The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

Category: Mortgage (page 1 of 15)

Forecast Shows That 2020 Will Be a Big Year for 1st Time Buyers

Next year should be a big one for first-time homebuyers.

I’m linking to an article by Aly J. Yale at The Mortgage Reports that shows that the 1st time buyer market is getting bigger.

According to new data, up to 9.2 million first-time buyers will hit the market between 2020 and 2022.

A New Frontier for First Timers

Says Yale, “according to a new analysis from credit bureau TransUnion, anywhere from 8.3 million to 9.2 million first-time homebuyers will enter the housing market between 2020 and 2022.

That’s up from just 6.67 million between 2013 to 2015 and 7.64 million between 2016 to 2018.”

Joe Mellman, senior vice president at TransUnion, the next couple of years should mark a turn-around for homebuyers.

“While we’ve recently seen a boom in refi activity, actual homeownership rates are down,” he said. “Challenges have included high home prices, sluggish wage growth, and limited housing inventory, but we may be starting to see daylight as slowing home price appreciation, low unemployment, increased wage growth, and low interest rates are helping affordability. As a result, we are optimistic that first-time homebuyers will contribute more to home ownership than at any time since the start of the Great Recession.”

Survey Results

TransUnion also surveyed potential first-time homebuyers on the perceived challenges that they face.

Interestingly, their results showed that most people are interested in buying a house for more privacy or the opportunity to build wealth.

Only about a quarter said they want to buy a home due to getting married or having children.

Per Yale’s article, “more than a third said they want a more steady job before buying a house. Another third said home prices are just too high.” 

Finally, the survey also found that many first-time buyers aren’t aware of their financing options.

“Many of our potential first-time homebuyer respondents don’t seem to be aware of the wide variety of financing options available to them,” Mellman said. “It suggests there’s a large opportunity for lenders to proactively identify consumers who are interested in becoming first-time homebuyers and then educating them on options they may not be aware of.”

Where to go for help

It would be my pleasure to help any first time buyers through the home buying process. Don’t hesitate to reach out to me for more information or to schedule a consultation.

Buying a Home Is the Most Affordable It’s Been in Almost 3 Years

Home prices have slowed a bit in some areas, but they continue to climb in the majority of markets in the U.S.  Inventory is stubbornly low in many parts of the country, but even with these factors, now is actually a good time to purchase.

Believe it or not, research shows that housing has actually become more affordable this year, despite home appreciation and tight inventory. Affordable homes are possible thanks to lower mortgage rates and greater purchasing power.

“Affordability is about the best it can be compared to what it is likely to be over the next few years. So, in that sense, it’s a good time to buy right now if you have the financial means.” –Lawrence Yun, Chief Economist, National Association of Realtors

However, this positive development may not last for too much longer. That’s why it pays to hunt for homes and mortgage rates now, as waiting could prove expensive.

I’m linking to an article from Erik Martin at The Mortgage Reports – you can find the entire piece here…

What The Numbers Show

Martin highlights a Black Knight study (found here) that shows “housing affordability hit nearly a three-year high in September.” Other findings from the report include:

  • The drop in mortgage rates since November has been enough to amp up buying power by $46,000 while keeping monthly principal and interest (P&I) payments the same
  • The monthly P&I needed to buy an average-priced home is $1,122. That’s down about $124 a month from November 2018, when interest rates were near 5%
  • Monthly P&I payments now require only 20.7% of the national median income. That marks the second-lowest national payment-to-income ratio in 20 months

Martin writes “that last point may be the most important. For the average home buyer, month-to-month housing costs are lower than they’ve been at almost any point in the last three years.”

Why Is Housing More Affordable Now?

Lawrence Yun, the chief economist for the National Association of Realtors, states that lower mortgage rates right now are helping to offset higher home prices.

“Assuming you put down 20% on a median-priced home, your monthly mortgage payment would be $1,070 at this time last year. That’s assuming a 4.7% mortgage rate at that time,” he says.

Today, your monthly payment on that same home could be down to $990 — $80 less — even though you would have paid more for the home thanks to rising real estate prices.

Will This Trend Continue?

Yun, and many other economists, believe that mortgage rates will likely remain attractive through 2020.

“But then they will rise, which will knock off many buyers from the pool of eligible purchasers,” predicts Yun. 

Should You Act Now?

Please do reach out to me so we can analyze your current situation to see if a home purchase might be in your best interest.  Based on the data, now is really the time to get started…and it would be my pleasure to help you.

