Part 2

(Continued from last week)

Low rates are surely the low-hanging fruit to incentivize borrowers, but not necessarily the only reason to refinance. Avoid the possible ticking time bombs and read below 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, (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 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 the following reasons: (a) home improvements; (b) tuition; (c) credit card and other debt consolidation; (d) to buy, expand or start a business (in most instances, it’s easier, quicker and less costly to borrow money using a 1 4 family property as collateral than to obtain a business loan); (e) to make year-end tax payments; (f) investment opportunities; (g) celebrations (weddings etc.); (h) to purchase a vacation home or other properties; (i) to prevent foreclosure (many times, income is lost [due to layoffs or economic decline in industry etc.], and mortgage payments fall behind, blemishing a borrower’s credit. There are lenders who will make a loan against the equity of the property to catch up on the mortgage payments and prevent foreclosure. Obviously the deal must make financial sense.); (j) to provide for many other types of personal obligations and emergencies.

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.

Planning now 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.

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 borrowers’ 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 were 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, respective to the house. In the end, lower payments are good for all.

Forbearance. Catching up on your payments deferred due to forbearance so you can refinance.

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

Carl E. Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. NMLS# 5668. He is a real estate mortgage banker and business-financing expert with over 30 years’ experience. He currently has 190 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]