Are You One of Them? A recent analysis from Black Knight shows that 75% of homeowners would benefit from refinancing.
Tonight we’re going to talk about how to analyze if you are one of the homeowners that could take advantage of record-low rates.
Here’s what we’ll cover:
1. The rule of thumb for when a rate and term refinance makes sense (no cash out)
2. When and why you should consider cash out to consolidate debts
3. The trend for interest rates and home values and how it can impact the refinance decision.
As always, let me know if you have questions you’d like me to cover. Comment below, or leave me a comment on YouTube
Welcome back, I’m Josh Lewis, certified mortgage consultant and broker-owner at BuyWise Mortgage here in Huntington Beach, California with the mortgage and real estate update for July 13th, 2020.
Tonight we are talking about rules for refinancing. I’m going to go over a rule of thumb for rate and term refinancing, and also for looking at cash out. I apologize, we’re a little bit late tonight, originally had scheduled this for six o’clock, but I had a crown put on one of my teeth this afternoon that was awesome.
And then, just super buried with all of the volume here, that we’re working on the loans, which you’ll see here with rates so low.
So let’s jump into that here. And actually, let me make this a little bigger and me, a little smaller. We had a little bit of a scare last week you’ll see this red candle.
The only reason why I show the candlestick charts is just so you can see the overall trend the technical analysis doesn’t mean anything to most people. But for this chart, we like to see that uptrend, that green arrow trending up there because that means bond prices are going higher and interest rates are coming lower.
So we had a little bit of a scare on Friday. Market kind of sold off, but as you can see here. This longer-term uptrend is still intact. So nothing to worry about, we saw the improvement again. I expect that we’ll just continue to stay in this range here from, about 1/8 above or 1/8 below where we’re at for the foreseeable future.
We actually had a nice run lower run higher in bond prices and lower the last couple of weeks. And we missed last Monday with the update. So let’s take a look here, what current mortgage rates look like. On the conforming side loans up to 510,400.
We are now, even on 0., no lender fee loans for the best-qualified borrowers, able to get under 3%. Whether that’s 2.99 or 2.875 depends a lot on the loan to value and how high the credit score is. But most borrowers are able to get under 3% unless we’re talking higher loan to value lower credit scores or properties like condos.
FHA at 2.625, VA at 2.625. And even now you’re gonna see. The higher loans over $510,400, the high balance loans for Orange LA Ventura, San Diego counties with higher loan limits.
Those are even participating now, 3/8, no points on the conventional high balance for the best-qualified borrowers FHA about the same high balance at 3/8 and VA there at three at 3/8, but within about a half-point cost. So rates are amazing.
You probably getting tired of seeing the headlines every week rates hit new all-time low. Probably didn’t see that last week, with the little increase up on Friday. But for the most part rates continue to trend lower. So let’s look at what I wanted to cover tonight.
I wish I had a little bit more time ’cause we have a cool report that we use to do an analysis for borrowers who are considering cash-out refinancing. But, what really got me thinking along those lines is.
The Black Knight Data or Black Knight, Inc they do, have a division that does data and analytics for the mortgage industry. And they dig through and do a mortgage monitor report I believe they release it monthly, but had some interesting information in it here the last week.
On July 6th, they reported that 90% of homeowners have tappable equity, what does that mean? It doesn’t mean they have equity in their home. It means they have equity above and beyond 80%. So if you owe 60% of your home’s value, you can borrow up to 80% cash out. So you’d have about 20% there.
So using an example of someone owes 600,000 on their home, or their home is worth 600, they owe 60% they’d owe about 360 would leave them 20% or about $120,000 that they could borrow out of the property.
So with that, the most important fact was. 90% of the homeowners with tappable equity have rates above the prevailing market average. So when we look at that, what is the prevailing market average? We just ran over that. So it’s above 3%.
And for all intents versus three, 3/8, depending on whether it’s a high balance or a standard balance loan. So most people have equity in their home and they have an ability to lower their interest rate while touching that equity.
So let’s look, you’ve probably heard me say this before your house is a piggy bank, but we like to think of it as a piggy bank, the kind where you put money in, and you’ve got to take out the hammer and smash it if you wanna get money out.
So we think of it as a tool for saving and building equity and building wealth and not for spending. But there are times when we want to consider the possibility of using the equity in your home. When you look from 2010, which is about when we kind of hit the bottom.
Property values dropped in 2008, 2009, 2010 was about where we’d hit the bottom. So over the last 10 years. Home values and a lot of areas have doubled. Most areas, anywhere from 52 to 75%, but some areas up a full 100%. When you look at that.
What I can say is where everyone went wrong before the last bubble is a lot of people looked at their house as a piggy bank, more like an ATM. I’ve built up this equity now I need a boat I need a vacation, I need a new car. Things that are not assets, things that go away that are transient.
Using home equity to buy those things or to pay for those things, not the smartest. But what we wanna look at here is. There are things that life brings that need to be paid for. So, whether it’s investing in a retirement account, you could be a little bit older and a little bit behind on your retirement savings.
You can borrow some money and max out the 401k for a couple of years. You may have run up some debt, putting kids through school. You may have had a medical issue. You might’ve been laid off for a little while. Maybe you got furloughed here during the time of the coronavirus, and you’re just trying to get caught back up.
It can be a good strategic tool. I see a lot of borrowers, everyone remembers sort of the downside of the last market and no one wants to touch their equity. Another piece of that mortgage monitor report. They basically went through and said that. The numbers of cash-out refinance keep going down.
As a percentage of all loans being done and less money being taken out. And overall, that’s a great thing, we wanna see people not pulling money out of their house, not pulling large amounts of money when they do. But what I can say is I’m regularly seeing clients with higher interest rate debt, that could be eliminated.
