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Should I Refinance?

TO REFINANCE OR NOT TO REFINANCE?

That is the question, but how to find the right answer?  First things first – have your goals together.  Mortgage Lenders are great at putting together loan options, but they are often times basing those options on what you tell them.  If you are asking for the lowest rate, they will put those options in front of you, but surprisingly they may not always be the best options.  Wait!?  What, the lowest rate isn’t always the best option?  Of course not – considering that the lowest rates are adjustable, or shorter loan terms with payments that may be out of reach for you.  So, let’s look at your goals for the refinance:

Number 1: I WANT TO SAVE MONEY!

Everyone likes to save money – we like to save money!  That’s why we’re writing this blog instead of mailing you a letter.  Letters cost stamps!  Let’s be more specific: do you want to save money now, as in lowering your monthly debt payments, or do you want to save the most over the term of the loan?  Are you struggling to make the payments you currently have, or does your end of month surplus cash look like the US Treasury’s?

The best place to start is by looking at your budget.  How much are you spending on all of your debt each month?  Is that a high or low percentage of your monthly income?  Do you have discretionary funds?  Do you have a large amount of unsecured debt?  How did you get to where you are and what changes need to be made to not get there again (if it’s not where you want to be)?  Is your retirement savings on track?  Having the answers to these questions before approaching a refinance is a great idea.  Even better – meet with your financial planner before talking to your lender to help put these answers, and goals, together.  Define what “saving money” looks like for you first.

Number 2: I WANT TO LOWER MY PAYMENTS

Debt isn’t much fun (well, it is for us, but for different reasons than you would think), but what it offers can be great.  Mortgage loans are necessary for most people to own a home.  We think owning a home is great!  Auto loans are generally necessary to finance your transportation.  Student loans – education.  Credit cards?  We’re not much of a fan of these.  Using a credit card for convenience and paying off the balance each month?  That’s generally a good thing.  Credit cards are bridge financing if you carry a balance – the interest is costly and paying the minimum will take forever to pay off the balance.  The point is: carrying the right kind of debt is ok, but eliminating the wrong debt is essential to your financial health.  Sounds like we are talking about cholesterol here and the analogy works: having a mortgage loan is like HDL- your financial health is better with this kind of debt, but high a high credit card balance is like high LDL and puts your finances on the path of systemic failure.  Refinancing offers an opportunity to right the ship, a “statin” for your system.  By eliminating the bad debt and restructuring/lowering your monthly debt payments you can bring your finances to a better place.  But beware – the last thing you want to happen is to combine all of your debt, lower your payments and then go on a spending spree.  It’s important to take full advantage of the opportunity and create a sound financial plan to avoid adding the “LDL” debt again in the future.  If your payments are reduced, plan to put some emergency money away and make sure you can pay off that credit card each and every month for good.

Number 3: I NEED TO FIX OR IMPROVE MY HOUSE

Construction loans, credit lines, fix up funds and often times local money is available in addition to your existing mortgage loan.  Sometimes it doesn’t make sense to refinance your current mortgage just to get some money to put a new roof on the house.  Look at the terms of your current mortgage and what is available from your lender.  If the interest is going up on your current loan by more than what you would save on the construction financing portion, then just add the construction loan instead.  Generally construction financing rates are higher than first mortgage rates, but if you are borrowing a small amount or your current mortgage has a much lower rate, then adding the secondary financing is a better option.  If the construction project is larger, then it might make sense to refinance to a construction loan program like FHA 203k or Homestyle so that you can make the improvements and get a low, fixed rate loan for the project and your current mortgage balance all in one.

Number 4: I WANT TO LOWER MY TOTAL COST

Long term planners – this paragraph is for you.  How much does the rate need to decrease for a refinance to make sense?  If your other debt is in order, and your home is perfect as-is, then let’s look at break even points and a cost-benefit analysis.  The absolute way to compare your current loan to a new loan is how much and how long.  Take your current payment times the remaining term to calculate a total cost on your current loan.  If the refinance option reduces that total number by an acceptable amount, by the same math (how much times how long), and the payment works, then it generally makes sense to do.  Let’s look at an example:

Current principal and interest payment (exclude taxes and home insurance): $1200

Remaining number of payments on your loan: 280

Total cost: $336,000

New 15 year loan principal and interest payment: $1516

New total cost: $272,880

If the higher payment fits into your budget, this certainly makes sense to do if you are looking for long term savings.   Even if the refinance costs $3,000, the savings is about $60,000 over the term.  This is a common scenario right now for many 30 year loans with rates in the mid-4% range to refinance down to a 15 year term.  You should also compare the total cost on your current loan if you simply increased the payment, but generally the refinance will add up to more savings.

