Buy or Refi: Which is Best for You?

Hello, and welcome to a very stressful webinar. Most people will never spend more money at one time than they will buying a home. And even if you’re refinancing, that’s often the second-most amount of money you’ll spend. But guess what? We’re going to take the stress out of both processes. And in just a few minutes.

How important is home ownership?

How important is home ownership? Well, it has its own month. Yup, June is National Homeownership Month. In fact, this is the 20th anniversary of that month. Congress made it official because they know that homes are the backbone of the U.S. economy.

In fact, pre-pandemic, almost a fifth of our nation’s economy was tied up in the housing market. So, you can see why the federal government cares so much about home ownership. A large part of what we’re going to discuss today are the government programs to help you get into a home – and stay in one.

The benefits of buying

So, let’s begin our conversation by talking about why you should want to own a home in the first place. Obviously, there are personal reasons like more space, more privacy, and the right to renovate to your tastes. But there are a lot of darn good financial reasons, too – and most people don’t know all of them.

1. Building equity

You’ve probably heard the word “equity” before. But what does it mean? Simply put, equity is the value you put into your home. Every time you make a mortgage payment, you build equity. That’s not the case when you pay rent. Your rent goes to a landlord, and the next month, you owe more. When you pay down your mortgage, you’re increasing the share of your home you own outright. That’s equity.

2. Saving long-term

When you build equity in your home, you create wealth. The most obvious way is simply by selling your home years later for more than you bought it. That means you not only lived rent-free for those years, but you also walk away with some extra cash. That often offsets all the homeowner insurance, mortgage interest, and other costs of living in your own place. Usually but not always, the longer you own your home, the more you can sell it for.

3. Building a strong credit history

These days, almost everyone knows what a credit score is. Many of us know how to check it for free. This three-digit number determines how high or low our interest rate will be on everything from a credit card to a mortgage. Well, when you buy a home and make those mortgage payments on time, you’re boosting your score. That will make it much cheaper the next time you need an auto loan or any kind of personal loan.

4. It’s healthy, too!

I know this doesn’t seem like a financial reason for owning a home, but according to the National Association of Realtors, homeowners are happier than renters. They have higher self-esteem, too. Here’s what we’ve noticed in three decades of financial counseling: The happier you are, and the more confident you are, the wiser choices you make with your money. So this is another financial reason to get into your own home.

What if you already own your home?

OK, now let’s talk to the current homeowners out there. You’ve listened to me so far and nodded along, thinking, “Yup, I got it good!” Can it be better if you refinance your home? That depends. Refinancing is just one of those powerful tools that’s so powerful, it can really hurt you if it’s not used properly.

How refinancing works

When you refinance your home, you’re taking equity out of it. Remember what we said earlier about equity. It’s the value of your home minus that mortgage. It’s the share of the home you own outright, not the share the bank still does. Well, you can extract some of that equity even before you sell your home. Here’s how that works.

You might have heard about home equity loans or home equity lines of credit, also known as HELOCs. They do the same thing in slightly different ways. A home equity loan is a traditional loan. Your equity is your collateral, and you get a lump sum of money. Usually, you can borrow up to 85 percent of your equity at a fixed interest rate. Then you pay it back monthly, just like your mortgage. A HELOC, on the other hand, is a little different. It’s a revolving line of credit with a variable interest rate. Think of it kind of like a credit card. You have a certain amount of money that you can borrow and pay back. You can take what you need, and you pay interest only on the amount you draw.

Home equity loans and HELOCs are good because you can usually get a low-interest rate, and you can use that money to pay off credit cards and other debts that have higher interest rates. That saves you money.  But it’s bad because you’re messing with the most valuable asset you own. There are horror stories of people taking equity out of their home to buy, say, a boat. Soon, they have no equity left in their home, yet they still have a hefty mortgage. That’s called being upside down or underwater, and it’s an awful place to be.

Why new homeowners should care about refinancing

It seems strange, but the moment you buy your home, you’re on the radar of every refinancing offer out there. Pretty soon, you’ll start receiving mail and email that promote the benefits of refi. Be careful, these offers aren’t about helping you, it’s about making profit for them. Before you buy or refi, you need to do a few key things. Let’s talk about those right now.

What is DTI? And why should I care?