So let’s talk about some strategies for that. If you have higher interest rate debt, credit cards could be student loans. And if you have a student loan and you’re not in a public service loan forgiveness program where it’s gonna eventually be forgiven and it has to be paid off.
Most student loans are at higher interest rates, or I shouldn’t say most, a lot of student loans are at higher interest rates than what mortgage look like right now. So what we can say is, as we wanna be moving towards mortgage independence, we covered that the week before the 4th of July.
We wanna get independent financial independent, get free from our mortgage. So if we wanna move towards that, but we also want to do it as efficiently as possible. We can take any higher rate debt, extinguish that debt with a cash-out mortgage, but we can then shorten the term. So we keep you on track and on pace.
So we’re paying a little bit more each month in the mortgage, but we should still be reducing the overall debt load. So you’re just being more efficient with smaller payments you’re paying off the debt faster and continuing to move towards independence.
So you can do that by taking a shorter loan term, or if you’re disciplined enough and you know yourself that you are disciplined enough. We can simply put additional principal payments each month towards it. We wanna look at using your home equity as a one time get out of jail free card if you had anything unforeseen unexpected.
We don’t wanna look at it as, hey, I need a new car, let’s go pay for that. Car is a depreciating asset. Anything that’s just gonna be gone, that’s just gonna disappear we don’t wanna pay for vacations. But if you had some medical stuff, if you may even made some bad decisions and you have high interest rate debt.
We don’t say as a rule because we don’t wanna spend home equity that we’re not gonna do the smart thing and get as efficient as we can on the debts. Nothing we can do other than a bankruptcy is gonna make those debts go away.
For the most part, the way the bankruptcy code reads now you’re looking at a chapter 13 bankruptcy, and you need to repay it either way. We have to repay the debt. Let’s look at doing it as efficiently as possible. One thing to remember, a lot of times I have clients come in that I have a perfect payment history.
They’ve never missed a payment, but they might have a credit score, that’s only 699 where otherwise it’d be a 750 ’cause they got a couple of credit cards maxed. So that will prevent you from getting the best terms on your loan.
But a lot of times in these situations, what we’re able to do, do the cash-out refinance, get the other debt paid off, get the monthly outflow of cash down to a manageable level. And within 30 to 60 days. That credit score is gonna go up and a lot of these people we see once they eliminate that debt.
They’ve got a 740, 750 credit score within a few months. After six months, a cash-out refinance is seasoned. So you can refinance that and have it no longer be considered cash out as cash-out loans that carry a little bit higher term on the rate. So, it’s just a lot of options, a lot of things to consider.
So we’ve kind of gone through why you would possibly consider, using equity out of your home to pay off debt times when it can be good and strategies for making it make sense. So if your debts are under control, maybe you have everything paid off. Maybe you just have a car payment.
Should you refinance? We get this question all the time and I’m getting people that are really confused on this. I have a gentleman I’m talking to right now. He’s at 4.75. With where his credit score is the loan to value and the type of property he was actually going to a slightly higher rate, like 3.375.
We call that a slightly higher rate now just because rates are so ridiculously low. And in his mind, when we’re looking at that, he said, I wanna get 3% or I’m not gonna do it. Now, that just doesn’t make sense. When you’re looking at a point of saving in his instance, almost a percent and a half.
Even though it wasn’t the absolute best rate available. We would be putting him into a much better position and saving a lot in interest. And if we wanted to in that situation. We can shorten up the term. We can do any number of things to keep him on track and moving towards financial independence.
But let’s look, we covered this a little while back. We have a very simple rule of thumb for when it makes sense to refinance. If you’re not looking at taking cash out or changing the term of your loan. Meaning going from a 32 to a 15, 30 to a 20, anything of that sort. You take $125,000 and you divide it by your loan balance.
And that gives you the rate savings that you need for a refinance to make sense. So here’s a super simple example. You owe $400,000, take $125,000 divided by $400,000 your loan balance. And that tells us 0.312% interest savings needed. So anyone in this situation, a roughly a $400,000 loan balance or 350 and above.
If you have a rate higher than 3.375 with rates at 3%, right now. You should be refinancing. You should be looking at it. I know it can be frustrating right now all of us in the mortgage industry are super busy and super backed up.
So we’re looking at where we normally close loans in 21 days, we’re looking more like 35 to 45 days right now, depending on the file. Just be patient, get everything in, gather your documentation, provide your loan officer, whatever they’re asking for and looking for.
And there’s gonna be a whole lot of hurry up and wait, we get everything together we submit it to the lender and we sit around and wait for the lender to go through and underwrite it and then we’re gonna gather a couple of conditions. They’re gonna clear those and we get docs and signs.
There won’t be a ton of work on your part, but there will be a good bit of waiting. So again, if you’re interested, you wanna see what your potential savings are. What you can do if you’re in California, I’d love to talk to you if you’re outside of California, we have a great network of people.
I had a guy in South Carolina last week, another one in Florida that we connected with some expert friends of ours and they’re taking advantage of the current interest rates. The thing that I would say is.
Just steer clear and be super careful, the giant call centers, the TV and radio advertisers for the most part, that advertising is really expensive. We had someone at the biggest lender, the one that bombards you with multiple ads a day across 17 different mediums.
They were charging a borrower, two points for a 2.99% rate on a VA loan. We were able to do the same rate with a lender credit. So basically a no cost loan at 2.75% saved them about six or $7,000 and got them a lower interest rate.
So I’m not saying I’m the only person in the world doing this, what I am saying is the big box retail mortgage centers call centers generally don’t have the best interest rates for you. So by all means, shop around if you want a second opinion, we would love to talk to you.
Otherwise, we’ll be back later in the week with another update, unless things get too hectic but, definitely, no later than next Monday, we’ll be back. All right, have a great night.