have been affected equally by the general decline in home prices. Some areas have seen the values of the homes actually rise. Areas in the southern part of California have seen an increase in home prices. If you find yourself in this situation, then you may be eligible for more conventional forms of refinancing.
Check with your local mortgage lender to find out how much you could possibly save by refinancing. You may very well lower your payment amount, shorten the duration of your home loan or potentially do both at the same time.  

These borrowers were able to save money and often shorten their payment terms. In fact, of the borrowers who refinanced during the second quarter, 40% of them of them were able to shorten the duration of their loans. Now is an excellent time to consider saving money on a home loan and potentially shorten the duration of your loan at the same time.

Frank Nothaft, Freddie Mac VP and chief economist, had this to say. “The housing market realized a significant shift in the second quarter of this year as refinance activity fell below 50 percent marking the onset of the first purchase-dominated market the industry has seen since 2000 and an end to the refinance boom that started in late 2008. In this time we saw fixed mortgage rates hit all-time lows, with the 30-year fixed-rate mortgage falling well below 4 percent. We also estimate over 25 million American borrowers refinanced their loans to the tune of over $70 billion in total interest payment savings.”

What People Are Doing With Their Home Mortgages

A substantial portion of the refinancing from these mortgages came from cash out refinancing. It has been estimated that around $7.8 billion dollars in home equity was cashed out during the second quarter of 2014.

One of the reasons that this is happening is that people are building more and more equity in the homes as the economy and housing market improve. Overall, the United States economy grew by 4.1 trillion over the last two years.

How People Are Saving Through Refinancing

On average homeowners have been getting their interest rate reduced by 1.4% points. Over time this translates into roughly a 24% savings in interest payments over the life of a loan. Those who choose to refinance through HARP were able to save on average 1.6% off of their current loan. For the average borrower this translates into a savings of about 3,200 in interest payments during the first year.

If you took out a home loan before 2008 then there is a very good chance that you could potentially save quite a bit of money through strategic refinancing. Of course, in order to benefit from refinancing programs like HARP you must first be eligible for them. According to the official HARP website, you need to meet all of the following criteria in order to be able to refinance:

– The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.

– The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009

– The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.

– The current loan-to-value (LTV) ratio must be greater than 80%.

– The borrower must be current on the mortgage at the time of the refinance, with a good payment history in the past 12 months.

Even small fractions of a percentage can add up thousands of extra dollars in interest payments. Whether you’re applying for an FHA loan, a VA loan or a conventional loan there are steps you can take to get your lender to offer you a lower rate.

One Quick Trick to Get a Better Rate

FHA guidelines require borrowers to have credit scores of at least 500. Mortgage applicants with a credit score of less than 500 will be unable to get an FHA backed mortgage. However, even if you qualify for an FHA loan, a VA loan or a conventional loan backed by Fannie Mae and Freddie Mac this doesn’t mean you’re guaranteed the best rate.

For example, a mortgage applicant looking for an FHA loan whose credit score is 680 will get a much better rate than an applicant with a credit score of 580. In many cases such an applicant could get a rate ½ percentage point lower than the borrower with a lower credit score.

According to the Federal Trade Commission, one out of every four credit reports has errors which may negatively affect the mortgage rate offer they’ve received from a lender. Consequently, millions of borrowers are needlessly paying a higher interest rate than what they deserve.

To get the rate that you deserve it is essential to obtain a copy of credit report and check it for errors. Correcting a mistake on a credit report can raise your credit score by as much as 100 points or more. In fact, many lenders will give you free access to your credit report as part of their rate quoting process.

Getting a Lower Rate with Conventional Loans and VA Loans

It is possible to pay less interest with conventional loans simply by making a larger down payment. For example, if you’re buying a condominium you can gain access to lower mortgage rates simply by paying 25% down instead of the 20% that many buyers put up. This could possibly be an attractive option if you’re able to afford the extra money down.

VA loans are unique in that the rates offered don’t change with high or low credit scores. Veterans are able to save money on their VA loan through VA streamline loans. These are no verification refinance loans which can give the borrower access to better mortgage rates.

With this type of loan the VA wives the typical documentation requirements that most lenders look for when they’re refinancing a home loan. This includes W-2s and bank statements as well as the need for a home appraisal. The only thing that VA requires for getting access to the loan is that it has a tangible benefit for the borrower.

No matter what type of loan you have, there is likely a way that you can save money on your loan by getting a better rate. It’s often simply a matter of finding the right lender who is willing to work with you.

Shortly after the financial crisis in 2008, subprime lending became synonymous with risk and foreclosure. Too many people simply couldn’t afford to keep paying their mortgages as they lost their jobs and the interest rates on their home loans increased.

Banks quickly abandoned these types of loans and tougher underwriting standards began to be put in place with the passage of the Dodd-Frank bill. But as of 2013 and well into this year, a number of banks are beginning to offer subprime loans once more.

