How Long Do I Have to Wait After a Foreclosure to Get a Mortgage?

When economic war ravaged the real estate market a decade ago, statistics show that peak foreclosure activity in the US occurred somewhere in 2010.  We continued to experience an elevated level through at least 2013, which means that as I write this post in late 2019, almost the entire rat is through the seven-year snake.   That waiting period — 7 years —  is the gold standard after a foreclosure.  So what do those looking to reenter the housing market need to know?  What about if they need something other than an FHA mortgage?  Let’s look.

What is a Foreclosure?

When it comes to “letting a house go” we could say that a foreclosure is the equivalent of the homeowner’s “nuclear option.”  Basically, an atom bomb is dropped on the owner’s credit and when the dust settles, which could take months if not years, there’s not a trace of the home he once owned.  Though the legal foreclosure proceedings vary from state to state, a foreclosure is ultimately what happens when the owner of a mortgaged property stops paying and takes no other legal or financial steps.  Ultimately, a notice of default will be filed on the property and absent drastic measures to restore payment on any lien attached to the title, the lender will end up selling the property via a foreclosure sale.

What Happens After a Foreclosure?

With a history of foreclosure (or “deed in lieu”) on one’s credit report, conforming loan guidelines state that a buyer re-entering the market must wait seven years before obtaining a new mortgage. If using an FHA loan program, that waiting period is cut to three years. In the case of jumbo mortgages, however, the waiting period will be established by the actual investor — the entity that provides the loan. Because of this, the institution/investor can set its own rules about the seasoning required. They can also set rules about how a foreclosure is qualified. Was it due to financial mismanagement? Strategically done to avoid consequences of the market falling further? Or, was it done due to a legitimate hardship on the part of the borrower? Each of these might be viewed differently by any investor and the waiting period might change accordingly.  The best advice I can give is that if you experienced extenuating circumstances (death, loss of job, etc.), ask how this could impact your options because several of our best-priced investors will reduce the typical 7-year wait in these cases.

Sorting Out Second Chances

At Guaranteed Rate, one of our strongest suits is that we have multiple jumbo investors available for most scenarios. We will see our strongest-priced jumbo investors re-enter the market for the buyer with a foreclosure also at the 7-year mark — identical to conforming. But below you’ll find some of the other tiers of available as the loan-to-value (LTV) increases or decreases, the loan amount goes up in size, and the FICO score factors into the picture:

5% Down Payment

We require a three-year seasoning period and will go to a loan amount of $1.5MM (purchase price of $1.58MM). For this program, we’ll need a 720 FICO and 9 months of reserves.

10% Down Payment

We require a three-year seasoning period and will go to a loan amount of $2MM (purchase price of $2.23MM).  Like with the 5% down program above, we’ll need a 720 FICO and 9 months of reserves.  If both your FICO score is lower (to 680) and your loan size is smaller (to $1MM), we’ll then permit a 4-year seasoning on the foreclosure but require 6 months of reserves.

20% Down Payment

All of the investors above are in, plus several others with varying FICO and reserve requirements, even down to a 661 credit score with a maximum loan amount of $1.5MM (purchase price of $1.875MM).

The jumbo mortgage market is inherently more complex than conforming or FHA and because of this, your jumbo lender needs to have the options and expertise that will accommodate the demands of getting a new home loan post-foreclosure.  But purchasing a home with a history of a foreclosure is indeed possible. We understand the requirements, restrictions and tips of the trade that facilitate many of the best second chance options in existence. Maybe more importantly, my experience as a loan advisor covers a time period before, during and after the real estate recession.  I reserve no judgment for what happened in that very different market. Instead of looking back and telling buyers what they can’t do, I see it as my responsibility to look forward and help them do what they can to realize the benefits of ownership again.

Bombs away,

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Do You Need a New Appraisal When You Refinance?

It’s September of 2019 and interest rates are again approaching historic lows. This means that many homeowners are considering a refinance — and for good reasons. If there is a hurdle for some, it’s the cost and risk of getting an appraisal on their property. What happens if the appraised value doesn’t support the loan amount, loan-to-value or the transaction itself? Are these clients then out the money for the appraisal report, typically anywhere from $500 to $1200?

Earlier in the year, we introduced an appraisal tool that allows us to determine, in advance and with a very high degree of accuracy, if a refinance transaction will be eligible for an appraisal waiver. This all happens before a client even makes a loan application, so we don’t require any personal information. How does it work? We need three pieces of information:

  1. The address of the property.
  2. The estimated value of the home.
  3. A good idea of the loan balance being refinanced.

