Streamline Refinance

Here is an excerpt from the FHA mortgage guideline book, explaining what the purpose of a Streamline Refinance is:

Streamline refinances are designed to lower the monthly principal and interest payments on a current FHA-insured mortgage and must involve no cash back to the borrower except for minor adjustments at closing not to exceed $500.

There are two options available for FHA Streamline Refinances, and the guidelines vary on your choice:

• Refinance without an appraisal
  • Maximum mortgage amount will be the lower of the original principal balance on the mortgage plus the new upfront mortgage insurance premium charged on the refinance or the sum of the existing FHA mortgage, closing costs, reasonable discount points and the prepaid expenses
  • This option is best for those that have paid down their FHA mortgage balance enough to be able to cover the closing costs in the loan, or have the cash to pay for the closing costs themselves
• Refinance with appraisal
  • Maximum mortgage amount will be the lower of 96.5% of the appraised value plus the upfront mortgage insurance premium or the sum of the existing FHA mortgage, closing costs, reasonable discount points and the prepaid expenses
  • This option allows you to include the closing costs of the refinance into the mortgage if the value of the home has increased enough to cover those costs

What If My Credit Isn’t Good?

Life happens, and sometimes you are not able to make all of your payments on time.  You might be struggling to pay all of your monthly obligations and refinancing your mortgage would provide an opportunity to lower your monthly payment and get back on track, right?  FHA Streamline Refinances are no credit qualifying refinance transactions.  Right from the FHA guideline book it states,

We do not require an appraisal, termite inspection or credit report on streamline refinances

What I can tell you is that lenders typically verify that you have made on time payments on your mortgage for the previous 12 months.  Most lenders verify this by running a credit report from one of the credit bureaus to show no late payments on your mortgage and completely disregard the remainder of the report.

Income and Assets

Lenders don’t even care what your income or assets look like either.  According to FHA,

Borrowers are not required to provide evidence of cash to close

AND

the sections [of the loan application] regarding income, assets and debts and obligations need not be completed

The purpose, as I showed above, is to reduce your monthly mortgage payment.  If we can do that, then we don’t really care about the rest.

Sounds Too Good To Be True??

This is one of those loan options that sounds just too good to be true…but it isn’t.  If you think you might want to take advantage of this loan option or discuss whether or not you qualify for this loan, contact a lender today.  If you have questions, I would be happy to talk with you and help you determine if you are eligible for this great refinance loan.

Lending a Hand,

Scott Wynn

What It Means to Refinance

Everyone knows what refinancing means, but sometimes we don’t consider what the implications of a refinance are.  Refinancing means that you are obtaining a new mortgage to get rid of your old mortgage.  So why would someone want to get a new debt to pay off an old debt?  There are the popular answers such as lowering the rate, reducing the payment, getting cash out or obtaining a fixed rate mortgage instead of an adjustable rate mortgage.  All of these are great reasons, but it doesn’t always make sense to refinance for these reasons, which I will explain a little later.  Other reasons may include removing someone off of the mortgage or paying off a large portion of the principal balance.  No matter the reason for refinancing, considering the short term and long term impacts of the refinance should be considered.

Short Term Impacts

Being a mortgage loan officer, I am naturally drawn to mortgage advertisements I hear on the radio and television about mortgage loan options available to consumers.  The one I probably hear more often than any other is the ability to obtain a no cost mortgage.  The no cost mortgage idea gets people’s attention and entices them to look at the possibility of refinancing when they may not have in the past due to the costs.  I will fill you in on a secret…there is no free mortgage.  You probably already knew that though, didn’t you?  Refinancing requires that new mortgage documents are executed and recorded, which costs money.  Someone will have to pay for it.  Likely there are costs that the mortgage lender incurs to process, underwrite, close and fund the mortgage loan, too.  So what do these advertisers mean when they call it a no cost mortgage?

There are a couple of different ways that mortgage loan officers structure a no cost mortgage.

1. They include the normal closing costs of the mortgage into the new mortgage loan obtained
2. The cost of the mortgage is built into the interest rate

When looking into refinancing your mortgage, understand what the closing costs are and how they are being paid.  Knowing the cost will help you in doing some of the calculations I will explain later in this post.