What are subprime loans?

A subprime loan is a loan with an interest rate above prime rates for borrowers who are unable to qualify for prime rate mortgages. Subprime borrowers typically don’t have the best credit score and thus pay a premium to be able to borrow. They are statistically more likely than other borrowers to default on their loans.

When it comes to buying a house, a subprime loan can costs tens of thousands of dollars more than a conventional loan in interest payments. They are often used as a last resort after the borrower has tried and failed to qualify for loans that come with better terms.

Subprime loans that are being offered today

Only a handful of banks are currently offering borrowers subprime loans. Those that are offering these types of loans are attaching 8-13% interest rates with them as opposed to the 4% interest rates that borrowers can get with a 30-year fixed rate mortgage.

As underwriting standards have gotten less restrictive borrowers who have gone through financial hardship are finding it easier to qualify for subprime loans. However, these borrowers will have to pay a premium in order to compensate for the riskier nature of their loan. In most conventional loans, the borrower will end up putting somewhere around 10% down. For an FHA loan, the borrower may be able to still purchase a home with as little as 3-4% down.

The borrowers in today’s market who find that subprime loans are their only option will often end up putting at least 35% down. This has given them a rather limited appeal as many buyers simply decide to improve their financial standing than take out a loan with such a high down payment and interest rate.

Some housing market analysts have argued that subprime loans will likely continue to play a more important role as time goes on. It has been estimated that after the financial crisis, around 12.5 million people were shut out of the housing market who previously might have qualified for a home loan. Minority groups have been hit especially hard as the new regulations have made it more difficult to qualify for a loan. Easing these buyers back into the market could give new life to a housing market that’s had many ups and downs over the last several years.

Refinancing can not only save you money off your monthly payments, it may also shorten the duration of your home loan. In some cases, it may be possible to accomplish both of these goals at once.
Millions of people have already taken advantage of programs like (HARP) the Home Affordable Refinancing Program to save a lot of money off of their mortgage. Some may even be thinking about the refinancing a second time. It doesn’t always make financial sense to refinance a home loan two or even three times, but it can if you know what to look for.

The Best Time to Refinance Once More

To state the obvious, refinancing only makes sense if it’s going to save you money or put you in a better financial situation. You only save money through refinancing if the rate at which you’re refinancing too is lower than the rate you currently have. For example, refinancing from 6% to 4.5% is going to make a huge difference in how much you pay in the long term.

Of course, some refinancing options may shorten the duration of a home loan and make monthly payments larger. In this situation, however, the homeowner would still be saving money in the long run because they would be paying less money over time in interest.

So, even if you’ve refinancing only a year ago, it will most likely to make sense to refinance again and lock in a low rate if interest rates are falling. For the time being, that simply isn’t happening though. Interest rates are at best remaining stable or slowly going up. This means that most people who have refinanced in the last 2 years will likely have lower rates on their home loan than is currently being offered on the market.

When Refinancing May Not Make Sense

Refinancing isn’t free so being strategic about when to refinance is always important. There is a certain point at which it no longer makes sense to refinance because you will actually be spending more on closing costs and other fees than you will be saving.

The general rule of thumb is that refinancing only makes sense if you can drop the interest rate on your home loan by at least 1%. But there are sever other factors that you may want to consider. Among these factors is how long you plan on staying in the home that you’re refinancing for.

Here is one way for you to determine whether refinancing will make sense. First, find the difference between your old mortgage costs and what you’ll be paying after refinancing. If you pay $1000 now and will pay $900 after refinancing then this number will be $100. Second, divide the closing costs of your new loan by the monthly savings. This will give you an idea of how long it will take before you break even. If you only plan on being in a house for another 3 years, but it will take you 4 years to break even, then refinancing obviously wouldn’t make sense.

Many if not most of these buyers will not have the cash reserves on hand to pay for a new home all at one time. This is where borrowing comes in. An affordable home loan can make the dream of owning your own home possible.

Depending on your income, credit score etc. the amount of money that you will be approved to borrow is going to vary. And just because you’re approved to borrow a certain amount doesn’t necessarily mean that it’s financially wise to take out a loan for that maximum amount.

Buying a Home

When you begin the process of buying a home for the first time, mortgage companies will examine your debt-to-income ratio to determine how much you can borrow. Mortgage banks look to make sure that no more than 36% of your monthly income is going to pay debts.

In order to calculate your monthly payment threshold you take your annual salary multiply that number by 0.28 and then divide by 12. So, if you make $100,000 a year then you would have a monthly mortgage threshold of $2,333. This is a pretty good rule of thumb that will serve most people well.

Most people most of the time won’t be teetering on the verge of foreclosure. What’s important to consider is what is unique to your own financial situation. Just because you make enough now to be able to afford a home loan at a certain price doesn’t mean that you’ll be able to continue doing this well into the future.

