I work with a fair amount of second home buyers and investors – and am asked how to best go about financing these properties (and second homes), as well as their required down payments.
I recently ran across this article from Peter Miller at The Mortgage Reports – and it’s a great read for those looking to tap into home equity to purchase another home.
At first, it may seem that the equity issue is simple. You
bought a house for $150,000 and it’s now worth $275,000.
You’ve paid down principal, too, so your current equity is
$190,000.
Can you really get a check for almost $190,000 from lenders?
Lenders generally will allow cash-out refinancing equal to 80
percent of your equity. They will see a property value of $275,000 and subtract
20 percent ($55,000). That will leave around $220,000. This money will be used
to first repay the existing loan of $85,000. The balance – $135,000 – represents the cash available to the
borrower.
With some program, you might do better. The VA cash out mortgage allows qualified borrowers to refinance up to 100 percent of their equity while the FHA cash out loan will go to 85 percent. However, these programs come with various charges and insurance costs that many borrowers with equity will want to avoid.
Cash-out refinance to buy another home
With cash-out refinancing, you can use the equity in your home for many things — but not for all things. For instance, you can use the money to pay for college tuition, to purchase a business, or buy another property.
Buying a second home or investment property
In terms of real estate, you can use real estate equity to
immediately buy a second home or to purchase an investment property.
As soon as you close the cash-out refi, you can use those funds
as a down payment on another home — or to buy the house outright — if you plan
to keep the current home as your primary residence.
How to Go About a Refinance
Reach out to your lender to begin the application process. He or she should be able to coach you through the process – and identify the key pieces that will help you make an informed decision.
I’ve helped numerous investors with this process, and I’d be glad to see if this option might work for you, as well! Give me a callfor more….
Tapping into home equity by
refinancing is more of a possibility today and becoming very popular for many
borrowers.
As interest rates have moved lower in the last 3 weeks and housing values across the country continue to steadily increase, homeowners now have access to a much larger source of equity and possibly better payment terms!
With current mortgage rates low
and home equity on the rise, many think it’s a perfect time to refinance your
mortgage to save not only on your overall monthly payments, but your overall
interest costs as well.
It’s really about managing the
overall assets that you have in order to maximize the returns. Make sure you
are working with the right mortgage
lender to help in figuring out which product is best.
What is a Cash-Out Refinance?
A mortgage refinance happens when
the homeowner gets a new loan to replace the current mortgage. A cash-out
refinance happens when the borrower refinances for more than the amount owed on their existing home
loan. The borrower takes the difference in cash.
Rates Are Down and Home Equity is
Up
Since rising home values are returning lost equity to many homeowners, refinancing can make a good deal of sense with even a small difference in your interest rate. Homeowners now have options to do many things with the difference.
More home equity also means you
won’t need to bring cash to the table to refinance. Furthermore, interest rates
can be slightly lower when your loan-to-value ratio drops below 80 percent.
Here’s what many of my customers
are doing with that equity:
Consolidate higher
interest debt
Eliminate mortgage
insurance
Purchase a 2nd Home or Investment
Property (or a combination of both)
Home Improvement –
upgrades to kitchen, roof, or pool
Benefits of Cash-out Refinances
Free Up Cash – A cash-out refinance is a way to access money you already have in your home to pay off big bills such as college tuition, medical expenses, new business funding or home improvements. It often comes at a more attractive interest rate than those on unsecured personal loans, student loans or credit cards.
Improve your debt profile – Using a refinance to reduce or consolidate credit card debt is
also a great reason for a cash-out refinance. We can look at the weighted
average interest rate on a borrower’s credit cards and other liabilities to
determine whether moving the debt to a mortgage will get them a lower
rate. Some borrowers are saving thousands per month by
consolidating their debt through their mortgage.
More stable rate – Many borrowers choose to do a cash-out refinance for home
improvement projects because they want a steady interest rate instead of an
adjustable rate that comes with home equity lines of credit, or HELOCs.
2nd Home or Investment
Property – many borrowers are utilizing the
value of the cash in their home to purchase rental properties that cash flow
better then the monthly payments of the new loan.
Tax deductions – Unlike credit card interest, mortgage interest payments are tax
deductible. That means a cash-out refinance could reduce your taxable
income and land you a bigger tax refund.
Reasons NOT to Refinance
Terms and costs – While you may get a lower interest rate than your current mortgage, your cash-out refinance rate will be higher than a regular rate-and-term refinance at market rate. Even if your credit score is 800, you will pay a little bit more, usually an eighth of a percentage point higher, than a purchase mortgage. Generally, closing costs are added to the balance of the new loan, as well.
Paperwork headache – Borrowers
need to gather many of the same documents they did when they first got their
home loan. Lenders will generally require the past 2 years of tax returns, past
2 years of W-2 forms, 30 days’ worth of pay stubs, and possibly more, depending
on your situation.
Enabling bad habits – If you’re doing a cash-out refinance to pay off credit card
debt, you’re freeing up your credit limit. Avoid falling back into bad habits
and running up your cards again.
