Refinance Now or Wait?

Refinance now or wait? With rates coming down as they have, some borrowers may want to delay a refinance, hoping that rates will improve further. Unfortunately, there are no guarantees rates will go even lower, and more critical, borrowers forget about the savings they forgo while they are waiting for rates to move lower potentially.

To make sure I don’t get in trouble with my company marketing policy, I will not talk about specific rates and instead will talk about the difference between your current rate and a new rate. 

Say your current mortgage payment is $1,775 a month. And based on a new rate, you could lower your monthly payment by $350 a month. You are in no rush and think rates will stay where they are or possibly go lower! Let’s assume by waiting another six months, you can score a .25% lower rate than today. The incremental savings you would see from a slightly lower interest rate would take a significant period to recoup the savings you would have been guaranteed by locking in that new rate today.

If you waited six months and could get a 0.25% rate lower than the rate you could get today, you would save $58 a month. But based on the $2,130 in savings you would have guaranteed by refinancing today, it would take over 3.5 years to make up for the forgone savings. If the rate were only better by 0.125%, it would take more than seven years to breakeven. And again, remember there is no guarantee that rates will move lower.

SECRET WEAPON – You Pick the New Term!

Get a tailored mortgage if your lender offers it! If you are managing your monthly payment just fine and have a goal of paying off your mortgage earlier by aggressively paying down your principal balance, this may be your secret weapon. For example, I have a client who purchased their home four years ago and wants to take advantage of a lower rate but does not want to start over with a new 30-year term, which eats into their long term savings. 

We did the math and were able to lock them into a new 22-year mortgage while keeping their monthly mortgage payment roughly right where it is now. In essence, our client was able to shave-off four years of payments without increasing their monthly cash flow. Be creative and take the time to run these numbers with your lender.

Why Don’t I Have the Best Rate?

Without fail, the number one question I get from first-time callers looking to refinance or purchase a new home is “what’s your rate?” I used to stumble a bit when asked this question because there is so much involved in getting an accurate interest rate and one that I can’t answer in a 30-second conversation. I wish it were that easy.

After years of experience, now I don’t hesitate to answer – I respond with, “What rate do you want? “This tactic usually serves to disarm them a bit and allow me to detail the components that go into an interest rate. 

If you are not getting the rate you heard on the radio or the interest rate you read in the Real Estate Section of the newspaper, it’s typically not because of some elaborate bait-and-switch scheme. In all probability, your rate is different because of Loan-Level Pricing Adjustments. Loan-level Pricing Adjustments are not discretionary fees, nor are they a profit source for me or my bank. These are federally mandated fees per Fannie Mae and Freddie Mac to compensate for loans with greater risk.

They work just like auto insurance. With greater risk come higher premiums. It’s an add-on to the base rates set by Wall Street. Here are just a few triggers that will increase your rate or fees:

  • Having a second mortgage or line of credit that you would like to subordinate. (Keep in 2nd lien position)
  • Doing a “cash-out” refinance with less than 40% equity in your home.
  • Having a credit score of 740 will save you almost a full percent in rate relative to a 640 score.
  • Investment property can add up to a full percent or more compared to the primary residence.
  • If you like Macaroni and Cheese, it will cost you. Not really, just making sure you are paying attention.

You can research your scenario at Fannie’s site.

Why Getting the Lowest Rate Might Be a Bad Idea!

I know it feels good to tell your friends that you have a lower rate than them, but you might just be spending more money over time to get that rate because you are paying points (aka extra fees to buy the rate down). And since many first-time homebuyers sell within 6 to 8 years, having that low rate was just for show. I know this might sound counterintuitive, but you may be paying more because of that lower rate.

The one constant in life is that life is continually changing. Folks can’t envision what will happen in years to come because life just happens, and maybe down the road, they need to a cash-out refinance to pay for required maintenance or repairs, or to help with their kids education, a wedding, or help with a new car, the list goes on and on. 

The important thing is to work with a lender who will take a little bit of extra time to crunch some numbers and help you decide whether a buydown or lender credit is better for your long term and short term goals.

New Tax on Mortgage Refinances

I’ve got some good news, and I’ve got some bad news. Here’s the bad news first.

Last week, the Federal Housing Finance Agency (FHFA) announced a surprise fee on all new refinance transactions sold to Fannie Mae and Freddie Mac, making up approximately two-thirds of all loans. The cost was assessed regardless of the bank or mortgage company you choose to work with and will increase the interest rate that you had been expecting and had been available.  

This sudden move came as a surprise both in the imposition of the fee and in making the fee effective almost immediately. Historically, they allowed 60-90 days before the new pricing went into effect, to enable lenders reasonable time to close their rate lock pipelines.

Why are they introducing a new fee?

Two reasons. First, both Fannie and Freddie are concerned about the uncertainty surrounding future mortgage defaults and the increased costs they incur. Secondly, they are worried about how quickly their current mortgages are prepaying due to the unprecedented wave of refinances. When a loan refinances, the prior loan comes out of the security, which creates losses to the investor who owns that mortgage, so by raising the cost to refinance will slow down how past loans are paying off.

Although Fannie nor Freddie outwardly stated this, many in the industry think that a third reason drove this announcement. The “refinance tax” will allow both enterprises to build up a capital base for their future release from conservatorship and back to becoming private entities – This is pure capitalism ladies and gentleman. 

 What is the impact to borrowers?

  1. Across the country, lenders are adding these new refinance fees into rate sheets effective immediately for all conventional conforming refinances.
  2. These fees are on top of all other fees already charged by Fannie and Freddie.