With the above, we can assess the probability of getting an appraisal waiver and if we do, we can be off to the races and closed on a refinance with less time and less expense. It’s really that easy and it’s a huge edge for the homeowner looking to save money on their housing expense.

Oh, and one of the best things about our appraisal waiver platform? It works for purchases too! If you’re considering making an offer on a property, run it by us. We can put in the address of the property and the intended offer price and we’ll know in advance if you’ll need an appraisal. In cases where you don’t, you can offer without an appraisal contingency, possibly further strengthening your offer.

Appraise be to God, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Can You Still Get a Stated Income Mortgage?

Believe it or not, the calls come in. “Do you guys still do stated income loans?” Still? Seriously, a lot has changed in ten years, but in the home lending building perhaps there has not been a more pronounced departure than the Elvis of all mortgages, the stated income loan.

Basically, these creatures roamed the earth and skies during the pre-real-estate-downturn era and allowed a borrower to state what he made in income per month. To state the amount of money he had available for a down payment. And even to state what he did for a living. All of this changed with the Dodd-Frank Wall Street Financial Reform Act (Dodd-Frank), and without getting technical, the core provision in this law is “ability to repay,” or ATR. Today, if lenders don’t prove that a borrower can repay the loan they are making, then a lot of bad things can happen to the lender. And if bad things can happen to a lender, then you know that’s gonna flow downhill to the person looking to purchase or refinance — namely, you, the borrower.

So, no. Stated income loans don’t still exist.  At least not in the traditional sense. But in the new world, lenders do have some very viable and attractive ways to determine ATR by alternative measures and I’ve outlined the three most common below. These programs address the reality of the borrowing public, especially the self-employed, who often file their tax returns in a manner that reduces income and maximizes expenses — for good reason and within the letter of the IRS law. To prevent these otherwise creditworthy borrowers from being shut out, today’s substitutes for stated income loans might involve some or all of the following characteristics:

Asset Depletion

An asset depletion loan allows a buyer or borrower to leverage his/her cash equivalents, investments and sometimes even retirement accounts to derive a hypothetical income stream that can be used for qualifying. These assets do not need to be moved or liquidated, just documented. For those who have sufficient net worth but insufficient traditional qualifying income, an asset depletion loan (also known as asset-backed, asset utilization, asset amortization, etc.) can prove an ideal solution.

Bank Statement Qualification

Business owners who show strong income into their business may want to consider a bank statement loan as an alternative to a stated income loan. For a bank statement qualification, we will typically examine 12 months of business bank statements. We’ll total all of the legitimate business deposits and we’ll apply an expense ratio to that sum. The resulting figure is the qualifying income. For those who “write off” a lot of business income on tax returns, a bank statement loan may circumvent that age-old challenge, because for these programs, no tax returns are required.

Debt Service Coverage Ratio (DSCR)

For the real estate investor who will struggle with a conventional mortgage qualification, we now have the debt service coverage ratio, or DSCR, home loan option. This program looks at the property’s income and nets out the housing payment on it. As long as the ratio is positive (and all other qualifying criteria are met), we have a deal.

While the sun may have set on the Wild West days of stated income, the home lending industry has come a long way back to offering attractive alternatives to the alternative borrower. Not all loan professionals have access to these options and fewer of those are fluent in the approval parameters. If you need help with a bank statement loan, an asset qualifying mortgage or a DSCR program, get in touch at any time. We are experts in these and look forward to being of service.

In a new loan state of mind, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Do Any Mortgage Lenders Work on the Weekend?

The fact of the matter is that a lot of real estate business gets done on Saturdays and Sundays. Prospective buyers go to open houses and buyers’ real estate agents often need to structure offers for their clients. Unfortunately, not all banks are open on the weekend even those that may take deposits and cash checks often do not have a home loan professional available to pre-approve a buyer or answer a complicated home loan question in an instant.

I’m different. Even though I’m generally not in the office on the weekend, I can always be reached and I have the full capacity to work through your scenario and give you an edge over your competition — those other bankers, brokers or lenders that may wait until Monday morning to get underway.

Let us know if we can help you today, whether that day is during the work week or the two days that follow, and that everybody’s been waiting for.

