Buy or Refi Which Is Best for You?
[Doris Baker, Certified Financial Coach] Good afternoon everyone and thank you for joining us for the webinar title “Buy or Refi: Which is Best for You”
For most people, a home is the most expensive thing they’ll ever buy. Which means it’s also the most complicated thing they’ll ever buy. And of course, that makes it the most stressful thing they’ll ever buy. Today, we’re going to simplify it for you. And while no one can make home-buying a fun and relaxing process, I’m pretty sure we can cut your stress in half.
Homebuying is a mess of stress
Owning a home can be both fun and lucrative. Buying it is a mess of stress. A poll from a few years back found that a third of homebuyers actually shed tears because they were so frustrated at the process. Most had at least four arguments with their families. The reason for this stress isn’t hard to figure out.
By far, the biggest form of debt in this country comes from mortgages. We collectively owe 16 trillion dollars on our homes. That’s how much we need to pay before we own our home free and clear. Needless to say, that can easily cause anyone to stress.
It’s especially stressful because mortgage debt is almost four times more than all the other forms of debt we struggle with. We’re talking credit cards, student loans, auto loans, personal loans, you name it. Everything else we owe is dwarfed by what we owe on our homes.
You’re not home alone!
So if you’re feeling stressed, you’re not alone. Not by a long shot. Now, there’s no way we can dive deep into every aspect of home buying and refinancing here today. So we’re going to hit the highlights and point you in the right direction for the best expert advice — and almost all of it is free. But before you can consult the experts, you need to know how to ask the right questions. Let’s show you those questions now.
The income questions
The very first step isn’t looking for a home. It’s looking at your paycheck. You’ll need to pay for your new home with money you earn, so we need to start there. Do you have a steady source of income? Have you had that for two to three years? And is it gonna keep coming? Otherwise, you’ll have trouble getting a mortgage — and even more trouble paying it.
The payment questions
So we just mentioned what you earn. Now let’s talk about what you owe. It’s hard to even get a lender to give you a mortgage unless you have a good credit score. We’ll talk more about that in a moment, but for now, you need to ask yourself: Do I pay my bills on time? And am I struggling with credit card balances and big loans? Because if I am, how will I 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 that much aside each month. Last but certainly not least are the miscellaneous expenses and bills that come with home ownership. You need to add those up, from property taxes to insurance and more.
By the way, these are refinancing questions, too!
After we talk about buying a new home, we’ll talk a little bit about refinancing your existing home. But many of these basic questions still apply, so even if you’re in a home now, it can’t hurt to pay attention to the new-home discussion. This refresher will help you when it comes time to refinance what you already own.
In fact, let’s talk about one number that’s important whether you’re buying for the first time or refinancing. It’s called debt-to-income ratio, or DTI for short. It’s the fancy way of saying, “We’re going to divide all your monthly debt payments by your gross monthly income.”
Why is DTI so important? Because lenders know it’s a reliable formula for figuring out if you’re going to make your monthly mortgage payments on time — or slip into foreclosure, which no one wants. If you divide what you owe by what you earn, you can give it a percentage.
43% is the magic number
The highest you want this number to be is 43 percent. That’s because it’s the highest number you can have and still get a qualified mortgage from most lenders. Confused yet? We’re mentioning DTI as just one of the many complex numbers you’ll need to master before buying a home for the best deal possible.
Why buy (or refinance) at all?
At this point, after a rousing conversation about DTI, we usually hear from people who say, “Maybe it would just be easier to keep renting” and “Maybe it would just be easier to keep paying the mortgage I have.” We understand how daunting buying a home and refinancing one can be. But done right, both decisions will be among the best financial moves you’ll ever make. And like we said earlier, you don’t have to go it alone. So let’s hear from some experts.
Whether you’re buying your first home or refinancing your existing home, every expert will tell you the same thing: Shop till you drop. There are so many lenders with so many different loan programs. As Wells Fargo consultant Barnaby Robles urges you: “Explore your options. Restrictions that one lender may have, other lenders may not have. The only way to find out is to shop around.” Sure, this will take some time, but remember, it’s the biggest purchase of your life.
When is the best time to buy or refi?
One of the most common questions our housing experts hear is, “Is now the right time to buy my home or refinance it?” That’s actually a complicated question. It’s really not about timing, it’s about your preparation. As Realtor Bill Gassett explains, “A significant pitfall for buyers is the fact it is very easy to lose out on a home they absolutely love. Besides getting the most they can for their home, sellers are looking for financially sound buyers who have a solid down payment and a trustworthy pre-approval letter from a reputable lender.”
Basically, trying to time the housing market is like trying to time the stock market. It’s risky. Instead, worry first about your paperwork. As Bill Gassett says, you want to save enough for a down payment and meet with a lender before you go house-hunting. That way, you’ll get a pre-approval letter. What’s that? It’s a document that shows sellers you’re serious, because you already did the legwork and got a lender to say you’re a good risk.