New and improved conforming loan limits for 2020!

The Federal Housing Finance Agency announced last week that it is raising the conforming loan limits for Fannie Mae and Freddie Mac to more than $510,000.

In most of the U.S., the 2020 maximum conforming loan limit for one-unit properties will be $510,400, an increase from $484,350 in 2019.

What this means is that many buyers who were unable to qualify for $500,000 mortgages due to “jumbo loan” restrictions can now re-visit an application!

Data from FHFA shows that home prices increased by 5.38% on average between the third quarter of 2018 and the third quarter of 2019. So, the baseline maximum conforming loan limit in 2020 will increase by the same percentage.

As a result of generally rising home values, the increase in the baseline loan limit, and the increase in the ceiling loan limit, the maximum conforming loan limit will be higher in 2020 in all but 43 counties or county equivalents in the U.S.

Find out more from Housingwire here…

Conforming Loans – what are they?

A conforming loan gets its name because it meets or “conforms” to specific guidelines set by the two largest government-controlled loan entities — Fannie Mae and Freddie Mac. Loans that are greater than $510,400 in general are considered “jumbo” mortgages and are not controlled by Fannie Mae or Freddie Mac.

Recent History

This marks the fourth straight year that the FHFA has increased the conforming loan limits after not increasing them for an entire decade from 2006 to 2016.

In 2016, the FHFA increased the Fannie and Freddie conforming loan limit for the first time in 10 years, and since then, the loan limit has gone up by $93,400.

Back in 2016, the FHFA increased the conforming loan limits from $417,000 to $424,100. Then, the next year, the FHFA raised the loan limits from $424,100 to $453,100 for 2018. And in 2018, the FHFA increased the loan limit from $453,100 to $484,350 for 2019.

Median home values generally increased in high-cost areas in 2019, driving up the maximum loan limits in many areas. The new ceiling loan limit for one-unit properties in most high-cost areas will be $765,600 — or 150% of $510,400.

Find out More

Please do reach out to me and find out what the conforming loan limit is for your neighborhood!

Quick Credit Score Improvement Tips

Let’s talk credit, as it’s so important. Your FICO scores can determine whether you are able to purchase that home or not, and save you a good deal of money on the rate you’re going to pay if your scores are good.

Of course, you want to make your payments on time, but how can you actually improve your credit score in a relatively short period of time? What can you do?

Here are a few things that you might be able to do relatively quickly and improve your scores…

Lower The Balances

It’s a good idea to keep the balance you owe on any of those accounts below 30% of the credit line. If you have a credit card with $1000 limit on it, keep your balance to $300 or less.

Increase The Trade Line

So, what if your balance is higher than that and you can’t bring it down? Well, go to that credit card issuer and ask them if they’re willing to give you a higher limit. By bringing the limit up, the amount you owe becomes a smaller percentage of your limit. That will help your score.

Don’t Close Accounts

One key thing to remember, don’t close off any credit lines that you have from the past. That’s good history that you’ve built up. You want to keep that good history. It’s like getting straight A’s in high school and not wanting to show the report card. Keeping good history will help your credit score. 

Collection Accounts

Finally, think about some of those collection accounts – only if they’ve popped up. If the seven-year reporting period is up (starting from when you first went delinquent with the original debt), dispute the debt from your credit report. Any proof you have regarding the first date of delinquency will strengthen your dispute.

When All Else Fails 

If you’re not able to get the collection account removed from your credit report, pay it anyway. A paid collection is better than an unpaid one and shows future lenders that you’ve taken care of your financial responsibilities. Once you’ve paid the collection, just wait out the credit reporting time limit and the account will fall off your credit report.

If you have more questions about your credit and how it impacts your ability to finance a home, please do reach out to me, as it would be my pleasure to help!

The Cost of Waiting to Purchase a Home and Trying to Time the Market

If you’re shopping for a home today, you know it can be hard work. You might not find something right away and it’s easy to become frustrated and fatigued.

Sometimes buyers get discouraged and say, “Let me take off a few months, maybe I’ll come back 6 months later.”

Some, on the other hand, think that the market might weaken shortly or that interest rates will fall even further…and are trying to essentially “time the market” Is that the right strategy?

The Cost of Waiting

Here’s the potential problem with that thinking…while you might want to take time off and away from your search, the market isn’t taking time off!

The cost of waiting to buy is defined as the additional funds it would take to buy a home if prices & interest rates were to increase over a period of time.