The Bottom Line
A cash-out refinance can make
sense if you can get a good interest rate on the new loan and have a good
use for the money.
Using the money to purchase a
rental property, fund a home renovation or consolidate
debt can rebuild the equity you’re taking out or help you get in a better
financial position.
With that said, seeking a refinance to fund
vacations or a new car might not be that great of an idea, because you’ll have
little to no return on your money.
It would be my pleasure to see if this type of plan
might be a good one for you.
Most loans with less than 20 percent down (for purchases) or home equity (for refinances) require some form of mortgage insurance. This can be pricey for some borrowers, so it’s important to have a strategy to deal with this type of insurance.
Everyone wants to pay less for mortgage insurance and with a little preparation and some shopping around that may be possible.
But before we look at lower costs, let’s first explain what mortgage insurance (MI or PMI for ‘private mortgage insurance’) really is.
For conventional (non-government) loans, it
may be also be called PMI, or private mortgage insurance. FHA programs require
mortgage insurance premiums (MIP) regardless of the size of down payment.
VA home loans call their insurance premium a
funding fee. Some lenders may not require a separate insurance policy, but
charge a higher interest rate to cover their risk.
Why 20 percent down?
Mortgage lenders really, really want you to
buy a home with at least 20 percent down. That’s because it substantially
reduces their losses if you don’t repay your loan and they have to foreclose.
However, most homebuyers, especially
first-timers, don’t have 20 percent to purchase a property. The National
Association of Realtors lists these figures for median down payments in 2018:
All buyers: 13 percent
First-time buyers: 7 percent
Repeat buyers: 16 percent
If you don’t have 20 percent down, most
lenders force you to purchase mortgage insurance. The policy covers their
losses if you default and they don’t fully recover their costs in a foreclosure
sale.
How much does mortgage
insurance cost?
What MI costs are you likely to face? For
conventional mortgages, MI costs depend on your credit rating, down payment
size, and type of loan you choose. For government loans, your credit score does
not affect mortgage insurance premiums.
Here’s the advice that Peter Miller gives on how to pay less….
How to pay less for
mortgage insurance
Mortgage insurance can be a big cost. For
example, if you buy a home for $250,000 with 3.5 percent down, and get FHA
financing, the up-front MIP will be $4,222. You’ll also pay annual MIP of $171
per month. After five years, you will have spent $14,482 ($171 x 60 plus
$4,222).
Here are several strategies to reduce or
eliminate mortgage insurance costs.
Go piggyback
Instead of getting one mortgage, get two. Try
a first mortgage equal to 80 percent of the purchase price and a second
mortgage for 5, 10 or 15 percent of the balance. You can then buy with no
mortgage insurance. Here’s how that might work, assuming that you have a 700
FICO score, 5 percent down, and buy a traditional single-family home for
$250,000:
First mortgage principal and interest, assuming a 4.5 percent
interest rate: $1,013.
Second mortgage principal and interest, assuming a 7 percent
interest rate: $249
Total payment: $1,263
A comparable 95 percent loan with 25 percent
coverage looks like this:
First mortgage principal and interest at 4.5 percent: $1,203
Mortgage insurance: $108
Total payment: $1,311
In this case, the difference is about $50 a
month.
Refinance
If the value of your property has grown, you
may be able to refinance to a loan without MI, instead of without waiting until
your balance is less than 80 percent. When refinancing, you want to try for a
double MI whammy — a new loan with both a lower rate and no MI requirement.
Speak with a loan officer for details; the monthly savings might be significant.
Look for refundable
premiums
If you expect to be a short-term owner, look
for mortgage insurance programs with refundable premiums. With the FHA, for
example, you can get a partial refund if you pay off the loan within three
years. And private mortgage insurers also offer refundable premiums. However,
their upfront costs may be higher.
Reduce your risk profile
With conventional financing, you can
significantly reduce what you pay for mortgage insurance by being a less-risky
borrower.
Improve your credit score. Even a one-point increase can save
you money if it puts you into a better tier
Make a larger down payment. Going from 3 percent to 5 percent
can save you money, depending on the program
Choose a fixed loan over an ARM
Choose a loan with a term of 20 years or fewer
Cancellation
Conventional loan guidelines allow
borrowers to request cancellation of their MI once their loan falls to 80
percent of the value of the home when you took out your mortgage. You must
normally be in good standing with your lender to drop MI this way.
With FHA and USDA mortgage insurance,
coverage continues for the life of the loan. For VA-backed financing, there is
no monthly charge.
Automatic termination
Alternatively, mortgage insurance for
conforming loans “must automatically terminate PMI on the date when your
principal balance is scheduled to reach 78 percent of the original value of
your home. For your PMI to be canceled on that date, you need to be current on
your payments on the anticipated termination date. Otherwise, PMI will not be
terminated until shortly after your payments are brought up to date.”