C’mon let it go! 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

How a Refinance Can Drive Down Your Monthly Expenses

While all real estate may be local, so too is it true that one homeowner, confronted with the opportunity to save $250 per month through refinancing, for example, may view that as a significant financial relief while another may feel it’s not even worth it to get off the couch to consider going through the hassle of the loan process. As we work into the second half of 2019, there is no mistake that the low rate environment we are enjoying again is providing opportunities for homeowners to refinance. Often in these cases, having an open mind about any level of savings can help us determine whether or not a refi is “worth it.”  Here in the San Francisco Bay Area, if we take an average loan size and make some assumptions on monthly savings through a refinance at today’s rates, we see that it’s not unreasonable to think that our clients can save between $150 and $350 per month. When you look at this in relation to the most significant household budget expenses; auto loans, student loans and credit car payments, it’s easy to see why a careful review is a great idea. Need more proof?

  • As of 2018, it is estimated that 44% of American adults have a car payment. On average these individuals owe over $30K on their auto loan and they pay over $500 per month on their payment. Interest rates vary but with an average FICO score of 695, you can bet your bottom dollar that some of these merry motorists are not enjoying 1% interest rates on their auto debt. It’s possible today’s refinance could cut your auto payment in half — or at least that’s the way it would feel until the car is paid off.
  • The average student graduates (or not…) college with about $25,000 in student loan debt. It’s estimated that the payment on this would hover around $280 per month. Owning a home is a big financial responsibility. Owning it alongside student loan debt can turn it into a financial burden that refinancing might ease.
  • Depending on what stats you review, it’s estimated that the average American carries between $4000 and $7000 per month in credit card balances that roll from month to month. And you can be sure that as this revolving debt ages, the interest rate on it does not suddenly get better. To break this cycle, a refinance can provide needed monthly budget space to slash the credit card balances and get off the minimum payment treadmill.

Bear in mind that in each case above, I am not advocating that our clients take on more debt! We are not suggesting that they do a cash-out refinance and pay off these other obligations. That may prove to be a good strategy and might warrant further examination. But even in cases where a borrower simply does a “rate and term” refinance and lowers the rate and payment on an existing mortgage, the savings that result can go a long way to comprehensively addressing the other components of any household budget.

We’re here to help when you’re ready to look under the hood, roll up your sleeves and do the work.

My uncle has a country place, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Should I Refinance into a 15-Year Fixed Rate Mortgage?

With the Federal Reserve tongue-tied and twisted and an easy trade war time-tripping into the future, we find ourselves the beneficiaries of another very appealing low interest rate environment here in the second half of 2019. This stands to benefit many who have mortgages at higher rates and even some who may not fit that exact bill, but who are focused primarily on reducing the term of their loan and perhaps paying their entire balance off at a faster rate. We are seeing a number of homeowners who are seeking to determine if they should abandon their 30-year amortized loans and refinance into a 15-year fixed. What are the key concepts these individuals need to know before they make this leap?

  1. For the vast majority, the mortgage payment will go up.  A while back I did the research on this and came up with my “10 and 2” rule. Namely, if you are in a 30-year loan now and have been paying it down for 10 years, then you refinance into a 15-year fixed rate loan with at least a 2% rate reduction over your present loan, only then would you have a new payment that is the same or lower than your current payment. And that’s a reach. So for most, refinancing into a 15-year fixed means a higher monthly payment, safe in the knowledge that the additional amount is going to reduce your principal balance and not to additional interest.
  2. You save big long-term. The total finance charge (aka, interest) on a 15-year loan versus a 30-year loan is dramatic. For example, on a $400K loan at 4%, you will pay a total of $287,478 in interest over 30 years. On a 15-year fixed at 4%, you will pay $132,575. But there’s a silver lining for the 15. Often the rate on a 15-year fixed will be lower than for a 30, so not only do you save on interest because of the term, but you save on interest additionally because of the lower rate. The rich get richer.
  3. Be mindful of your credit capacity. If you refinance into a 15, you’ll have a higher payment reporting on your credit report. Other creditors who may examine your debt-to-income (DTI) as a function of your creditworthiness could limit your access to credit due to the higher payment. This may or may not be a factor for your financial future, but do take it into consideration before you take the 15-year plunge.
  4. It’s possible to be debt free but wealth poor. I realize this sounds funny, and paying off a home is a commendable financial goal, but realize that while you are doing it, most of us also need to meet concurrent objectives when it comes to our money. Having a “rainy day” fund, paying off any tax-disadvantaged higher-rate consumer debt, saving for college and retirement and investing outside of real estate are important and worthy objectives and if all of your discretionary income goes into a higher mortgage payment, you could find yourself debt-free but savings poor down the road. That would almost certainly force you to look into refinancing the home again and accessing the equity, likely with a 30-year loan or a HELOC. Don’t laugh, we’ve seen this movie before…

With rates lower, it might indeed be worth looking into a 15-year fixed rate mortgage. But keep the above points in mind as you do. Like in physics, all actions have opposite reactions and finance is no different. Getting a lower rate, paying less interest over term and paying off your home quicker are all enticing objectives. There is a price to entry, however, and any true loan professional can help you assess that cost. Let me know if you need my help at any point in your journey.

