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Using your Home’s Equity | Managing Cash Flow & Paying Down your Mortgage

The COVID-19 pandemic has raised a lot of familiar questions about the economic outlook, interest rates, and home values for most of my clients.  Clients want to know how they can save on their monthly cash flow (not just mortgage payment), if interest rates are low enough for them, or how they can shorten the term of their mortgage loan.  Check out my past post about 4 ways to manage your home’s equity.  While all these ideas are good for Homeowners, deciding what makes sense can be overwhelming and during this time, some Homeowner’s face uncertainties with their income.  This article discusses monthly cash flow, using equity to consolidate consumer debt or point number one from my previous article.

Improving your monthly expenses will do more for you long term than the one-time economic impact payments most of us received through the CARES Act.  My recommendation for everyone is to either:

  1.  Invest in yourself by saving this money OR
  2.  Paydown or pay off debt with this money 

But paying off maybe one credit card might add an extra $35 – $55 a month to your cash flow.  Not enough to make an impact encouraging you to save monthly or enough to give you a real sense of security. 

Your home’s equity may be the solution for monthly savings.  Consider this, you owe $215,000 on your home that you purchased in 2015 for $250,000 and the value has appreciated on average 4% per year since that time.  Your Home’s value might be $305,000.  You can do a cash out refinance up to 80% Loan-to-value (LTV).  Here is the math and the appreciation chart:

Home Purchased May 2015 for $250,000 with 5% down

May 2020 Loan Balance roughly $215,000

Estimated max Home Value May 2020 $305,000

Max LTV at 80% of $305,000 (max loan amount) $244,000

Estimated cash out from refinance: $25,000

Most homeowners have credit card debt, car payments, IRS debt, student loan payments or installment loans (personal unsecured debt).  Assume this scenario has $25,000 in outstanding debt.  With high interest rates on credit cards, $29k in balances can add up to range $500 – $800 per month in payments.  Use the equity from your home and save on your total overall monthly payments:

Existing PITI payment based on principle balance owed of $217,272 with home purchased May 2015, for $250,000 with 5% down on a 30 year conventional loan at 4.375% fixed, amortized P&I payments to principle owed May 2020.  Proposed PITI payment based on loan amount $244,000 80% LTV new 30 year fixed conventional loan at 4.375%.  Rates do NOT reflect a FICO score when determining rate eligibility.  Sample provided for illustration purposes ONLY as a side-by-side comparison.  Actual loan terms, qualification terms and conditions may not be available at time of application and are subject to change.  5/19/2020.

The scenario above demonstrates the effect of using your home’s equity to consolidate debt and preserve monthly cash flow.  The savings overall is $758 per month in this sample.  This scenario shows a net positive effect of adding over $700 per month to your cash flow or in another sense, “paying” you over $700 per month since you have now eliminated those payments.  Not to mention “skipping” the mortgage payment at least one month.  A homeowner could take advantage of a significant boost to their saving account. 

Homeowners who are savvy in their financing can turn that savings around by applying it as principle reduction or setting the cash aside for a rainy day or reserve fund.  Below is an illustration of how that savings applied as principle reduction against your mortgage would not only save interest, but shorten the loan term overall:

The amortization gained is a critical resource to consider in this chart.  It is telling you that you gain nearly $128k (this scenario) by making consistent principle reduction payments on your home.  That gain represents the interest you are not paying on your mortgage giving you a “gain” in your equity. 

After that 14 years of paying additional principle, if you decide to sell your home, you net $388k in the sale of your home vs an estimated $260k if you make regular payments on the $244,000 (consolidating $25k of debt).  This is using the Forecasted appreciation model above (conservative estimate) vs the Historical. 

Most borrowers do not like the idea of consolidating debt into their mortgage because they feel they are dragging their debt along.  But, if you consider the additional savings for principle reduction towards your mortgage, or even just a portion of that savings (not to mention the appreciated value factor on your home), you gain more than enough in the long run to justify debt consolidation into your mortgage.  The additional payment is an adjustment to a way of thinking they are positive appreciating payments vs negative depreciating payments.  Remember, you were in the habit of paying it before the consolidation, now you are just allocating it in your favor.

