What Can a Mortgage Refi Do For You? 

 

Lunch and Learn Mortgage Refi Recording

 

 

 

 

What Can A Mortgage Refinance Do For You?

 

Introduction + Who We Are

 

Welcome, I’m so happy to have everyone with us today. Before I get started with our mortgage refi content, I want to talk about our credit union. If you are new here, I want you to meet Copper State Credit Union. We are a credit union that is the product of a merger between two equally thriving credit unions back in 2019, Deer Valley Credit Union and Canyon State Credit Union combined. Then, the Southwest Healthcare Credit Union joined us in 2020 and we created our new name and brand. We are open for membership if you live, work, or worship in any of the following counties that you see here on the screen. We have seven branch locations that are open currently. We also have a GCU branch on their closed campus, and we serve over 40,000 members. We offer a variety of accounts and loans, online banking, mobile app, pretty much anything that you would expect of a financial institution.
We have a few core values that center all along these four things: family, empowerment, excitement, and discovery. Finances can be exciting, especially when you find a way to make your money work for you and find that empowerment when it comes to your finances. We definitely have a big focus on family and really helping our Arizona families achieve financial success however that looks for you.
In today’s session, I'm going to give a basic definition of a mortgage refinance, talk about some of those factors that are going to help you qualify, plus review what a mortgage refi can do for you.

 

 

 

What Is a Mortgage Refinance? 

 


First up, I really like this definition of a mortgage refi and I pulled it from daveramsey.com.

Refinancing is the process of getting a new mortgage by changing the terms of the one you already have on your home. So, essentially your first loan is paid off through the refinancing process and the second loan is created in its place. People do this for a variety of reasons, and there's a lot of different ways that mortgage refinancing can serve you. But I just wanted you to understand that process - it's not having a second mortgage, it's transitioning the loan you have already into a new loan with different terms.

 


How to Qualify for a Mortgage Refinance

 


Now that you know what it is - can you qualify? Here are a few things that are going to be helpful when it comes to qualifying for a mortgage refinance.


1. Have 12 Months Mortgage Payment History


I learned this firsthand when I bought my home, you've got to have pretty much across the board a 12-month mortgage payment history. If you're just buying your home now, you can't turn around three months later and refinance. Mortgage payment history allows the lender to see that you have that experience and are able to make consistent, on-time payments. This makes it less of a risky transaction for the lender.


2. Have Some Equity In The Home


Another thing that is helpful to have with a refinance is equity in your home. That means the portion of your home that you actually own.

There are several ways to increase the equity in your home
• Large down payment at purchase
• Making regular payments over time
• Making extra payments or additional payments
• Housing market – values appreciating (going up)

If you caught my Q&A session with Greg, our Chief Lending Officer, he mentioned that Arizona is outpacing the rest of the United States when it comes to home values. That Arizona is actually growing over 10% per year in home values.
It's worth it to take a look at your equity position or what percentage of the entire value of your house do you actually own, free and clear, already paid off.


3. Regular Income


Another thing you’ll need in order to qualify is regular income. You've got to be able to prove your income and prove your employment. This is a little trickier for small business owners, people that are self-employed. Hopefully, you've got a history there because that helps. That regular income is so important because lenders don't want to be giving out loans if people are unable to repay.


4. Credit Score


If your credit score is below the 620-630 range, start to do some really simple things to boost your credit. People are always surprised to hear this, but you can actually increase your credit score significantly in six to 12 months. This isn't something that takes years and years. You can actually work on your credit in a very short-term way and see results. One thing you can do is simply make regular, on-time payments for all of your current loans. Another thing you can do is check your credit report. You get a free credit report every year, entitled by federal law from annualcreditreport.com. Often times there is an error on one or more of your reports that can adversely affect your credit. We also have a great tool in online banking called Free Credit Score that gives daily score updates and credit reporting/monitoring so that you can keep tabs on it.

 

 



What can a mortgage refi do for you?
"Save on total interest paid."

 

 

 


1. By shortening the term

Using the calculator above and the following details, we compared interest paid on a 30 year term vs 15 year term, if all other loan details stayed the same:

$300,000 loan amount
20% down payment
30 year term
Interest rate: 3.5%

Compare this info to a 15 year term. If that’s the only piece of information you change, the total amount of interest paid decreases by $70,000 over the life of the loan.
As you can see, shortening the term of your mortgage via mortgage refi can save you quite a bit on total interest paid.

2. By lowering the rate

Something else a mortgage refi can do for you is save on total interest paid by reducing the rate. Try to get at least a 1% reduction in mortgage rate to offset some of the costs of refinancing. You can use the same calculator above to compare the same loan terms at 4.5% and 3.5%. It’s quite a significant savings!

3. By locking in a low fixed rate if transitioning from an ARM


If you have an adjustable rate mortgage (ARM) you may want to take advantage of the low fix rates that we have right now, if your adjustable rate is about to expire. You may want to refinance to lock in that low rate for a certain number of years.

 

 


What can a mortgage refi do for you?
"Increase your cash flow."

