Buy or Refi: How to Save Big Either Way

Hello, and welcome to a very important webinar. Most people will never spend more money at one time than they will when they buy a home. And even if you’re refinancing, that’s often the second-most amount of money you’ll ever spend. Our goal is to take the stress out of both processes. And in just a few minutes.

So, let’s begin our conversation by talking about why you should WANT to own a home in the first place. Buying a home could be the biggest financial decision we’ll ever make and housing-related expenses eat up nearly 12 cents on every dollar we spend. Yikes. But still, there are a plenty of benefits. First there are the personal reasons: you might want more space, more privacy, and the right to renovate to your tastes. But there are a lot of darn good financial reasons, too. Most people don’t know all of those.

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’re building equity. That’s not the case when you pay rent: your rent just goes to a landlord and you’re not any closer to owning the property. But when you pay down your mortgage, you’re increasing the share of your home you own outright. That’s equity.

And once you have equity, you have access to a whole new source of money to possibly borrow from. You’ve probably heard about home equity loans or home equity lines of credit, also known as HELOCs. This means your home is like a mini bank that you can tap for extra cash. You’ll have to repay what you borrow, of course, but home equity is a great way to get large lump sums of cash that usually have lower interest rates than a regular loan from the bank.

When you build equity in your home, you’re creating wealth. The most obvious way to do that is simple: Sell your home for more than you bought it. That means you not only lived rent-free for those years, but you 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.

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.

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.

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 important than your credit score. Like a bad credit score, a high DTI can torpedo your chances for getting a mortgage. Here’s why…

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.

DTI is like a golf score. The lower the better. A low DTI means you’re not spending everything you earn just to make payments on your 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’ll 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 highest your DTI could be and still possibly get approved is 43 percent. Anything higher than that, and many lenders will flinch. They just won’t want to take a risk on you. Why 43 percent? No one knows, really. It’s just the number most lenders have settled on. Obviously, if you can get your DTI lower than that, it helps even more. But how do you do that?

The goal here is to improve your DTI so it impresses your lender. Not only so that you get approved for a mortgage, but to get the best interest rate possible. The less of a 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 or within our control. Here’s what IS within our control: Our monthly expenses.

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!

Aside from numbers on paper, like your debt-to-income ratio or the amount of money in your bank account, lenders may look for other things to prove that you would be able to afford a mortgage.

It’s not just about how much you have in the bank, but how you get your money. Is your income steady? In other words, does it come in at regular intervals? Or does it fluctuate month to month? Is it reliable? Freelance, seasonal, or contract workers might mean that they don’t have regular employment and a predictable paycheck coming in every two weeks. And finally, have you held one job for several years in a row? Lenders really like it when the answers to these questions are YES.

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

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 answer them. You can get a better idea of how you’ll appear to a lender. Speaking of which, let’s talk about refinancing – what it means, how it works, and whether or not it’s a good idea for you.

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!” But can it be even better if you refinance your home? That depends. Refinancing is one of those powerful tools that’s so powerful, it can really hurt you if it’s not used properly.

Refinancing, or “refi” for short, is not the same as getting a second mortgage or a home equity loan. It’s when a homeowner replaces their current mortgage with a new one. This new agreement comes with new terms like a new interest rate or a different term length. This is useful and allows homeowners to restructure their mortgage to better fit their current financial situation. One of the main advantages of refinancing is lowering your mortgage payment.

There are different ways to refinance a home. The kind that we’re talking about today is commonly known as rate-and-term refinancing, which is the most common type of refinancing.

Refinancing might seem like it’s trading one mortgage for another, but it actually uses a new loan to pay off the original mortgage. The timing of refinancing is important because the interest rate at the time you refinance is going to become your new mortgage interest rate. Ideally, this number is lower than your current mortgage rate, which can save you thousands of dollars over the rest of your mortgage.
You’ll have a new balance which will be what was left on your previous mortgage. Other things that can change when you refinance is:
– Adding or removing someone to your mortgage
– Changing the length of the loan from a 30-year to a 15-year loan or vice versa,

– Or switching form a fixed loan to a variable one (and vice versa

Refinancing a mortgage is pretty much identical to getting a mortgage for the first time. You can choose to refinance with the same lender or go with a different one. And just like you did for your initial mortgage, it’s always recommended to shop around so that you’re getting the best deal possible.

After submitting an application, the lender is going to review all the usual things like your credit history, DTI ratio, and employment history. The home will need to be appraised again so that lenders don’t let you borrow more money than the home is actually worth. One key difference is that instead of being paid for by the bank, now it’s you, the homeowner, who must pay for this appraisal, keep that in mind.

Typically, conventional mortgage holder, which most of you probably are, can refinance their home at any time. If you were trying to refinance with the same lender as your current mortgage, many lenders have a six-month waiting period before they’d consider this – but you can get around this by refinancing with a different mortgage lender.  FHA loans, VA loans, and USDA loans have their own time requirements before they can be refinanced and can range from 7 months to a year.

Refinancing can be tricky if your credit score has decreased since getting the first mortgage. So even if you’re technically able to refinance, it’s important to check that your credit is in a place where you’ll get approved for the new loan.

The moment you buy your home, you’re going to be on the radar of every refinancing offer out there. Pretty soon, you’ll start receiving mail and emails promoting the benefits of refinancing. Be careful, because these offers aren’t about helping you or getting you a great deal. They’re about making profit for themselves.

For free, you can consult a housing counselor who won’t try to sell you anything but will answer all your questions. The private agencies that offer this counseling are approved by the federal government – specifically, the U.S. Department of Housing and Urban Development, better known as HUD. If you go to the HUD website and search for “housing counseling,” you can find a local agency near you or a national agency that can still answer your questions.

Of course, we’ve just scraped the surface. But we can help you dive deeper…

Thanks for listening.