New Homeowners Benefit From Lower Rates
A Penny Earned
Saving money always feels like a great accomplishment. Have you ever noticed when you’re at the grocery store and you go to check out, you actually look forward to the cashier pulling your receipt from the machine and handing it to you saying “looks like you save $47.00”.
“Thank you very much” you say.
Your home is saving money for you every day you drive up your driveway. Even in a low to moderate equity growth market, your real estate investment is earning 3% to 5% a year. On a $300,000 home, that’s $9,000 to $15,000 a year, going into the piggy bank you call home.
A Penny Saved
As a renter, if you want to save money, you downsize, or move to a lower rent area of town. As a homeowner, you don’t always have the luxury of changing your mortgage payments if your finances start getting tight.
Interest rates and home values are not predictable, and there is very little control you have over either. When you buy your home, you are subject to whatever market conditions exist at that time.
Homebuyers ask me all the time, “when is the best time to buy”, or “is this a good time to buy?”. My answer is always the same. It’s the best time to buy when you’re ready to settle down, and your finances allow.
When you bought your home, you committed to what most likely amounts to the biggest investment, and probably the biggest payment of your life. Once you go through that process, you’re not thinking about going through it again. Not anytime soon at least.
2016 is starting very similar to how 2015 started, with near record low interest rates, and we’re not done yet. Shortly after the Feds raised rates, oil prices and China’s economy made headlines, causing a mass exodus out of the stock market, and into long term bonds.
This caused rates to drop, which is good news for homeowners.
If you’re a new homeowner, and have never refinanced your home before, my goal here is to demystify the refinance process, and help you to make an educated decision if market conditions give you an opportunity to reduce your interest rate, reduce your monthly payments, or pay off your home sooner.
Debt Consolidation Refinance
When you look at your credit report, you have a list of individual debts, all with different interest rates and balances. If you add up all of your outstanding debt, and add up all of your required payments, you can calculate the cost of that debt.
The interest you are paying between all of your credit cards, car loans, and student loan debt is more often than not, a two digit number, and often as high as 3 to 5 times what you would pay to borrow money against the equity in your home.
When you can lower your interest rate, and pay off high interest credit card debt, the savings could soar into the hundreds of dollars each month.
Buy Wise Advice: Understand the Cost
A debt consolidation refinance can give you the impression that you are saving more than you actually are. Keep in mind that by taking term loans, and rolling them into a 30 year loan, that your payments will naturally go down.
With revolving debt, making the minimum payment each month will take decades to pay off most credit card balances. Also, spreading a $10,000 credit card balance over 30 years will also make the payment almost disappear.
Another thing to consider when refinancing your purchase money loan, is that you’ve been paying that loan down for the past few years, and you will reset the ratios of interest and principal by resetting your term to 3o years again.
That said, a debt consolidation loan will save you literally thousands, maybe even tens of thousands of dollars when it counts most. Be smart, don’t buy into the savings without understanding the cost.
Rate and Term Refinance
Simply reducing the interest rate, or reducing the term of the loan, without taking out equity or paying off debt, is called a rate and term loan. If you are paying off a second mortgage that you used to purchase the home, you can consolidate those loans into a single loan at a lower rate and payment.
Financially savvy homeowners will keep their mortgage payment the same, while simultaneously reducing the interest rate and the term of the loan. Even taking a slightly higher payment to significantly reduce the term will result in literally tens of thousands of dollars over the term of the loan.
Both FHA and VA loans have the special ability to allow a homeowner with on-time payments to reduce their interest rate with little to no cost or paperwork. Streamline refinances most commonly will not require an appraisal, your value is not considered. That means no appraisal, and no appraisal fees.
Even if you think you owe as much or more than your home is worth, if you meet the minimum savings requirement, you could significantly reduce your rate, payments and even mortgage insurance for those with FHA loans with higher mortgage insurance rates.
Removing Mortgage Insurance
If you have a FHA loan prior to mortgage insurance becoming permanent, or if you bought with 5%, or 10% down using conventional financing and private mortgage insurance, then you are counting the days when you can remove the mortgage insurance premium.
If you’ve ever pulled out the amortization schedule, and looked at when that mortgage insurance will “fall off”, you’re looking on average at about 11 years for a FHA loan with a 3.5% down payment. Unfortunately, your lender will not consider the equity you’re earning in your home.
Other than waiting it out, there’s only one other way to remove mortgage insurance, watch your equity, make all your payments on time, and wait for the absolute soonest opportunity to keep, or reduce your interest rate, and remove that pesky mortgage insurance payment.
Buy Wise Advice: Financial Planning
There’s no cost, and nothing to lose by having your lender review your current mortgage statements, and looking for an opportunity to get you closer to the long term financial plan you have place for your and your family.
If you’re in the State of California, we’re happy to provide a detailed analysis of your current situation, and provide a clear set of options. Many times, one of those options is to do nothing, you’re in great shape. If you’re outside of California, we’ll be happy to recommend someone that can help.