Let’s talk about something that’s so important yet so misunderstood. It’s called debt-to-income ratio, or DTI for short. It’s the most important number for buying a home – even more than your credit score. Like a low credit score, a high DTI can torpedo your chances for getting a mortgage. Here’s why…

What is DTI?

Your lender calculates your debt-to-income ratio by dividing your monthly debt obligations by your pre-tax monthly income. So basically, it’s everything you owe each month – like credit cards and an auto loan – divided by everything you earn each month. To make a complicated formula a little easier, they usually leave out monthly expenses like food, utilities, and health insurance, among other things.

Why DTI matters

DTI is like a gold score. The lower the better. A low DTI means you’re not spending everything you earn just to make payments on debts. Mortgage lenders like that, because it means you have money available to make those steep monthly payments on your new home. For most people, the biggest loan we ever take out is a mortgage. You can understand why those lenders are a little cautious. That’s why they rely on your DTI to make their final decision.

The DTI you want

The highest you want your DTI to be is 43 percent. Anything higher than that, and many lenders will flinch. They just won’t want to take a risk on you. Obviously, if you can get your DTI lower than that, it helps even more. But how do you do that?

How to get a dominant DTI

The goal here is to improve your DTI so it impresses your lender to not only give you a mortgage, but to offer it at a really low interest rate. The less risk you are, the less you pay in interest. Obviously, one way to strengthen your DTI is to earn a lot more money. But that’s not always possible, and it’s really not within our control. Here’s what IS within our control: Our monthly expenses.

The income questions

Let’s start by asking ourselves three questions about our income. Is it steady? In other words, does it come in at regular intervals? Or does it fluctuate month to month? Is it reliable? In other words, does the nature of my work mean I don’t get paid sometimes? And finally, have I held one job for several years in a row? Lenders really like it when the answers to these questions are YES.

The payment questions

Here are some more questions that lenders have: Do you pay my bills on time? Are you struggling with credit card balances and big loans? Because if you are, how will you juggle those and a six-figure mortgage?

The savings questions

Finally, let’s talk about what you have socked away. While you can buy a home without a down payment, that’s rare. You’ll likely owe many thousands right off the bat. Besides that, you need to pay the mortgage, so you need to make sure you can set aside that amount each month. Then there are the miscellaneous expenses and bills that come with home ownership. You need to add those up, from property taxes to insurance and more.

If you want to refinance your home, many of these basic questions still apply. So even if you’re in a home now, it can’t hurt to honestly answer them. This refresher will help you when it comes time to refinance what you already own.

Create a household budget

No one likes to hear the words, “make a budget.” But it’s so easy to do these days – and it’s crucial if you want to buy or refi. If you don’t relish the idea of putting pen to paper, there are scads of websites, apps, and programs that handle the drudgery of budgeting. Many of them cost nothing, and the ones that do cost only a few dollars. Here’s how they work.

One of the most popular budgeting tools is called Mint. Another is called Personal Capital. But  a lot of banks and credit unions offer similar programs on their websites for their customers. Basically, you just type in your income and expenses, and these programs do the math for you. You can even project your savings if you eat one less takeout dinner, or if you refinance your mortgage. The software does the heavy lifting!

If that’s a little too techy for you, there’s a middle step. Websites like Tiller let you download customized spreadsheets that stay on your computer, and you can easily personalize them. Quicken has software that’s been around for decades and most of us are familiar with. Each solution has its pros and cons, but they all work. So it’s really up to what makes you feel the most comfortable.

Still unsure? Consult an expert

If you’re trying to save for a home or want to figure out how to take equity to pay down debt, you need to consult a professional. The best are certified credit counselors from a nonprofit credit counseling agency. Where can you find one? Well, you happen to be in luck.

Consolidated Credit 1-800-435-2261

Consolidated Credit is one of the nation’s oldest and largest credit counseling nonprofits. We can help you create a budget, and we can help you reduce your debts. Once you accomplish those two things, it’s so much easier to buy or refi.

Consolidated Credit also has HUD-certified housing counselors on staff. They can help you with anything we’ve mentioned here today, because let’s be honest, we just hit the highlights. This is a huge and expensive topic, so here again is the phone number and website for If you want to know more about anything we discussed. Thank you so much for spending some time with us today!