Outside of the costs, consider another short term impact which is what your current mortgage looks like.  Are you an adjustable rate mortgage that is going to adjust in the near future?  Do you have a pre-payment penalty on your mortgage that will need to be paid if you refinance?  Are you on an interest only mortgage and considering refinancing into a principal and interest payment?  All of these items should be considered in the short term when looking to refinance and if you are unsure of what these mean, consult with your mortgage loan officer for assistance.

Long Term Impacts

The payment, interest rate, term and overall financial impact are the long term considerations to be analyzed.  If you choose not to pay for the closing costs, mentioned earlier, at the time of closing then you will need to determine which of the options is being used to pay those costs.  Either way, the monthly payment will be impacted.  Here is an example:

Let’s say you are refinancing your $200,000 mortgage and the cost to refinance that mortgage is $5,000.  You could obtain a new mortgage in the amount of $205,000, and a rate of 6.25%, instead of paying for the costs at closing or you could get a $200,000 mortgage with a higher interest rate, maybe 7%, to cover the costs.  If you are interested in how this works, check out my post on How Mortgage Lenders are Paid.  This will help you in understanding how to increase rates to cover costs.

Another factor that often goes without consideration is the term on your mortgage.  When I help customers decide on whether or not refinancing makes sense, I look at the remaining term on their existing mortgage compared to the new one.  If someone has been paying on their mortgage for 9 years and wants to refinance, realize that you will likely refinance into a 30 year mortgage starting the 30 year clock over.

If the reason for refinancing is to get cash out then make sure you look at what the cash will do to help you with your financial picture.  Sometimes that cash is used to pay off debt.  I once helped a customer refinance their home to get cash out to pay off debt.  By refinancing we saved them thousands of dollars and almost $700 per month, on a $250,000 refinance.  The reason it helped so much is because they had equity in their home that helped to pay off car loans and credit cards.  Ultimately, it made sense for them to do this.  But, they could have just used their credit cards again, after the refinance, and put themselves into the same financial picture they were in before, or even worse.  You will be the only one that has control over whether this will help you long term.

Mathematical Reasoning

Math is normally not what most people consider to be fun, so I will do my best to make this simple, yet effective in assisting you to determine if refinancing makes sense.

• Break Even Point
  • Determine the point in time in which the refinance will ultimately help you more than the short term hurt
    • If you are going to reduce your payments by $116/mo but it costs $4,273 (just an example) to refinance, just divide the cost ($4,273) by the savings monthly ($116) to get 36.84 – the number of months it requires you to keep the new mortgage before it made sense to refinance
    • If you are getting cash out, consider the amount of savings you have each month in your entire financial picture and not just your mortgage payment (in some cases your mortgage payment will be higher)
• Short Term vs Long Term
  • With all the scary stuff in the news about the mortgage crisis and foreclosures, many want to get out of their adjustable rate mortgage so they know exactly what their payments will be for the life of the loan
    • If you want to get out of your adjustable rate mortgage, scheduled to adjust in 3 years but currently has a rate of 5.125% compared to 30 year fixed rates of 6.25%, for example, calculate the current payment compared to the potential payment over the 3 year period of time
    • Here is an example:  5.125% payment = $1,104 vs 6.25% payment = $1231 or a difference of $$127/mo, over 3 years is $127 X 36 months = $4,572
    • Add in the closing costs of $4,273 (same example as above) for a total cost of $4,273 + $4,572 = $8,845 – is it worth it to you for the peace of mind to know your payment wont adjust for the next 3 years?
• Mortgage Term Calculated
  • If you have been paying on your mortgage for 5 years and now you want to refinance to take advantage of a lower rate, consider you are getting a new 30 year fixed mortgage and will paying for 5 years longer than you would have if you did not refinance
    • Current payment may be $1,200 and by refinancing, you could reduce that to $1,100 or save $100 per month
    • Cost to refinance of $4,273 (just an example from above) should be considered
    • 5 years of $1,100 payments = 5 years X 12 months/year X $1,100 = $66,000 more to pay at the end
    • TOTAL savings over 25 years (new 30 year term minus the 5 years you would have saved by not refinancing) = 25 years X 12 months/year X $100 = $30,000
    • TOTAL cost of the refinance over the 30 years = refinance cost of $4,273 + cost of the longer term of $66,000 = $70,273
    • This calculation only works if you intend to stay in the home for the full term of the mortgage, but in this scenario, it would not make sense to refinance