A number of factors could come together that would make paying back a home loan at a certain price prohibitively expensive. If, for example, you take out an adjustable rate mortgage, then your monthly mortgage payment could go up according to market conditions. Inflation is also going to drive up the cost of nearly everything that you purchase on a day to day basis.

Necessities such as food, energy and clothing are all bound to get more expensive the more time goes by. In other words, just getting by with the same amount of money is going to become more difficult. Another important factor to consider is job security. It’s worth considering how likely it is that you’ll be able to do the same job and earn the same wage or higher well into the future. Moreover, how much would you be earning if you had to switch careers in order to adapt to the changing job market?

These are all issues worth considering when deciding how large of a loan you should take out. No one has ever been seriously harmed by being too financially secure and by having too much money stored away in their savings account. Choosing the size of the loan you want to borrow is a combination of understanding what’s unique about your financial situation, planning for the future, living comfortably and taking on risk.

Virginia residents that want to save money to buy a home can now receive additional benefits for doing so. Per the new law, anyone that invests up to $50,000 in a financial institution can call those funds a first-time home buyer savings plan. The term invest is used very loosely as it applies to funds that are put into a savings account, mutual funds, brokerage account, or most other financial accounts including stocks. The funds can then grow tax free, with a cap of $150,000. The funds can then be used for closing cost, lender fees, or anything else that appears on the closing statement. The goal is to make it easier for people to save for a new home and this in essence keeps more money in the hands of buyers, rather than going back to the government in the form of tax payments.

In order to qualify, a Virginia resident needs to be a first time home buyer. If they already own a home, they would not meet the standards necessary for growing the funds tax free. If a buyer was given a home and did not obtain a mortgage for it, they may still be eligible for the program.

This new law also helps first time home buyers that are planning on using gift funds for their down payment. Family members that want to help can put money into a savings or investment account, label it a first-time home buyer savings plan and use the interest or dividends to go towards closing cost and other fees on behalf of the first time home buyer. The caveat is that the funds have to be used for the first time home buyer in the future. This is an excellent way for families to get involved while growing their funds and obtaining tax advantages. By passing a law that encourages individuals and their families to grow funds tax free, Virginia lawmakers are hoping to strengthen the housing market and local mortgage industry. Delegate Tag Greason sponsored the bill saying, “By supporting this plan, Virginia re-enforces the commitment we have to our younger citizens, our families, and the overall recovery of the housing market.”

It will be interesting to watch how well the new program works and how many people use the first-time homebuyer savings plans over the next couple of years. Virginia is one of several states that are trying to strengthen its mortgage industry through creative financing programs, tax breaks, and other government programs. To learn what is available near you, contact your mortgage lender. They are the most knowledgeable resource for local and national mortgage loan programs and can tell you which ones you qualify for.

Home equity lines of credit (HELOCs) work much like a credit card. The borrower is allowed to take out a certain amount and as the principal of the loan is paid back that amount of credit becomes available for use once more. Suppose, for example, that you take out a HELOC for $5000.00. If you take out $3000 and pay back $2000 then you still have an available $4000 worth of credit.

What You Should Use a HELOC For

HELOCs are like any other type of loan in that they will eventually have to be paid back. The interest rate on the loan is usually variable meaning that it can fluctuate with market conditions. Keep in mind that there is no way to predict when the interest rate on the loan may go up.

Accordingly, the most financially beneficial way to use a HELOC is to take money out and then immediately pay it back before an interest charge can be incurred. This will not only build up your credit over time, it will save you from potentially paying thousands of dollars in interest cost.

Ideally, the majority of the purchases that you make with money from a HELOC should improve your financial standing. In other words, you can ask yourself whether a certain purchase is likely to make you better or worse off financially. Items such as work tools or cars are often necessary to get by and do one’s job. These sorts of things will eventually need to bought one way or another and could thus broadly fall into a category we’ll call ‘necessary expenses.’

What You Probably Shouldn’t Use A HELOC For

Necessary expenses can improve your standing financially and help you get by in order to make even more money. Unnecessary expenses, by contrast, can eat away at your savings and make it more likely that you will not be able to pay back all of your debt. Using a HELOC to fund the downpayment on luxury cars or designer clothing can be problematic. Living above your means will eventually catch up with you.

There will be times in your life when you’ll need emergency funds in order to keep going. This might be medical bills or payments to fix a car that isn’t working. In one way or another, you’ll eventually need money to get through some sort of emergency. And the more debt that you take on the harder it will be to save in the long run.

In addition, using a HELOC to fund unnecessary items can be expensive. The interest rate on HELOC can vary and even making the minimum payments can get to be overwhelming on a sufficiently large HELOC. Not only will it likely be expensive to make these payments over time, it will also hurt your credit score. This affects your ability to get new loans and can make the entire process of borrowing more expensive in the future.