Free and clear, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What’s the Point of Points?

Let’s get right to the point. What point? Points. I don’t get it. What’s your point? The point is points — what are they, how do they work and should I pay them when I get a mortgage? There’s a lot of confusion about points and when a borrower researches his or her best mortgage options, inevitably there will be an element of points in the debate. So in order to help ourselves find the best terms on any home loan, we need to get this point thing under our belt.

Point One (One Point)

Simply, one point equals 1 percent of the loan amount. If you have a $500,000 mortgage, 1% of it is $5000. Similarly, fractions of a point work the same. In our example, 1/2 point on $500K is $2500. If a lender says you can get any certain rate by paying 3/4 of a point, simply take your loan amount and multiply it by .75%. This rule never changes, despite loan size, type, borrower profile, etc. One point is one percent of the loan amount.

Point Two

Let’s put a finer point on points. We’re going to focus on “discount points” and not “origination points.” Discount points are meant to have a direct impact on the rate that the borrower obtains. “Origination points” are a cost to get the loan itself — independent of the rate provided. An important concept to know here is that on any given day, a mortgage lender can offer the public a range of rates. Let’s say a borrower qualifies for a 4.000% rate with “zero points.” This means that without paying any discount cost, the borrower’s rate would be 4.000%. Easy, right? OK. So what happens if the borrower wants a rate of 3.75%? Is that possible? Yes. But in order to get the lower rate, the borrower will need to “pay” the lender what it would cost to bring the 3.75% rate to “par,” meaning to level equal with the cost of the money at 4.000%. On the lender side, there is more cost associated with lower rates and an “inverse cost” (aka, lender credit) associated with higher rates. So on the scale of, say, 3.500% to 4.500%, the lowest rate would have the highest cost to obtain and the highest rate would have the highest “rebate” or lender credit. Due to regulation, lenders cannot profit any more or less depending on the rate chosen, so the cost or credit to obtain any rate must come from, or go to, the consumer.

Point Three

Does it make sense to pay points when you get a mortgage? Now I must tell you that as a veteran loan originator, many borrowers pay points to get a “sexy” rate. Let’s say a 4.000% rate is available with zero points, but that a 3.875% rate can be bought for a half point. Some will make that investment just to have the ‘3’ handle on their “water cooler rate.” OK, fine. It happens. But the decision to pay points should always include a math calculation and fortunately, it is a simple one. Let’s use our example again and say that 4.000% is available on a $400K loan at 0 points, or “par.” The payment on this loan would be $1910. Now let’s say this borrower hopes to get a rate of 3.750%. The lender comes back and says that 3.750% will cost .75% (3/4 of a point) to obtain. So, we have an investment of $3000 that will be paid at close as discount points, but in return, this borrower will get a 3.750% rate instead of 4.000% for the life of the loan. The payment savings per month in this case would be $58. Remember that the borrower is “investing” $3000 at close to get the $58/M savings, so we divide the cost by the savings to determine the number of months it will take to recover the investment. In this case, it will take 52 months, or a little over four years. If this borrower plans to be in the home and not replace the mortgage within the that time, the choice to pay points may indeed be a good one. However, if the borrower does sell or refinance in that initial window, the investment (or part of it) really will not return. Yes, the borrower got the better cash flow per month, but he/she never realized the true savings the lower rate would provide.

The decision to pay points is a personal one. This is not a “right or wrong” choice and is highly individualized to the scenario and the borrower’s financial plans and goals. Helping a buyer or someone looking to refinance understand how points work, and if paying them is worthwhile, is a conversation we are always happy to have. Call any time if I can be of service!

In the right direction, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

No-Cost Refinances. Too Good to Be True?

With all the talk of trade wars pushing mortgage rates to lows we haven’t seen in a couple of years, perhaps you’ve been thinking of refinancing and maybe even done a bit of research on the topic. It’s likely you’ve come across the term “no cost refinance,“ and you may be saying to yourself, “How do some lenders offer a refinance without costs?” or, “Is this too good to be true?”