The other calculation you need is the break even point.  At what point in the future will I recoup all of the costs of doing the refinance?  Two ways to calculate the break even offer manipulation of this time frame.  One way to calculate break even is on the interest savings.  If you save .625% in interest on the loan (reducing the rate by this much) and the refinance costs 2.375% of the loan amount, then it will take 3.8 years to recoup (ignoring time value of money and the decreasing benefit of interest savings over time).  If you are a spreadsheet guru you could put this into an amortization table and calculate the exact break even by interest savings, but hey, life isn’t exact anyway.  The other way to calculate break even is on a cash flow basis, but this isn’t as effective a calculation.  If the monthly payment savings is $300 and the loan costs $6,000, then it will take 20 months to break even.  The reason this approach is flawed is that you might be extending the term on your loan for this payment savings, which would potentially cost more in the long run.  The simple formula here is: cost divided by benefit.  That will yield the break even point.  Have your lender help, and if they don’t know how to calculate this for you, then find a different lender!

Number 4: I WANT TO REDUCE MY TAX BILL

Mortgage interest is tax deductible.  If you consolidate other debt that doesn’t have tax deductible interest, you could reduce your overall tax liability.  Bring in your CPA and let’s have coffee with calculators.  It’s great fun, and so is saving money!  We think the government has enough to work with anyway, so why give Uncle Sam more than he has contracted for?

Number 5: I STILL DON’T KNOW WHAT TO DO

This likely has been more fun for us to write than for you to read about it.  We are only going to complete a refinance for you if it makes financial sense to do so.  Sure, completing loans is fun, but we need to make sure it is to your benefit.  MN State law requires that the loan have benefit for you, and we’re you’re fiduciary, which means we need to look out for your best interests (no pun intended!).  Bring your questions and scenarios to us and we’ll crunch numbers, calculate the savings, project long term costs, ask CPAs for tax analysis, talk with financial planners about retirement and other savings goals, and have you leaving our office more confident in your financial future.  Maybe then you can spend more time working on getting that LDL lower instead of worrying about making extra payments on that credit card that seems to be stretching out to infinity.

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Mortgage Underwriting Tidbits

Mortgage programs are becoming more flexible for different scenarios.  Although guidelines are strict and offer little variance from the rules, at least we are starting to see rule changes.  Some of these may help you get approved for a loan when you couldn’t before.  Others might present obstacles.  Let’s take a look at a few underwriting tidbits that are relatively new in the last year.

Down Payment Funds

The minimum down payment for conventional financing was reduced to 3% of the purchase price.  Resources are available to help with this based upon the location of the home or a borrower’s income.  Some home buyers get creative with where they get their down payment funds.  Here are a few rules to know:

  • All funds used in a real estate transaction must be sourced.  If your rich uncle Jimmy is giving you money as a gift, be prepared to show a copy of the check you received and have Jimmy sign a gift letter.  If you are selling baseball cards, cows, a truck, snowmobile or those gold bars you have been stashing in a secret hole behind grandma’s house, get a bill of sale and have the seller provide a check.  Cash is not traceable and cannot be used!  Underwriters need to do a look-back for 60 days on your asset statements, so any big deposits you have in there also need to be sourced.
  • You may use gift funds with all loan programs.  Hey, we all know saving up money is a challenge.  If mom, dad, grandma, or uncle Jimmy wants to give you some money to buy a house – take it!  Don’t expect underwriting to accept gift funds from some random college buddy that lives in Montana though.  Many programs have rules that require gift funds come from a family member or employer.
  • The Minnesota Housing Finance Agency may have money waiting for you.  We’re a proud partner with this Agency to offer down payment assistance, which allows a home buyer to own a home with as little as $1,000 for down payment.
  • Marry an eligible veteran and you won’t need a down payment.  VA programs don’t require a down payment up to a $417,000 purchase price for eligible veterans with full entitlement.
  • Creative financing is allowed for a down payment.  Creative what?  Think of all of your assets – not just the car and diamond earrings you inherited from Grandma.  Your 401k may offer loans that you can use for the down payment.  If you have stocks, bonds, IRAs, whole life insurance – many times you can take a loan against these assets or open a margin account.  Basically, borrowed funds can be used for the down payment as long as the loan is secured to an asset.  No, you can’t use a credit card to buy a house because it is unsecured.