Outside of using this savings for your mortgage, you have other options like putting the cash away for retirement in an IRA or general savings, increasing your 401k contribution or starting a college fund for your kids.  Either way, it is nice to have options to better your financial future.  I recommend to all my clients to maintain a minimum 3-month reserve on all expenses, then start using the savings to build wealth.  You should work with Financial Advisors and Mortgage Professionals who help you manage your money for your goals and who will stick with you in your planning.  Your home is too big an investment to risk not working with the right people.

The information contained in this post is meant for illustration purposes ONLY and does not reflect a FICO score or APR analysis.  Content is for demonstrating a general effect with using home equity and a cash our refinance product/program.  Actual terms and conditions may vary and may not be available to all borrowers or at time of application.  It is recommended borrowers seek the advice or their loan officer or reach out to the author of this post directly.

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Mortgage Forbearance: What you should know

The recent COVID-19 crisis has been a constantly evolving issue in the financial services industry including mortgage banking.  Much discussion has shifted from lenders being at capacity to offer low rates to how the FEDs buyback program and Mortgage Forbearance are hurting interest rates and obtaining credit for housing.  Below are some things to consider before taking a Mortgage Forbearance.

Please Note: Homeowners who need access to a forbearance should be able to obtain it.  This summary is meant to encourage Homeowners to consider their options prior taking a forbearance.  A mortgage forbearance can have serious financial implications if considerations are not reviewed responsibly.

What is a Mortgage Forbearance?

A mortgage forbearance is a kind of payment deferral where your mortgage payment is put on hold until a later date.  When that later date occurs, the Homeowner is responsible for resuming their mortgage payment.  It can help stall the process of foreclosure on the home so the Homeowner can attempt to get back on their feet financially, allowing them to keep their home. 

Recent action by the Federal Housing Finance Authority (FHFA) is requiring mortgage servicers to allow mortgage forbearance for those borrowers affected by COVID-19 issues such as job loss, loss of income, contracting the virus, death of the primary wage earner due to COVID-19, etc.  You do not have to had contracted the virus to attest for a forbearance.  Additional information is available here from FHFA

Will a forbearance affect my credit or will I be charged late fees?

The FHFA has instructed mortgage servicers that consumers’ credit should not be affected if a forbearance is granted and that late fees or penalties are to be waived in that event.  However, we have already seen credit reports reflecting “forbearance” under a borrower’s mortgage loan and they were marked 30 days late on their payment. Banks are reporting and allowed to show “Forbearance” under the mortgage account if actively in this status.  While this consumer could make a case for the forbearance and late mark to be removed, they will most likely go through many challenges before it is removed IF the servicer is willing to comply. 

Can I get a new mortgage loan if I have a Forbearance?

Not really and likely No for now. This includes refinances and is evolving day-by-day. Banks may introduce overlays, or additional requirements in the future, before you can successfully close on a new home loan if you have a forbearance.  For now, banks are NOT allowing new home loans with a current Forbearance showing on credit. In addition, it is possible that as more Homeowners use Forbearance, Fannie Mae, Freddie Mac, and HUD may update their guidelines to include seasoning periods or specific requirements for borrowers who have a Forbearance on their credit.

Will it be more difficult to get a mortgage loan if I do NOT have a Forbearance?

During times of recession, lending guidelines (in general) condense to ensure qualified individuals can make their mortgage payments on time.  The ability to repay a mortgage loan focuses on income, credit, and assets of a borrower.  All three areas must meet qualifying guidelines.  Obtaining a mortgage loan depends on the borrower circumstances.  If a borrower has a good stable work history of receiving the same income consistently and pays on time, the borrower should be able to qualify.  Again, this depends on the bigger picture the borrower is presenting for a home loan.

What does a forbearance payment plan look like?