It’s important to recognize that all financial transactions involve some costs. In the case of a mortgage these could be lender fees, appraisal fees, charges paid to a title or escrow company and even days of interest on the loan itself. It would not be fair to say that a refinance has “no costs,” but perhaps more accurate to realize there are different ways these costs can be paid. Let’s look at the three most common ways a borrower will cover the expenses of a refinance:

  1. Increased loan amount: Let’s say our borrower has an existing loan balance of $400,000 and closing costs that total $3000. This applicant would aim to finance $403,000 with the new loan. So long as the appraised value of the home will permit and so long as the new rate and payment allow, this would be the most common way we’d see a borrower refinance his or her home loan.
  2. Out of pocket: In our example above, this homeowner would not increase the loan amount, but instead leave it at $400,000 and would write a check, at closing, for the $3000 in total settlement charges. The largest benefit here is that the loan amount does not increase. This is the least common approach we see.
  3. “No Cost” structure: In a no cost refinance, the borrower actually opts to take a slightly higher rate than he could otherwise attain. With the higher rate, the lender will usually be able to offer a higher “rebate” or lender credit, and these funds are then used to pay the settlement charges. The borrower does not increase the loan amount, but foregoes a rate that might otherwise have been slightly lower.

So you may be asking, “Why would anyone deliberately take a higher rate?” The answer comes down to math and a slight shift in philosophy. In the case of the math, a lower rate and payment, no increase in loan balance, and costs that do not need to be paid out of pocket are all desirable and very likely have financial benefit in both near- and long-term. And in a philosophical light, the borrower is accepting that it is better to get most of the benefit at none of the cost than all of the benefit at some of the cost.

What’s the best way to refinance? The answer depends entirely on your own situation. If your subject property is in California, get in touch today and we’ll help you make that determination.

Freedom’s just another word for nothin’ left to lose,

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

When Is a Good Time to Refinance?

There’s that great, old maxim that goes, “There are two kinds of jobs in the world; the kind you shower before and the kind you shower after.” And in that spirit, I would offer that there are two kinds of refinances in the world — the kind you transact because you want to and the kind you pursue because you must. We’ll cover both here and we’ll talk about when it may be a good time to consider refinancing your home. But first, some basics.

Refinancing your mortgage(s) allows you to change the terms of your current loan or loans, by replacing them with a new one. Yes, you will go through the loan process again and there will be associated costs. Analyzing the recovery period on the costs involved will be a component we’ll address below, but even in the case of a “no cost” refinance, just accept that there are always some expenses. Next, because your title does not transfer in a refinance, it is very unlikely your property tax basis will change via refinancing. Many homeowners express that concern, but it is a concern that is generally unfounded. You can most often refinance without fear of triggering a reassessment and seeing your property taxes go up. Finally, there are two, broad categories of refinances; rate and term, and cash out. A rate/term refinance will cover just the payoff of your existing loan balance and perhaps your closing costs. A cash out refinance will pay off the existing loan or loans, your closing costs and will allow you to “cash out” some of the equity in your home. In other words, you walk away from escrow with a check. And no, you do not pay income taxes on those proceeds, as they are not income, but equity instead.

Refinances of Choice

By far, most refi activity is driven by rate. If you hold a mortgage at 5.000%, for example, and rates drop to 4.250%, and a refinance at the lower rate can save you $250 per month, you can consider making the switch. Now if it costs $3000 to refinance the loan, you will “recover” your closing costs in the first year you hold the new loan, but thereafter, you are saving $250. Some might argue that part of your savings stem from resetting the loan term back to 30 years — and they would be right. But nothing prevents this borrower from refinancing then continuing to make the original payment they had with the old loan, right? By doing so, they might even get ahead of total interest payments. So a refinance by choice provides options for saving in the near-term or long-term, depending on the borrower’s objectives. And we help them analyze and figure this out.

We’ll occasionally help a borrower convert a 30-year fixed into a 15-year fixed loan to hasten pay down of the loan. Sure, the payment almost always goes up in these cases — so this would definitely fall into the “choice” category — but if the owners can afford it, the reduction in term interest can offer a real financial benefit.

