As the Christmas Holidays get closer and closer, I get to feel a little bit like Santa too…
No, I’m not growing a beard, and there is no new trendy workout involving climbing up and down chimneys (I know it’s coming though!). I’m talking about a rate and term home loan refinance I’m about to close on for a very nice family down in Monroe, Utah.
They bought their home 3 years ago with a Utah Housing loan.
If you’re not familiar with Utah Housing Corporation, it promotes homeownership by offering 100% financing in the form of a first and second mortgage. The second mortgage will include your required down payment and closing costs. Sounds like a good deal, right?
I’ll go into more details in a different post, but in short, a Utah Housing Loan is great if it’s the only option you have. The interest rates are quite a bit higher than what you would get on a normal FHA or Conventional loan. However, the biggest issue really is that they don’t subordinate the second mortgage to any other lender.
In other words, as long as that second mortgage has a balance (and you can’t afford to pay it off) you are stuck not being able to refinance through anyone else but Utah Housing. Did I mention they have higher interest rates? Good, you get my point.
Back to our refinance story.
My borrowers actually looked into refinancing their loan back in Jun,e and were told they couldn’t. The loan officer didn’t look beyond that $7,000+ second mortgage balance that was in the way.
Luckily, my borrower decided to give it another try, found my website online, and reached out to ask for a second opinion.
My trail of thought was this:
I figured he has owned this home for 3 years now, so he must have equity in it by now.
I also know my guidelines: a second mortgage taken out at the same time with a first is called a “purchase second”.This means that the second mortgage can be paid off when doing a rate and term refinance – it won’t be considered a cash-out (where one would need to have at least 15% equity left in the home).
I only needed this family to have a minimum of 3% equity in their home to save them money on a refinance. So we started a refinance application, crossing our fingers and toes.
The “gamble” paid off.
When the appraisal report came back, the value of the property had increased by 23%. That’s an average of a little over 7% per year – with no significant improvements to the home since purchasing it!
Best part, besides the significantly lower interest rate? Private mortgage insurance is no longer required!
Second best part? A rate and term refinance can have incidental cash back at closing not to exceed $2,000. We made sure to take advantage of that, Christmas is around the corner 😉
Third best part? The first mortgage payment will be due February 1st, so my borrowers won’t need to make a December or a January mortgage payment. That’s two mortgage payments that can go into a savings account for a rainy day, or towards paying down debt. Or both.
Was Santa ever that generous to you?
Moral of the story?
Using an average increase in home values of 7% per year, estimate how much equity you now have.
If you have 20% equity or are close to it, send me an email at [email protected] and I’ll run the numbers to see if a refinance makes sense for you.
Even if you don’t quite have the 20% equity, the new private mortgage insurance premiums will potentially be lower now than when you bought the home with a 5% down payment.
*The 2 things that affect private mortgage insurance rates are credit score and equity or down payment. If either has improved, you have an opportunity to save.
When will a refinance not benefit you?
If your interest rate is in the low 3s, a refinance right now will probably not be worth it for you.
Even if your current loan is FHA, and you’re going to be paying that monthly mortgage insurance for the life of the loan. Any savings gained by eliminating the FHA insurance are going to be eaten up by the higher interest rate on a Conventional loan.
Always ask for a second opinion, especially if you know you’ve been good 😉