What happens next?

The mortgage industry is united in its disappointment with the announcements, specifically with the break from all past precedent of providing a reasonable advance notice of the effective date. The probability of FHFA, Fannie Mae or Freddie Mac revising their announcements with a different effective date is probably low.  

Now for some good news… 

Interest Rates are still at extraordinarily low levels, and refinancing may be a smart financial move, which can save you money every month or reduce the number of years remaining on your mortgage. You may also be able to consolidate your debts to save even more money.

The True Cost of Waiting to Buy a Home

I know shopping for a home today is hard work and very frustrating at times. Inventory is low, and demand is high – It may take many offers, and a few tension-filled bidding sessions, before you land that home. Buyers can quickly get discouraged and say, “I am tired of this. I am just going sign a new rental lease instead and try this again in 6 months to a year”. 

Here’s the thing: you can take some time off, but the market isn’t taking time off, even with COVID. For example, in Sacramento County, the forecasted appreciation is 4.22% in just the next six months; let’s quantify that. A home worth $442,000 today would be worth $18,637 more in 6 months. Being careful with this prediction, even if we cut this estimate of appreciation in half to 2.4%, waiting would require you to get a bigger loan, and pay more every month, or put more money down.

I think the effects of COVID will continue to ripple through our economy in ways we can’t even imagine. If home prices do dip temporarily, the economic value to a person of owning their own home, and taking advantage of today’s super-low 30-year fixed rates, will put them in a much healthier long term financial position than choosing to rent for the next several years. The key is for people to buy homes that they enjoy living in, with a long term outlook. A short term paper loss is nothing compared to the long term economic benefits a homeowner would receive.  

And what about interest rates? Should you wait until rates go down further? No, the monthly savings with a lower rate are nice but small compared to the missed appreciation and amortization. It could take longer for the incremental savings of a lower rate in the future to make up for the money lost by waiting. Should rates drop significantly, you can always refinance in the future. Stick with it, keep shopping, and you will find something! 

 And remember, there’s no guarantee that rates head even lower. It’s essential to weigh the individual options for you, and I’m here to help you do that.

MORTGAGE TIPS TO SAVE YOUR DEAL

It’s been almost three months since Governor Newsom’s order that all Californian’s shelter-in-place. It sure feels like more. I feel such empathy for those that live alone, are single parents or have lost their job, It’s simply awful. I am thankful every single day I get up and get ready for work.

Covid-19 has re-ordered virtually every industry in the world to figure out how to adapt,. Not only adapt, but improvise, and overcome this virus or otherwise fail. In California, mortgage lending and real estate are still thriving; all be it, with a whole new subset of issues to we have never faced before. Below are just a few tricks that might help you during your next purchase:

APPRAISAL WAIVER

Did you know that in some cases, your lender will not require you to get an appraisal when buying a home? We have been doing this for years. Now, with Covid-19, and given the fact, sellers don’t want a stranger in their home, the appraisers can be just as uncomfortable entering a home. It’s lovely to know you have this option if you work with the right lender.

Fannie Mae and Freddie Mac traditionally offer an appraisal waiver for low loan-to-value refinance or if you put down at least 20% on a purchase. Also, in conjunction with new Fannie and Freddie Covid-19 updates, our underwriters are permitting exterior only appraisals under certain circumstances. 

However, you may still want to get an appraisal done (~$525) to ensure you are not paying too much for the home. But if you and your agent have taken the time to look at comparables and feel the value is there, not needing an appraisal can not only save you money by not having to pay for the report, it can also help in other ways. 

For example, I had a client facing multiple offers, and the only reason their offer was accepted is that they came in at asking price AND agreed to remove the appraisal contingency. Meaning, if for some reason, the appraisal came in lower, they would have to come out of pocket to make up the difference. These buyers didn’t have much in reserves after the down payment and closing costs, and what they did have left was their cushion for any future emergencies. With this appraisal waiver in place, they would not pay one extra dollar out of pocket – And not needing an appraisal was just what they needed – peace of mind. 

CAN’T GET A JUMBO LOAN?

Jumbo loans have been walloped during this pandemic as mortgage servicers tighten their lending criteria. Many lenders have stopped issuing them altogether. Jumbos are loans that exceed the maximum you can borrow with a Fannie, Freddie, or FHA conforming loan. For example, let’s assume you are buying a home in Sacramento County, where the max Fannie/Freddie loan amount is $569,250. Thus, if your loan amount is higher – you fall in the Jumbo loan category. 

Since Fannie and Freddie do not back jumbo loans, they are considered riskier and require higher credit scores, lower debt-to-income ratios, and may require a few months of cash reserves or even up to a year or more worth of mortgage payments. A little trick is to use a piggyback second mortgage to avoid taking out a Jumbo loan. Jumbo rates can be higher than those on conforming loans, so borrowers buying a high-value home may take out a conforming mortgage, then cover the rest with a piggyback loan and down payment.

Let’s assume you found your dream home for $850,000 in the perfect neighborhood. Now, throw in you were just told by your Jumbo lender that the loan for $680,000 you were qualified for, no longer exists. When the reserves required become higher, your rate just went up too. You could instead go with a conforming loan of $569,250 plus a piggyback loan of $110,750 and save the day.

Every day this pandemic throws new challenges our way. Because of that, we continue to adapt and improvise and overcome. This is why it is essential to work with people you trust. Lenders that have decades of experience will guide you through the steps of home-ownership and finance. Be safe, everyone.