Student Loans

  • Minimum payments – let’s say you owe $25,000 on student loans and your minimum payment is $80.  First, it would take quite a while to repay that loan with that payment amount.  Underwriting for Fannie Mae and FHA require that 1% of the balance be used as a minimum payment for qualifying.  However, Freddie Mac programs allow us to use the minimum payment as long as an income-based repayment plan is in place.

Self Employed Income

  • Distributions to owners on K-1 statement are needed in order to use the income from the business (corporate income) as personal income to qualify for a loan.
  • Calculating qualifying income for self employed borrowers can be easy or really complex, depending upon the tax filings.  You need to report and file business income with the IRS on at least the most recent tax year to be able to use the income, and generally two years’ worth if this is a new enterprise for you.  Some programs allow one year, but only with prior experience in the industry or profession.  At the most general level, self employed eligible income is the combination of net profit and non cash deductions (depreciation, depletion and business use of home).  Our best advice – get your personal and business tax filings together and in the hands of a self employed income expert Loan Officer to review and analyze.  If you are a do-it-yourself type, you can try it for fun here: http://www.freddiemac.com/learn/lo/forms/form_91.html

Disputes on Credit

  • Disputes on your credit report will exclude those account details from the calculation of your credit score, thus artificially inflating or deflating your score.  They need to be removed at the credit bureau level.  Here’s our blog on removing disputes: https://furlongteam.com/blog/removing-disputes-credit-report/

Roommate and Household Income

  • Roommate income, or boarder income, can now be used to qualify for a home loan.  Keep in mind that this rental income needs to be documented for 12 months.  If you and your buddy are renting an apartment, you’ll want a lease between the two of you and have rental payments go directly to you and not the landlord.  Same goes for the tenant in your basement – have a lease and document the rent payments for 12 months and you could use this to qualify for a refinance of your home.  The Fannie Mae Home Ready program also allows the use of other household income to help you qualify for a loan even if you are the only borrower.

The mortgage industry changes every day with new updates, regulations, technology, volume of business and oh yeah – interest rates.  Our best advice – get in touch with an expert Loan Officer before you get too serious about shopping for a home.  The last thing we want you to do is ride all over town with your Realtor looking at homes that you won’t be able to buy.  Our other advice – send in everything upfront so your Loan Officer can review all of the documentation and alert you of any potential issues early on.  Generally when we have the time, most issues can be fixed or resolved.  They are all saying it, but now really is the best time to buy a home!

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Online Mortgages – What A Buyer Should Know

These days it seems offers are everywhere online to get an approval and complete a loan.  Many of these offers seem great and easy to complete.  And in some cases they are.  What is important to know is how it works, what the risks are, and how to go about determining which offers are legitimate and which are not.  Here is a quick tutorial and a quick reference guide to navigate you through the wires of an online mortgage:

How the online process works

Online technology has evolved to a point where it is easy to communicate information and documentation, even if you know little about computers.  Entering information into an online form, such as a mortgage application, is fairly straight forward.  Click the apply online button, enter your information such as employment, income, credit, assets, address, identifying information and press send.  Viola, the check arrives in the mail!  Not so fast – a lender is required to verify your information submitted via documentation and determine your ability to repay the loan and meet loan qualifying criteria.  However, entering an online application these days is a snap!

What is needed from you

Once the lender does an initial review, they will request your documentation (pay stubs, W2s, tax filings, bank statements, identification, and other items specific to your application).  Today, many lenders have the option for you to upload your documentation directly into your loan file.  This used to be referred to as FTP, or file transfer protocol, but today is as simple as click “upload file” and then select the file from your computer.  The days of faxing documents, or even bringing them into a Loan Officer’s office, are quickly slipping away.

With the application complete and your documents uploaded, the lender can then process and underwrite your loan.  Some lenders are trying an automated system that notifies you of missing items while other will have an assigned Loan Officer inform you of any additional needed items.  Also, some lenders will allow you to complete your lock on your own and others will have the Loan Officer discuss lock options with you via phone.

The entire process can be done online without ever having to go to a lender’s office or even talk with a Loan Officer.  Seems great, doesn’t it?  For some, the convenience of it is very appealing, but for others who want to understand and know how all the moving pieces work need a Loan Officer to assist them with the process and information.

Know the risks

It is very important to know the risks!  The first risk is when you are purchasing a home, Realtors want to connect with a Loan Officer who knows your file.  If you submit an offer with a pre-approval letter from a lender with whom you have yet to communicate, the Listing Agent on that home may not accept your offer.  They will want to confirm with the lender that your documents have been reviewed, as well as credit score and some level of underwriting.  The listing agent will also want confirmation that you can close on time, and they want a go-to person with your lender who can provide timing and tracking updates.