What credit score do I need to buy a home
When we suggest that potential homeowners work on their finances, they usually ask us about their credit score. Here’s what Maria Gaitan, our housing counseling director, has to say about that: “To get approved for a traditional mortgage, you generally need a FICO credit score of 620 and above to qualify for a good interest rate. However, as a first-time homebuyer you can find financing options that allow you to qualify, even if you have a score in the 560 to 600 range.”
Your first step might be a consultation
If you’re overwhelmed by what we’ve discussed so far, you might want to start by talking to a housing counselor. You want that to be a HUD-certified counselor, like the ones at Consolidated Credit. They’ll present you with all the options, and that includes refinancing.
You can call or find us online for more information, and we’ll put up this contact information again at the end of this presentation. But we just want you to know you can get a free one-on-one consultation for everything we’re discussing here today.
Refinancing the right way!
Now let’s spend a few moments talking to those of you who already own a home but want to refinance your mortgage. For those of you who have heard the term but aren’t quite sure what it means or how it helps you, let’s break it down for you.
What is refinancing?
Refinancing means you get a new home loan to replace your existing one. Why do that? Because you can profit from the exchange. If you can refinance into a loan that has a lower interest rate than the one you currently have, you can save money on both your monthly payment and overall cost of the loan.
Finding a lower interest rate
Obviously, refinancing only works when you can find a lower-interest mortgage than the one you have right now. Those rates are at historic lows right now, but like we discussed with home-buying, there are other factors to consider. For one thing, you need to qualify for a new mortgage just like you did for your first, so everything we discussed earlier about DTI still matters. And you want enough equity in your home so you can save even more.
Refinancing a home comes with some of the same costs as buying one. Most fees are rolled into the new loan, so they’re sort of hidden. But they’re there. Other fees must be paid before you close on your new mortgage, like an appraisal. Either way, you’re paying thousands of dollars. It’s hard to say exactly how much, since circumstances vary not just by the cost of your home but where you live. The financial website Bankrate estimated in San Francisco County, a $200,000 refi will cost nearly $5,000 in fees.
Does it make dollars and sense to refi?
You need to look at several key factors to decide if you can refinance your home. Those include the value of your property, the loan amount, whether you want a 30-year or 15-year loan, what your credit score is, and even where you live. Thankfully, you don’t need to do this all yourself. There are many online calculators that will add it up for you. Try your bank or credit union for starters.
What to do with the refi windfall?
If the numbers work out and a refi is in your favor, the next question is: What will you do with all the money you save? While you might be tempted to spend it, we can help you save even more. How? By suggesting you pay off your credit card balances. You could save an extra dollar for every $5 you saved on the refi. Here’s how.
Did you know more than half of all credit card holders carry a balance each month? And did you know that credit card interest rates are hovering around 20 percent? That means many people are paying $1 in interest for every $5 they charge. But they don’t have the money to pay off that stubborn debt. After you refinance, you can get rid of credit card debt and pocket even more savings. That can go into an emergency fund, college fund, car fund, vacation fund or anything else. As long as it’s going into your pocket and not your credit card company’s pocket, we’re happy!
We’ve mentioned several times today that you need to save for buying a home or refinancing one. But we haven’t said exactly how to do that. Saving doesn’t sound like something that’s particularly complicated, does it? But there are ways to do it faster and easier. While we have an entire presentation on smart budgeting, let’s hit a couple highlights that really matter when it comes to today’s topic.
How to budget painlessly
Now let’s talk about budgeting tech. Sure, you can create a household budget with pen to paper, but there are online programs that will do the mundane work for you. Online budgeting tools are safe and easy. Most are free, too.
One of the most popular programs is called Mint, although many 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.
But here’s where they can help you save: You can project your savings if you eat one less takeout dinner, or if you refinance your mortgage. The software does the math for you if you type in, say, the cost of one less Starbucks latte or one extra mortgage payment.
Once you create a budget to save for a new home or a refi, you can start socking away cash. Here’s an easy way to do it: If your employer pays you via direct deposit – and 82 percent of Americans get paid that way – you can ask your company to split your direct deposit. Most employers will let you send some money to one bank account, and some money to another – at no charge to you.
So you can shunt some of your paycheck directly into a separate savings account. You won’t even miss the money, because you’ll never see it in your checking account. This works especially well when you get a raise. Just send the extra cash directly to your savings account.
If you want more budgeting and savings advice, you can get a free debt analysis from one of Consolidated Credit’s HUD-certified housing counselors. 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!
Consolidated Credit may be able to help you save money and get out of debt faster than you can on your own.
Our licensed and trained credit counselors will provide you with a FREE budget analysis
We work with your creditors to lower your interest rates and eliminate fees
We consolidated your credit card debt into ONE low monthly payment
Call 1-800-435-2261 to speak with a certified credit counselor and start your path to getting out of debt today or go to www.consolidatedcredit.org and tell us a little about yourself and one of our counselors will call you!