The market is quite good in terms of appreciation right now in California and Arizona. The forecasted growth in value is 2.4% in just the next 6 months; let’s quantify that.

The Numbers

A home worth $300,000 today would be worth $7,300 more in 6 months. Additionally, if you were planning on putting the same percent down, you would have to borrow more because the home is more expensive.

What about interest rates? Rates today are at very attractive levels, so does it make sense to wait for rates to go down further…and what if they don’t?

No, the monthly savings with a lower rate are nice but are dwarfed by the missed appreciation and amortization, and it would take many, many years to recoup what you would have lost.

One other thing to consider…if rates drop significantly after your purchase, you can always refinance in the future to take advantage of that lower rate.

Today’s Data

Here’s the data from FHFA – see how the forecast is for nearly 5% appreciation in the year ahead. The longer you wait, the more you miss out on appreciation and the more expensive you new purchase will be.

Stick with it, keep shopping, and you will find something. Don’t hesitate to reach out to me with questions, as it would be my pleasure to help!

Know Your Down Payment Options: From 0% to 20%+

Coming up with enough cash for a down payment when buying a house is the single biggest roadblock for many hopeful home buyers.

But how much do buyers really need?

What is a down payment?

In real estate, a down payment is the amount of cash you put towards the purchase of home.

It is deducted from the total amount of your mortgage and represents the beginning equity — your ownership stake — in a house and property.

Down Payment Options

Many borrowers still believe that 20% is the minimum…and that’s just not the case.  There are options from 0% to 20%+ that can work for many would-be buyers.

For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:

  • FHA Loan: 3.5% down payment minimum
  • VA Loan: No down payment required
  • HomeReady/Home Possible Conventional Loan (with PMI): 3%
  • Conventional Loan (with PMI): 5%
  • Conventional Loan (without PMI): 20% minimum
  • USDA Loan: No Down Payment required
  • Jumbo Loan: 10% down

PMI is “private mortgage insurance…and you can find out more about that here…

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.

Benefits of a larger down payment

Conventional loans without mortgage insurance require a 20% down payment. That’s $60,000 on a $300,000 home, for example. There are a number of benefits to bringing in 20%:

  • No mortgage insurance
  • Lower interest rate, in most cases
  • More equity in your home
  • A lower monthly payment

As a reminder, the down payment is not the only upfront money you have to deal with. There are loan closing costs (you can find out more about those here…) and earnest money to consider as well. Before the dramatic music returns, let’s explore some lower down payment options.

Benefits of a smaller down payment

From Dan Green at The Mortgage Reports:

“A large down payment helps you afford more house with the same payment. In the example below, the buyer wants to spend no more than $1,000 a month for principal, interest, and mortgage insurance (when required).

Here’s how much house this home buyer can purchase at a 4 percent mortgage rate. The home price varies with the amount the buyer puts down.”

Even though a large down payment can help you afford more, by no means should home buyers use their last dollar to stretch their down payment level.

A down payment will 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.

However! We must also consider the higher mortgage rate plus mandatory private mortgage insurance which accompanies a conventional 97% LTV loan like this. Low-down-payment loans can cost more each month.

Assuming a 175 basis point (1.75%) bump from rate and PMI combined, then, and ignoring the homeowner’s tax-deductibility, we find that a low-down-payment homeowner pays an extra $6,780 per year to live in its home.”

Once you make your down payment, it’s tougher to get that money back

More from Green: “when you’re buying a home, there are other down payment considerations, too.

Namely, once you make a down payment, you can’t get access to those monies without an effort.

This is because, at the time of purchase, whatever down payment you make on the home gets converted immediately from cash into a different type of asset known as home equity.

Home equity is the monetary difference between what your home is worth on paper, and what is owed on it to the bank.

Unlike cash, home equity is an “illiquid asset”, which means that it can’t be readily accessed or spent.

All things equal, it’s better to hold liquid assets as an investor as compared to illiquid assets. In case of an emergency, you can use your liquid assets to relieve some of the pressure.

It’s among the reasons why conservative investors prefer making as small of a down payment as possible.”

In Conclusion

As you can see, there are a wide variety of down payment options for buyers.  Please feel to contact me to go over those choices, as it would be my pleasure to help you in financing your next home.

Mortgage Interest Rates and The Federal Reserve

I receive a number of questions regarding mortgage interest rates every time there is a meeting of the Federal Reserve Board. 

Most assume that the Federal Reserve controls mortgage interest rates…and, interestingly, that’s not the case.