The second risk is obvious – know who you are doing business with!  Some online lenders make all the promises, but may fail to deliver.  Reputation in the marketplace is important.  Do your research!  The Better Business Bureau, Department of Commerce and 3rd parties such as your Realtor, Zillow, Trulia and others are good ways to verify your lender is legitimate.  Not only are you submitting personal documentation to a lender you are not meeting face to face, you are also pinning your hopes and dreams of homeownership to this company.  Make sure they have a great reputation.  Another way to look up a company or Loan Officer is via nmlsconsumeraccess.org.  The NMLS system, or Nationwide Mortgage Licensing System, has the licensing data for each company and Loan Officer.

The third risk is having a point of contact.  Even the highest qualified borrowers will run into things that need to be corrected or problem solved.  If your loan application is in the hands of a machine and not a lending expert, who do you go to when an issue arises?  It makes great prudent sense to connect with a lender first before going through the online application process to make sure you have a contact that can help if the need arises.  Research the person as well to insure he or she is licensed and has the know-how to make sure your loan gets done, on time, and delivers the terms you are expecting.  Reading Loan Officer reviews on Zillow is a good way to get to know who you are working with, or use the trusted guidance of your expert Realtor to assist you.

Guide to the CFPB

Overall, completing a loan online is more efficient, flexible with your schedule, and can yield a positive experience if coupled with an expert Loan Officer and a highly reputable local lender.  The CFPB has a guide on shopping for a loan (Download the CFPB Guide) and a lender should provide you with a Loan Estimate within 3 days of your completed application (includes your name, income amount, Social Security number and birthdate to obtain a credit report, a property address, an estimated value of the property, and the mortgage loan amount sought.

3% Down Conventional Fannie Mae and Freddie Mac loans

Both Fannie Mae and Freddie Mac reintroduced conventional 3% down programs this year.  A few key differences to note:

Fannie Mae requires at least one of the borrowers to be a first time home buyer.

Freddie Mac Home Possible has income limits you can look up by clicking here.  The Home Possible program also has reduced mortgage insurance.

Both programs allow the 3% down payment to be entirely gifted by a relative, employer, or a community 2nd down payment assistance loan or grant.

More guidelines apply and we can help you with an approval in a short amount of time.  Complete a pre-approval request online and we can get you started right away: furlongteam.com/preapproval

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Selling and buying in a seller’s market

We have had many clients lately that have needed or wanted to sell their current home and buy another, so we wrote up some tips about buying and selling your home in a seller’s market.

Selling Your Home in a Seller’s MarketSelling your home in a seller's market

The sell side is generally the easier part (though it may not seem that way as you are painting and boxing up all your belongings getting the house ready for market). The market is currently a very strong seller’s market, which means offers contingent on the sale of another property are not as strong.

Buying a Home in a Seller’s Market

We work with our clients to devise a plan for getting approved for the next purchase without having to sell their current home, or strategies for interim financing to utilize your current equity towards the purchase of a new home. In addition to this, with all the constraints this process has, we as your lender will be flexible to meet timeline demands, concurrent closings and can assist in getting contingent offers accepted.

Planning early is never too early and we can help devise a specific strategy for you to make the transition.

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FHA Streamline 203(k)

The Furlong Team is pleased to offer the FHA Streamline 203(k).

A few quick things to know about 203(k):

  1. Find your contractor early. They need to be licensed and should be organized with their paperwork!
  2. Repairs should not require large structural changes.
  3. The timeline for closing is longer than standard mortgage programs.
  4. The underwriting process has more details and will be a bit more work than a standard loan program, but just have patience and you will be ok!

FHA’s Streamlined 203(k) program permits borrowers to:

  • Finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in
  • Finance funding to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser

FHA offers insurance to lenders for two repair programs – the 203(k) Streamline and the standard 203(k).

Eligible repairs include, but are not limited to:

  • structural alterations (not applicable on Streamline (k))
  • additions (not applicable on Streamline (k))
  • reconstruction (not applicable on Streamline (k))
  • remodeling (only minor remodeling allowed on Streamline(k))
  • new siding
  • plumbing
  • painting
  • decking
  • heating and/or air-conditioning
  • electrical systems
  • roofing
  • flooring and carpeting
  • energy efficient improvements
  • major landscape work (not applicable on Streamline (k))
  • pool repairs and pool fences.
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    Documenting Assets for Closing on a New Home and Deposits

    When I talk about documenting assets with new borrowers, I often get questions like: “why do I need to document funds for closing” or “why do I need to show where this deposit into my account came from?” It is required of borrowers to source all deposits into documented asset accounts over a certain amount or cumulative amount, depending on the loan program guidelines.

