Pssst, you've already done the hard work to get a sweet refi.
Posted by Kelly
Mon 11 January 2021
When’s the last time you took a look at your financial sitch? We’re not talking about your weekly bagel budget, we’re talking about the big picture stuff — the kinds of things that can make a real difference.
Sure, that question was meant to be rhetorical but mind if we take a shot at the answer? We reckon it was probably when you got your current home loan.
And who knows what’s changed since then? Our guess is, plenty.
Home equity is going bananas across the board.
Thanks to this global pandemic, interest rates are at an all-time low. And that means more people are getting home loans. And more people with home loans means more people looking for homes. And suddenly demand outweighs supply and houses are becoming more valuable. And an increased market price means more equity in your home.
In fact, according to CoreLogic’s Home Equity Report, home equity for the second quarter of 2020 was up 6.6% year over year. That’s a collective gain of $620 billion and an average gain of $9,800 per homeowner.
Big numbers, but how do you take advantage of them? Well, the equity in your home has almost certainly increased, and that works for you in a bunch of ways.
To get an idea of just how much your equity has increased, check your home’s market value here.
Can we get a ‘hell yeah’ for cash-out refi?
The most obvious advantage of more equity in your home is the amount of extra cash available for you to draw out and use to consolidate your debts, do some home improvements or follow Bon Jovi on their world tour.
Telling you to use the equity in your home is a no-brainer, we’re not rocking your world with that particular tip, we get it.
What we’re really trying to say is, “The housing market is super kooky right now and you’ve probably got way more equity in your home than you realize so get in there and check. it. out!”
Goodbye mortgage insurance, hello lower monthly payments!
Here’s the thing — your home equity may have increased so much that when you refinance, you won’t have to pay mortgage insurance.
Say what now?
Well, whether or not you pay mortgage insurance depends on what your LTV is (that’s your loan to value ratio). And when you refinance, your mortgage insurance isn’t transferable so the lender looks at your situation like a fresh loan and you’d have to pay it again (if your LTV is more than 80%)
But, if your home equity has increased enough, the whole ‘start a fresh loan’ thing could actually work in your favor.
So, say when you got your loan, your home’s market value was $540k and your loan was $450k, your LTV would have been 83% so you would have paid mortgage insurance.
Now, if we do the math based on the 6.6% increase the market is currently experiencing, your home would be worth $575k, and you’d be sitting at 78% LTV. BAM! NO mortgage insurance.
Naturally, if you’re doing a cash-out refi, you’d have to add the cash-out amount to your total loan and that’d affect your LTV but, if you’ve paid enough off your principal, you could still refi without paying mortgage insurance.
What’s your DTI done for you lately?
Your debt to income ratio (DTI) is a big ol’ part of the ‘should we lend these people money?’ pie. Your lender would have factored it in when they approved your current home loan.
So, what’s that got to do with refinancing? Well, take a look at what’s changed since then — basically anything to do with income, and you guessed it, debt will impact your DTI.
Are you earning more? Have you paid down a student loan? Have you paid down that pesky credit card debt?
One, or all of those things will mean a nice little update to your DTI.
Here’s how it’s worked out — your total monthly debt payments are divided by your gross monthly income.
So, if when you applied for the loan you were on $4000 a month and your monthly debt payments were $1800, your DTI would have been 45% — so you would have just scraped in (anything more than that, and lenders start to get squirmy).
Now, if that promotion or new job is giving you an extra $500 a month, assuming your monthly debt payments are the same, your DTI will be around 40%.
And if you’ve paid down some debt AND increased your income, then you’re in a prime position for some seriously sweet DTI action.
Then you can waltz into your refinance armed with your tasty new DTI and watch it rain sweet-as loan options.
Put your FICO score to work.
If the last time you checked your credit score was when you got your loan, it might pay to take another look. Literally.
Your FICO affects what interest rate you get so a good-looking FICO will attract some seriously sexy rates.
“But, I haven’t done anything to change it!” we’re hearing you say. Um? The best way to improve your FICO score is to show a steady, regular payment history. Like, oh I dunno…. A HOME LOAN!
So, all those monthly payments you’ve been diligently making? You’re about to resent them a whole lot less. Because chances are, they’ve improved your FICO, and in turn, your chances of getting really great refinance options.
Now, go forth and refi already!
If you’ve been playing along at home, you’ve probably got a pretty good idea of where you stand. And if you’re okay with having a vague idea of where you’re at, that’s cool — you probably drink decaf coffee too.
But seriously — how sweet would it be to know exactly where you stand?