I’m linking to a fantastic article by Dan Green at The Mortgage Reports – he does a great job in highlighting what really takes place with mortgage rates.  You can read the entire piece here…and I’ll highlight a few key pieces below.

The Federal Reserve Open Market Committee

The Federal Reserve Open Market Committee (FOMC) is a rotating, 12-person sub-committee within the Federal Reserve, headed by current Federal Reserve Chairman Jerome Powell. The FOMC meets eight times annually on a pre-determined schedule, and on an emergency basis, when needed.

The FOMC’s most well-known role worldwide is as keeper of the federal funds rate.

The Federal Funds Rate is the prescribed rate at which banks lend money to each other on an overnight basis.  It is not correlated to mortgage rates.

The FOMC met a few weeks ago and dropped the federal funds rate by .25 basis points to 1.75%.

The Federal Reserve does not control mortgage rates

Here’s a fantastic graph (courtesy The Mortgage Reports) that shows how the Federal Funds Rate does not track with the 30-year mortgage rate (the green section tracks the mortgage rate, while the blue section highlights the Federal Funds rate):

When the Fed Funds Rate is low, the Fed is attempting to promote economic growth. This is because the Fed Funds Rate is correlated to Prime Rate, which is the basis of most bank lending including many business loans and consumer credit cards.

For the Federal Reserve, manipulating the Fed Funds Rate is one way to manage its dual-charter of fostering maximum employment and maintaining stable prices.

The Federal Reserve can affect today’s mortgage rates, but it does not and cannot set them.

The Federal Reserve has no direct connection to U.S. mortgage rates whatsoever.

The Fed Funds Rate and Mortgage Rates

As Dan Green states: “It’s a common belief that the Federal Reserve ‘makes’ consumer mortgage rates. It doesn’t. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.

Here’s proof: Over the last two decades, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%.

If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.”

With that said, the Fed does exert an influence on today’s mortgage rates.

Fixed Mortgage Rates vs. Treasury Yields

A far better way to track mortgage interest rates is by looking at the yield on the 10 year Treasury bond.  These two seem to track quite closely:

The 30-year fixed mortgage rate and 10-year treasury yield move together because investors who want a steady and safe return compare interest rates of all fixed-income products.

U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages. How? When Treasury yields rise, so do mortgage interest rates. That’s because investors who want a steady and safe return compare interest rates of all fixed-income products…and investors move to these type of products to fulfill their needs.

What the Fed Says Impacts Mortgage Rates…and Bond Prices

Dan Green outlines how the Fed impacts rates: “the Fed does more than just set the Fed Funds Rate. It also gives economic guidance to markets.

For rate shoppers, one of the key messages for which to listen is the one the Fed spreads on inflation. Inflation is the enemy of mortgage bonds and, in general, when inflation pressures are growing, mortgage rates are rising.

The link between inflation and mortgage rates is direct, as homeowners in the early-1980s experienced.

High inflation rates at the time led to the highest mortgage rates ever. 30-year mortgage rates went for over 17 percent (as an entire generation of borrowers will remind you), and 15-year loans weren’t much better.

Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.”

Meanwhile, mortgage rates are based on the price of mortgage-backed securities (MBS) and mortgage-backed securities are U.S. dollar-denominated. This means that a devaluation in the U.S. dollar will result in the devaluation of U.S. mortgage-backed securities as well.

When inflation is present in the economy, then, the value of a mortgage bond drops, which leads to higher mortgage rates.

This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.

Economic Turbulence on the Horizon – Recession, Rates, and Real Estate

It does look like most economists are pointing to a recession (although most do think it will be relatively mild by historical standards) in the next 12 months.

A recession occurs when there are two or more consecutive quarters of negative economic growth, meaning GDP growth contracts during a recession.

When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.

How do the economists know this?  And what does this mean for interest rates and real estate values?  Read on for more…

Recessionary Indicators

The Yield Curve

One of the major indicators for an upcoming recession is the spread between the 10-year US treasury yield and the 2-year US treasury yield.

While various economic or market commentators may focus on different parts of the yield curve, any inversion of the yield curve tells the story – an expectation of weaker growth in the future.

What does this inverted yield curve look like?  Here’s a good depiction:

Why does inversion matter?  Well, the yield curve inversion is a classic signal of a looming recession. 

The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time. 

When short-term yields climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs. 

Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.

Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.

Unemployment

Unemployment is a recessionary factor, too – as economic growth slows, companies generate less revenue and lay off workers to cut costs.