Next, we have the “cash out” refinance where the borrowers will use the proceeds to finance home improvement, a large purchase, college tuition, etc. I’ll even go so far as to say a debt consolidation refinance can fall into the “choice” category because there are occasions where a borrower’s debt may still be manageable but a careful review suggests that by consolidating it with the mortgage, the overall financial result is positive. And then there are other occasions where debt gets out of control and a refinance is really the only way to bring it back to a manageable state. That brings us to our next category…

Refinances of Necessity

Debt consolidation refinances where a borrower can significantly reduce payments are NOT, I repeat, not a free lunch. If you build student loan, credit card and other consumer debt into your mortgage, you might effectively be financing short-term debt at higher rates over a much longer term at lower rates. Still, interest is accruing in both cases.  Further, it’s incumbent upon the borrower to avoid racking up new debt once the old ones are consolidated. That kind of fiscal discipline must go hand in hand with a debt consolidation refi if it truly to move the homeowner forward financially. Other refinances of necessity happen when a loan has a balloon feature. In these cases, the loan holder must change the terms of the note before the balloon payment is due. Even though not as dire, we’ll often see a refinance used to get a borrower out of an ARM loan that will begin adjusting in the future and into a fixed rate loan. I’ll also group refinances to drop PMI (or FHA MIP) in the ‘necessity’ category. Sure, paying the insurance premiums perhaps isn’t life or death, but most borrowers do feel that if they can drop PMI and save right now, that’s something worth acting upon instead of waiting.

Individual financial situations are as unique as houses themselves. Refinancing is a tool that can help accomplish a wide array of financial goals, but regardless of the intended outcome, it’s vitally important that the math and the costs are understood. In each case, we help our refinance clients develop a better understanding of what’s at stake today, during the process and into the future. If you feel we can help you with your refinance decision, get in touch any time.

Back Jack, do it again, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Unlocking a HELOC Mystery

If you could create a client-facing “tip sheet” for your business, a simple punch list of things to do and not-to-do, what would be on that list? You know, the items that always seem to fly under the radar of public knowledge and wisdom, but the ones that frequently undermine the best-of-intentioned customers? I’m sure all of us have this wealth of “insider knowledge” that we’d love to share with the public and, as a result, save them from the misery and inconvenience of being counted among the unfortunate and unsuspecting.

High on my list would be an explanation of how home equity lines of credit (HELOCs) are treated when a borrower goes to refinance a home. Typically, a borrower would obtain a HELOC one of two ways:

  1. At the time of purchase (as with an 80-10-10 or “piggyback” loan).
  2. At a later date. The borrower would have a first mortgage in place an later add a line of credit in order to do home improvement, consolidate debt, etc.

There’s an important distinction between the two options because in the first case, the funds used from the HELOC are considered “purchase money.” In the second case, well simply, they are not.

For the homeowner who has both a first mortgage and a HELOC, refinancing involves some additional considerations. The borrower may either consolidate the balance on the HELOC with the remaining first mortgage amount, or he may subordinate the HELOC altogether. This second option implies that the HELOC will stay as is, but that the second mortgage lender will agree to a process that allows that lien to stay in second position on the title of the home.

Assuming that we have a borrower who is looking to consolidate a HELOC balance into a single, new mortgage, lenders will first look at the nature of the proposed loan. If it will be a conforming or FHA loan, then any balances that are NOT purchase money, once combined will create a “cash out” refinance — even if the borrower does not get a single red cent back at the time of closing. Again, simply consolidating any balances that were not exclusively used to buy the home (such as with an 80/10/10) mean the new loan will be classified as a cash-out refinance and be priced accordingly — typically with slightly higher rates and more restrictive loan-to-value (LTV) parameters.

If the new loan will be a jumbo mortgage then things get a little more interesting. If the new loan balance will fall above the FHA and conforming limits then many jumbo investors will look at the line of credit itself. Specifically, they will look to see if any draws were taken on the line over the last twelve months. If not, then they will often classify the refinance as “rate and term.” This can be a real benefit to the borrower in the way of lower rates and higher LTVs. Just to clarify, the HELOC in these cases did not need to be purchase money, it just needs to have been recently inactive with respect to its balance increasing. If that holds true, structuring the refinance as a jumbo as opposed to a conforming, if possible, may be a highly beneficial approach and we employ it all the time here in the high-cost environment of the San Francisco Bay Area. But caveat borrower. If you have 11 months of payback on the HELOC that is punctuated by a $1 draw on the line in month 12, you go back to square one or you are looking at a cash-out refinance.

And so this last point is the one I wish I could shout from the rooftops.  If you have a jumbo scenario, and if you have a home equity line of credit that you’re looking to consolidate, try to avoid draws for 12 months before you refinance.

Let me know if any questions any time. We’re here to help you with your jumbo or conforming refinance and we’re here to help unlock a common mystery of the HELOC.

LOC her up, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283