  • Lump Sum – Some plans may require the full lump sum of deferred payments due all at once.  If your total mortgage payment is $2,000 per month (includes PITI) and you defer for 6 months, you will have $12,000 due at the end of the deferral.  Remember, the servicer is paying out the interest due to investors and paying out the Property Tax and Insurance premiums when due.  The servicer wants to be whole again, especially if they are borrowing funds to meet these obligations.  This is the most common and likely plan the servicers will use.
  • End of the Loan – Other plans may put the balance owed at end of your loan term, being added to the principle owed on your home loan.  You risk losing any appreciation gains with this option, especially if you just purchased your home. This option is more like a loan modification. Anticipate needing to show hardship for this type of plan. For now, how this plays out is still yet to be determined.

What if I want to hold my mortgage payments for 6 months and save the money?

Many Homeowners have considered holding their mortgage payments aside for the forbearance time to build up a reserve fund in case they lose their income.  Every situation is a case-by-case as there is no litmus test to say one thing or another.  However, consider that your interest rate on your checking or saving account is next to nothing compared to the interest you pay on your mortgage.  The money sitting in saving accounts that would have been made for the mortgage payment does not earn enough to have the money sitting there. 

A Homeowner who may lose their income and wants to have some relief so they can cover everyday expenses like groceries or utilities can make a good case for the need to have forbearance.  But, there are still other solutions.

What are some other solutions to a forbearance?

  • 401k & IRA Accounts – The IRS has put special waivers in place for withdrawing from your 401k or IRA for COVID -19 hardships such as waiving the 10% penalty on IRAs and allowing for additional loans or higher loan amounts against a 401k.  Speak with your HR representative about your 401k options or your Financial Advisor about IRA options
  • Refinance your existing mortgage – It may seem an obvious solution given my profession, but a rate/term refinance or cash out refinance can add to your monthly cash flow and reserves if you are still employed.  Even if you are furloughed during this time, but have savings, you could be eligible for a home loan and refinance.  Many of my clients have used this solution.
  • Skipping 2 months’ payments – Since you are refinancing your home loan, the payoff of the old loan serves as your mortgage payment.  Instead of making your payment, we can work so your loan closes before it is due.  Interest must be earned on a home loan before it can be collected.  So, say you are closing this month, April.  You let the payoff serve as your April payment, May must be earned interest by the bank (no payment due), your first payment is due June 1st.  Plus, you can take a small amount of cash out when doing a rate/term refinance (usually less than a percentage of the loan, no more than $2,000).  If you have a mortgage payment of $2,000, skipping 2 payments and taking the potential max cash back, you have $6,000 added to your saving account.  Finally, don’t forget any added monthly savings you gained from your refinance.
  • Cash out Refinance/Debt Consolidation – The Economic Impact Payments (EIP) are great for helping consumers and Homeowners.  I pray people choose to save the funds or pay their obligations.  But remember, this is one-time.  Using your home’s equity and taking cash out on a refinance can potentially help you save hundreds per month by reducing or eliminating unsecured consumer debt.  That is a savings that adds hundreds every month to your cash flow.

Summary

The news and guidelines continue to evolve during this unprecedented time.  Despite the abrupt slow down in the economy, housing is expected to remain strong and values are expected to continue appreciating.  The demand for housing is strong all around.  Interest rates will fluctuate between now and the next few months.  But they are remaining at all time lows.  There will be more opportunity for housing, especially with lower rates on the horizon. 

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Our New Office In The North Phoenix Area

On February 27, 2020 we celebrated the Ribbon Cutting for our new office in the North Phoenix Area. The support of the local Anthem Area Chamber of Commerce was instrumental in this endeavor and continues to be a staple for additional growth.

The evening was highlighted by the local business community coming out to support All Western Mortgage and with special recognition from Congresswomen Debbie Lesko, our representative. I am ever grateful for the local community, my All Western Mortgage family, the Chamber of Commerce and most especially my family for their support and encouragement.

Here is to this exciting venture!