Category: Mortgage (Page 35 of 60)

How to use a cash-out refinance to purchase another home

May 4, 2019 / Tom Bonetto

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.

I’d invite you to read the full article here – and I’ll mention a few key highlights:

How much equity do you have?

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 call for more….

It’s Time To Seriously Consider a Refinance

April 8, 2019 / Tom Bonetto

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 2^nd 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.

2^nd 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.

Mortgage Insurance – Mistakes to Avoid and How to Pay Less

March 16, 2019 / Tom Bonetto

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.

I highly recommend that you read the entirety of Peter Miller’s post from The Mortgage Reports, although I’ve put together a few key pieces from his article below…and my article on Mortgage Insurance here…

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!

Before Making a 20% Mortgage Down Payment, Do Read This

March 2, 2019 / Tom Bonetto

“How much should I put down on a house?”

It’s a question that I hear all the time from would-be home buyers— especially first-timer purchasers.

And, the answer is: “it depends,” as it really will vary by buyer.

I’d highly recommend that you check out Dan Green’s article at The Mortgage Reports for more.

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!

New Investor Product – Fix and Flip

February 2, 2019 / Tom Bonetto

Researchers have found that house flippers renovated more than 200,000 homes in 2017, with an average profit of nearly $70,000 per property. That’s a lot of houses—and a lot of money.

Despite the popularity of house flipping, the biggest barrier to entry and success in this space is cash. Without enough money, you can’t purchase the home, pay for renovations, or find a buyer for the property when the time comes to sell.

Fix and flip loans are used by short-term real estate investors to purchase and renovate a property before flipping it for a profit or refinancing it after rehab. This type of financing for flipping houses offers investors fast closings for properties in any condition.

Finance of America has a fantastic set of offerings in this category…..

Not sure whether you need the Fix & Flip Single Loan or the Fix & Flip Exposure Limit?

The Fix & Flip Single Loan is designed for investors who need funding to flip a single investment property.
The Fix & Flip Exposure Limit is a line of credit offered to experienced investors who plan to acquire and/or renovate multiple properties.
All Fix & Flip Exposure Limits allow investors to close quickly.
Both Fix & Flip Single Loan and Fix & Flip Exposure Limit offer the option of rehab funding, if needed.

Our commercial offerings are quite unique. These products are in-house from origination to funding. Controlling the financing from origination to funding allows our investors to reliably plan the timing for their projects. Timing is always important in the real estate market, especially in construction and rehab.

For experienced investors we establish an exposure limit and for new investors we start our first project together with a single mortgage. Contact me for more details.