A rapid increase in the overall unemployment levels—even if relatively small—has been an accurate indication that a recession is underway.

Here’s a chart that shows what happens when unemployment starts to trend upward – and notice that recessions follow shortly thereafter:

As you can see, when things in the economy starts to slow down, one of the first things business do is to reduce their labor force.  The curve is flatting now, and unemployment might be ticking up soon.

Mortgage Rates During Recession

When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.

During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity. 

Here’s a quick snapshot of what mortgage rates have done during recessionary periods:

Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.

Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road. A borrower should be market- and financially savvy when considering large real estate purchases in a recession

Real Estate During Recession

Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate actually appreciate historically during times of recession.

That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.

When more people can qualify for homes, the demand for housing increases – and so do home prices.

In Closing

Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.

If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!

Which Is Better: Cash-Out Refinance or a HELOC?

When you need cash for home improvements, school tuition, a down payment for a 2nd home, or debt consolidation, you might want to consider tapping into what could be your greatest source of wealth — your home equity.

Interestingly, there is more than one way to access your home equity – so it’s smart to compare available options to find the right fit.

Two of the most popular ways are a home equity line of credit (HELOC) and a cash-out refinance. Both of these loans can work if you want to access your home equity, but they do work rather differently.

The “Cash-Out” Refinance

Cash-out refinancing involves replacing your current home loan with a new one. The “cashing out” part of the equation means you essentially take out a larger home loan than you currently have so you can receive the difference as a lump sum. This strategy works for those who have equity in their homes due to paying down their mortgage balances or appreciation of their property.

To qualify for a cash-out refinance, you need to meet similar requirements as you would if you were applying for a first mortgage – and you must have the equity in your home to qualify, as well.  You can borrow up to 80% of your home’s value.

So, let’s assume your home has a value of $300,000 and you want to take cash out. In that case, you could only borrow up to $240,000 through a cash-out refinance. If you owe that much or more on your home already, you wouldn’t qualify.

The Home Equity Line of Credit (HELOC)

While a cash-out refinance requires you to replace your current mortgage with a new one, a HELOC lets you keep your first mortgage exactly how it is.

Acting as a second mortgage, a HELOC lets you borrow against your home equity via a line of credit. This strategy allows you to withdraw the money you want when you want it, then repay only the amounts you borrow.

You now have two mortgage payments to make each month – your first mortgage payment and the new HELOC.

To qualify for a HELOC, you need to have equity in your home. Depending on your creditworthiness and how much debt you have, you may be able to borrow up to 85% of the appraised value of your home after you subtract the balance of your first mortgage.

For example, let’s say your home is worth $300,000 and the balance on your mortgage is currently $200,000. A HELOC could make it possible for you to borrow up to $255,000, because you would still retain 85% equity after accounting for your first mortgage and your HELOC.

Generally speaking, HELOCs work a lot like a credit card. You typically have a “draw period” during which you can take out money to use for any purpose. Once that period ends, you may have the option to repay the loan amount over a specific amount of time or you might be required to repay the balance in full.

Like credit cards, HELOCs also tend to come with variable interest rates, so you should be prepared for some rate volatility.

Key Differentiators

Before you decide between a HELOC or a cash-out refinance, it helps to do some analysis on your personal finances and your overall goals.

A cash-out refinance may work better if:

  • Your current home loan has a higher rate than you could qualify for now, so refinancing could help you save on interest
  • You need more than $50,000 overall
  • You prefer the stability of a fixed monthly payment or only want to make one mortgage payment every month
  • You have high-interest debts and want to consolidate them at the same rate as your new mortgage
  • What you save by refinancing — such as savings from a lower interest rate — outweighs the fees that come with refinancing
  • You are able to roll your closing costs/fees into the new loan amount so there are no out-of-pocket costs

A HELOC may work better if:

  • You are happy with your first mortgage and don’t want to trade it for a new loan
  • You need less than $50,000 overall
  • Your first mortgage has a lower interest rate than you can qualify for with today’s rates
  • You aren’t sure how much money you need, so you prefer the flexibility of having a line of credit you can borrow against
  • You want to be able to borrow up to 85% of your home’s value versus the 80% you can borrow with a cash-out refinance

Here’s a quick “snapshot” of two different options – notice how the smaller transaction works well with the HELOC, the larger one with the refinance.