The Moral of the Story

If I had to state what the moral of the story was for this post, it would have to be to pick a great mortgage lender who is going to help you in completing these calculations and look out for your best interest compared to their ability to earn a commission.  For assistance on picking a great mortgage loan officer to assist you with refinancing, check out my post on the 8 Questions to Ask Your Lender.  If you have the right mortgage loan officer in your side, they will complete these calculations, and possibly more, to determine if it makes sense for you to refinance.  If you need a little more help, check out the refinance calculator on my mortgage website.

Lending a Hand,

Scott Wynn

Who Gets the House(s)?

The first thing you need to do is work out who will keep the house(s).  Sometimes separating couples decide that they will sell the residence and sometimes one party agrees to move, giving up rights to the home to the other.  A good site with information to consider on who is best suited to take the house can be found on Professional Mortgage Matters blog.  Such considerations include who is able to handle the mortgage payment on their own and is the size of the house needed considering the separation.

Once you determine who gets the house, make sure you understand the implications that may have down the road.

Predict the Future

When you decide how to work out the arrangements of the transfer of ownership and/or liability, make sure to consider what may occur in the future.  Typically, a Divorce Decree or Separation Agreement will identify who takes ownership rights of the property and therefore all liabilities are the responsibility of the owner of the home after the divorce is complete.  Seems simple enough, right?

The Separation Agreement or Divorce Decree is merely a civil agreement between the separating spouses.  This agreement does not mean that the other spouse is following through on that agreement and does not override the agreement you made when you purchased the home.  When you purchase a home and obtain a mortgage, both parties agreed to pay back on that mortgage and if it was not paid back as agreed upon, could impact you in several ways:

• Late Payments – any payments made outside of 30 days will be reported as your credit report as a late payment
• Short Sale – if the spouse who took ownership of the home agrees to sell the home at a price below the  mortgage balance at the time, the mortgage company may be willing to accept a lower payoff, but would be shown as a short sale on the credit, which is very similar to a foreclosure
• Foreclosure – payments are not being made and the bank takes the home as the collateral for the mortgage debt
• Qualifying for New Debt – when qualifying for new debt, such as a home or car, income and debt information is gathered to identify you ability to repay the debt which may not be possible with the mortgage liability on your credit

ALL of these scenarios would impact both people despite what the Divorce Decree or Separation Agreement states.  Typically the spouse that was awarded the house and mortgage will be responsible for all fees and costs associated with the problems that arise from that house and mortgage but that does not mean the person who was released, is released from the original agreement with the mortgage company.

Consider what incidents may occur in the future and work to resolve them prior to signing a separation agreement.

Possible Solutions

There are many solutions that can be considered to work through this issue during a divorce.  Here are a few I thought of:

• Require that the spouse awarded with the home refinance the property immediately to remove your name from the liability
• If the refinance can not occur immediately, put a time frame by which the spouse must refinance the property to remove you from liability (maybe 1-5 years)
• Put in writing that the spouse who took over the mortgage will cooperate to provide documentation to show that they are paying the mortgage debt through their own funds
  • This will, in some cases, allow the underwriters on a new debt to remove the mortgage debt from your financial picture to help you in qualifying

The Disclaimer

I am not an attorney and have based this post on my own divorce as well as experience in the mortgage business.  I am not qualified to provide legal advice and you should consult with an attorney on your own for additional consideration when dealing with mortgage and divorce.  Also seek mortgage advice from a qualified mortgage lender.  Many attorneys are unaware of the implications of mortgage debt after a divorce.  By talking with a mortgage professional you can better understand what would need to be done in the future to avoid problems with qualifying in the future.

Lending a Hand,

Scott Wynn