 


Cash flow is the term for the balancing act between money coming in and money going out from your household on a monthly basis. You have a certain amount of money coming in each month and a certain amount of money going out. What's the flexibility level - are you having to spend every single penny that you make every month or is there some money left over? A nice benefit of refinancing in some cases is it will increase your cash flow in a couple of different ways.

1. By Dropping PMI

If you can drop your private mortgage insurance, you’re likely to save money on a monthly basis. PMI is insurance that protects the lender from risk in the case of mortgage loans, especially those with less than 20% down payment or 20% equity in the house.

But let's say you've owned your home for a couple of years and you've built up the equity. The value has gone up and you know, "Oh, yeah, with the new value right now and what I've paid into it, I have 25% or 30% equity." In some cases, like if you have an FHA loan, (they call it MPI – mortgage premium insurance) you can refinance to a conventional mortgage and you can get that insurance dropped off. The cost of mortgage insurance is anywhere from a quarter percent of the loan amount, up to 1% of the loan amount. You will definitely notice the difference in your budget if you’re able to drop the mortgage insurance.


2. By Dropping the Rate

You can also increase cash flow if you are getting a significant drop in your rate. If for some reason you originally financed your mortgage for 7% and you can now qualify for 4% that’s going to be a huge impact on monthly cash flow.

A lot of people do this third option to increase cash flow - extending the term of their mortgage.
If you have 21 years left on your mortgage, and you refinance it back up to 30-year again, it will likely significantly lower the monthly payment. It’s easy to take that extra $200 or $300 a month without thinking about the long-term impact. It feels nice in the short term, but you could be paying tens of thousands of dollars more in total interest paid, just like we saw in that example. We went from a 30-year to a 15-year, well, it goes the opposite way. If you extend your term, you're paying way more overall even though you're getting that monthly payment reduced.

 

 


What can a mortgage refi do for you?
"Nothing, if you don’t stick around!"

 

If you don't plan on staying in the house for a while, a mortgage refi can’t really do much for you! Make sure you plan on being in the house for a couple of years. A mortgage refi is somewhat of a race to what we call a break-even point. Essentially this is the point where you’ve been making payments long enough to recoup the costs of the refi and begin to save money.

What costs? Mortgage refi’s cost between $2,400 up to about $3,000 or more, on average. if you're planning on staying in the house for many years, 5-10 years or more, this isn't an issue for you. But it's not the best idea to refinance if you're going to be selling the house or moving again in a year, in most cases.

It can also cost you in resetting or restarting your amortization schedule. In simple terms, that's the schedule set up that determines where your mortgage payment is allocated each month. At the beginning, when you first get your mortgage, most of your money is going towards interest. As you go on, later in the term, then that same payment you're making is now going more towards principal. If you are five years in to a 30-year mortgage, so you've got 25 years left, realize that if you go back to a 30, you're resetting that. You're resetting that where you're going to start paying everything towards interest up front again.
For some people that's totally fine, but it's just worth being aware of. A nice recommendation here or at least Copper State Credit Union does this, I don't know if every financial institution would do this, but we actually will work with you to make your new mortgage match the remainder of your current term. So, for example, if you refinance when you were 12 years into a 30-year mortgage and you had 18 years left, we'd be able to give you a mortgage for exactly 18 years.
So, you're still resetting in a sense that you'd still be paying more interest up front, but you're keeping that same remaining term. Again, this stuff is very dependent on individual circumstances, but it's worth looking into if that sounds like you.

 

 


What can a mortgage refi do for you?
"Give you cash out based on home equity."

 


This is something that people are talking a lot about and a lot of people are taking advantage of. It sounds like such an awesome idea. Why not? Why not take cash out of your home? The rates are low!

You want to be careful with this option.  Using that home equity to pay off high interest debt or to use it for home improvements might be a perfectly good choice for you and your financial situation. 
But you still have to pay it back! Whatever 'cash' you take out of your home, you're stripping the property of that equity and putting your house on the line if you cannot repay. If you go for this option, be ready for the reality that your home may not keep going up in value. Make sure you have a valid reason for taking cash out and be sure you can manage all the costs associated. You need to have a budget or spending plan in place. This is particularly true if you're using a cash out refi to pay off high interest debt such as credit card debt. If you're paying 20% APR on a credit card with a $15,000 balance, you will save on interest if you use the 'cash' from a cash-out refi to pay off that debt. But if you don't have a plan in place to keep from spending and running that credit card up again, it's a very slippery slope. More debt increases your Debt to Income Ratio or debt-vs-income percentage and once it's too high, there's no way you'll get another loan and you may become unable to make the minimum payments on your debts. At this point you could end up in bankruptcy and lose your house.

Lots to consider as you think about what a mortgage refinance can do for you! There are so many positive things as well as some items to carefully consider before moving forward. 


Thanks for watching! Make sure you take our survey and get your free download – the Should I Refi Quiz.

 

Lunch and Learn Mortgage Refi Recording

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This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.