    How long do I need to document assets?

    Generally, we only document the last 60 days’ period of the asset statements (last two months’ bank statements). Deposits not only need to be explained, but they need to be sourced as well.

    What kinds of deposits should I document?

    For example, if I see a deposit into a bank account for $1,200 it is required that we have a copy of the check and proof of the source. If the funds came from a relative, it is considered gift funds and must be eligible under loan program guidelines. If it is from the sale of an asset, it is required to provide a bill of sale and copy of the check. If the funds are wired in, the source needs to be documented (letter from the company explaining why they sent funds).

    Many times funds wired to an account show where they are coming from (IRS, company payroll, etc) and then we don’t need any further documentation. Sometimes the deposit can be “backed out” of the statement ending balance if the source cannot be documented (cash, for example, cannot be traced/sourced), other times that asset account can be deemed ineligible as a source for closing funds.

    Bottom Line: use caution

    Bottom line, if you plan to purchase a home, be careful about the money going into your account for 2 months leading up to the underwriting. Mortgage investors have strict guidelines in regards to documenting funds for closing as this is an area where fraud has frequently occurred in the past.

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    Fannie Mae and Freddie Mac 3% Down Payment

    Fannie Mae and Freddie Mac have recently reintroduced the 3% down payment conventional programs. Many benefits are available for home buyers with these programs including reduced rates, reduced mortgage insurance and, of course, a lower down payment!

    Some differences between Fannie Mae and Freddie Mac are as follows:

    Fannie Mae 3% Down Payment:

    • Purchase or rate/term refinancing only
    • Homebuyer education is required
    • At least one buyer must be a first time homebuyer
    • Single family, primary residence only
    • Down payment assistance loans allowed (must be a Community Second)

    Freddie Mac Home Possible 3% Down Payment:

    • 680 minimum credit score
    • Homebuyer education is required
    • None of the buyers are required to be first time buyers

    Watch our informative overview video here:

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    FHA Streamline Refinance Program

    The FHA Streamline Refinance program waives the requirement for an appraisal, allows for the new, lower FHA mortgage insurance rates, and can save homeowners a lot of interest and insurance fees over the life of the loan. Not to mention, your payment will be reduced without needing to add additional time onto your loan term!

    Request a Quote

    From http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ins/streamline:

    FHA has permitted streamline refinances on insured mortgages since the early 1980s. “Streamline refinance” refers only to the amount of documentation and underwriting that the lender must perform, and does not mean that there are no costs involved in the transaction. The basic requirements of a streamline refinance are:

    • The mortgage to be refinanced must already be FHA insured.
    • The mortgage to be refinanced should be current (not delinquent).
    • The refinance results in a lowering of the borrower’s monthly principal and interest payments, or, under certain circumstances, the conversion of an adjustable rate mortgage (ARM) to a fixed-rate mortgage.
    • No cash may be taken out on mortgages refinanced using the streamline refinance process.

    Lenders may offer streamline refinances in several ways. Some lenders offer “no cost” refinances (actually, no out-of-pocket expenses to the borrower) by charging a higher rate of interest on the new loan than if the borrower financed or paid the closing costs in cash. From this premium, the lender pays any closing costs that are incurred on the transaction. FHA does not allow lenders to include closing costs in the new mortgage amount of a streamline refinance. Investment properties (properties which the borrower does not occupy as his or her principal residence) may only be refinanced without an appraisal.

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    Conventional Mortgage Insurance Options

    About Mortgage Insurance

    Private mortgage insurance is required for borrowers of conventional loans with a down payment of less than 20% of the purchase price. Mortgage insurance is an insurance policy for the lender that provides coverage to the lender in the event that the borrower is unable to repay their mortgage.

    There are several options for paying the premium:

    • Monthly Premium: The borrower pays the same amount every month until the loan balance is paid down to 78% of the initial property value, at which point the mortgage insurance payments end. There is no initial premium at closing.
    • Single Premium (Refundable): The borrower makes one lump sum payment at closing, but receives a partial refund if the loan is terminated within 5 years. There are no monthly payments.
    • Single Premium (Non-Refundable): The borrower makes one lump sum payment at closing. There are no monthly payments.
    • Single Premium (Lender Paid): The one-time lump sum payment is paid by the lender through a higher interest rate for the borrower.
    • Split Premium: The borrower pays a portion of the premium upfront and a portion in monthly payments.