In Conclusion
Do reach out to me to discuss your down payment and mortgage insurance options, as it would be my pleasure to help you!
Per Mr. Green: “If you’re a home
buyer with a good deal of cash saved up in the bank, for example, but you
have relatively low annual income, making the biggest down payment
possible can be sensible. This is because, with a large down payment, your
loan size shrinks, reducing the size of your monthly payment.”
Or, perhaps your situation is reversed.
“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”
Dan continues: “One thing is true for everyone,
though — you shouldn’t think it’s “conservative” to make a large down payment
on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually
true.”
“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”
For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:
Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.
Larger Down Payments Actually Increase Risk
Green continues: “As a homeowner, it’s
likely that your home will be the largest balance sheet asset. Your home
may be worth more than all of your other investments combined, even.
In this way, your home is both a shelter and an
investment and should be treated as such. And, once we view our home as an
investment, it can guide the decisions we make about our money.
The riskiest decision we can make when
purchasing a new home?
Making too big of a down payment.”
The Higher The Down Payment, The Lower Your Rate of Return
The first reason why conservative
investors should monitor their down payment size is that the down
payment will limit your home’s return on investment.
Consider a home which appreciates at the
national average of near 5 percent.
Today, your home is worth $400,000. In a year,
it’s worth $420,000. Regardless of your down payment, the home is worth
twenty-thousand dollars more.
That down payment affected your rate of
return.
With 20% down on the home — $80,000 –your rate of return is 25%
With 3% down on the home — $12,000 — your rate of return is 167%
That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!
Instead of measuring success by how many hits you have (or don’t) in a particular game…how about having achievable, repeatable objectives (call them “attainable goals”)? This will absolutely help your consistency and keep your emotions in check.
More importantly, you will be a much better teammate and
competitor. The object of the game is a
team win, right?
Tying your self-worth as a player to getting hits is a guaranteed ticket to an emotional roller-coaster, and in the end, it’s counter-productive to getting the results you want.
Being aware of the
situation has multiple benefits. In addition to being a mentally stabilizing
attainable goal, it also increases the likelihood of having a quality at-bat!
Step 1 – Study the Pitcher
From the dugout
you should be watching and studying the pitcher – check for tendencies and
track pitches in counts.
Step 2 – Be Situationally Aware
Remember, baseball is actually a team sport. Take a look on the
bases and know the outs, is there a situation that needs executing?
Attainable Goal #2 – Aggressive vs Passive Mentality
Once we are ready to hit in the batter’s box, our goal is to
find a way to be 100% confident and ready to do damage all the way until the
ball is either hit or caught by the catcher. This 3-5 second period should have
no doubt, worry, or fear, penetrate its walls.
Step 1 – Identify Who You Are
To make this a truly attainable goal, you need to identify which way your thoughts are leaning.
In between pitches
or at-bats take a deep breath and either continue with the aggressive attacking
mentality, or realize you are a little passive or defensive and regroup and
give yourself assertive and confident self talk.
Step 2 – Make the Adjustment
There is no one
way to get your mentality where it needs to be. Find a way that works best for
you, to get your mind right when you get into the batters box.
It’s important to
remember that nobody can tell themselves to stop thinking something. The
thought has to actually be replaced by a new thought.
Attainable Goal #3 – Choose your velocity
By trying to be
ready for both fastball (FB) and off-speed (OS) pitches, a hitter will often
find his timing isn’t great for either one. The hitter ends up being somewhere
in the middle – too slow for the FB and too early for the OS.
Looking hard
velocity or softer velocity can simplify an approach that will still allow you
to be able to hit the pitches in that group.
With 2 strikes,
all bets are off, of course. Just battle
and put the ball in play – and if you see a mistake, crush it!
Attainable goal #4 – Shrink the zone
Home plate is 7
baseballs wide. But if we are looking at the strike zone I would say its closer
to 8 baseballs wide and lets say 10 baseballs tall.
If we are looking
to hit every strike in that 8 x 10 box we are not going to be very successful.
There are high
percentage strikes we should swing at (more likely to get good results) and
there are low percentage strikes that if we swing at will usually result in
weak contact and/or an out.
We need to shrink
up our hitting zone until we get to 2 strikes. I like to think of making my own
3 x 3 box within the strike zone. I place this imaginary zone where I most want
to hit the baseball.
In Conclusion
Having a plan
isn’t guaranteed to give you the results you are looking for every time.
However, taking your best swing on the pitch and location you wanted will
result in better at-bats and better overall production.
And you can best
help your team win that way!
Trust in the process which will clear our mind and that will allow you to take your “A” swing on more pitches in the zone that you want to hit.
Thomas Eugene Bonetto
Mortgage Loan Originator
NMLS: 1431961
About The Coach
Tom Bonetto has been helping his customers and players achieve their best for nearly 30 years. His goal is to provide both a superior customer experience and tremendous value for both his business associates and his players alike.
The views expressed are my own and do not necessarily reflect those of Starlight Mortgage.