As you can see, for the smaller transaction, the HELOC is less expensive overall – both in fees and monthly payment. However, once you go over the $50,000 mark in cash-back, it appears that the cash-out refinance is the most economical, all things considered.

I’d invite you to find out more from Gina Pogol at The Mortgage Reports here….and Holly Johnson at Magnify Money here….

HELOC Pros and Cons

Pros

  • Applying for a HELOC allows you to maintain the terms of your original mortgage, which can be an advantage if your rate is low.
  • You can use money from a HELOC for anything you want, and you only have to repay amounts you borrow.
  • HELOCs tend to come with lower closing costs than traditional mortgages and home equity loans.
  • HELOCs can generally be closed quicker than refinances

Cons

  • Taking out a HELOC means you’ll need to make two housing payments every month — your first mortgage payment and your HELOC payment.
  • Interest on a HELOC is no longer tax-deductible, unless the funds are used for acquisition or updating your home.
  • They are more expensive the more you borrow – if you are needing more than $50,000, your payments might be higher than that of a refinance
  • Since you only repay what you borrow and the interest rate on HELOCs is typically variable, you may not be able to anticipate what your monthly payment will be. Your monthly payment could also be interest only at first, meaning your payment won’t go toward the principal or help pay down the balance of your loan.
  • The interest rate on HELOCs tends to be higher than first mortgages, and their variable rates can seem riskier. You may also be required to pay a balloon payment at the end of your loan, so make sure to read and understand the terms and conditions.

Refinance Pros and Cons

Pros

  • You can use the money from a cash-out refinance for anything you want, including home upgrades, college tuition, a vacation or debt consolidation.
  • If rates have gone down or your credit has improved since you took out your original home loan, you could refinance your mortgage into a new loan with a lower interest rate.
  • You can choose from different types of loans for your refinance, with various terms and fixed or variable rates available.
  • Interest on your first mortgage may be tax-deductible.
  • Interest rates on first mortgages tend to be lower than other options, such as home equity loans or HELOCs.

Cons

  • Closing costs for a cash-out refinance are typically higher than those of a HELOC
  • If interest rates have gone up since you purchased your home, you could be trading your mortgage for a higher interest loan that will be more expensive.
  • Refinancing your home to take cash out may leave you in mortgage debt longer.
  • You won’t qualify for a cash-out refinance unless you have at least 80% equity in your home after the process is complete.

In Conclusion

As you can see, there’s really no right or wrong decision to be made here, but it is important that you know the benefits and drawbacks of both options. Please do reach out to me for more information, as I’d be happy to go over the specifics of your scenario to find the best option.

A True Mortgage Approval Before a Purchase – The “TBD” Underwrite

In today’s competitive real estate market, potential home-buyers need every advantage they can get.

One way to differentiate your offer from the myriad of others is a true “TBD underwritten” loan approval. 

I’m not talking about the typical pre-qualification letter that is a cursory overview of a borrower’s ability to gain an approval, but a fully underwritten approval that is only waiting for a contract.

This process is for the home-buyer who wants a solid, iron clad pre-approval that has been fully underwritten and signed off by mortgage underwriters. 

How does that work?

Well, it works very similarly to a full-fledged underwrite – except the address is left blank – or “TBD” (to be determined).  The underwriter analyzes the file as if it was a true loan – and provides the actual loan conditions that the borrower must meet.

What’s the downside?

The only real downside is time.  This process could take as long as a few weeks, because all documentation needs to be gathered (tax returns, W2s, pay stubs, bank statements, etc.) and then analyzed by the underwriter.

What’s the advantage?

There are a multitude of advantages.  First and foremost, the borrower will know the exact size of the mortgage that they will be able to qualify for.  They will have a very good idea of the monthly payment and be assured that the loan will go through.

Equally important, the offer you submit will essentially be like a cash offer.  The real estate agent presenting the offer will share with the seller’s agent that the mortgage approval is actually confirmed – not pre-qualified.  This will make your offer much more attractive to the sellers, as they don’t have to be concerned about mortgage approval.

Finally, the closing can take place more quickly than standard financed transactions.  Essentially all that’s needed is an appraisal to confirm the value of the property.  Instead of a 30 to 45 day close, these can be done in less than 20!

In Conclusion

If you know that you will be purchasing a home in the near future, ask your mortgage lender about a “TBD approval” to see if that’s an option.  If so, I highly recommend that you go through the process early – and in that way you will be miles ahead of your buying competition!

Please do reach out to me for more information, as I can absolutely help you with a “TBD” underwrite!

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