Refinancing has become a hot topic in recent years. With Rocket Mortgage reporting that interest rates went from the monumental 11% in the late 1970s and early 1980s to as low as 2.68% in late 2020, we have become accustomed to the low cost of borrowing. These lower interest rates allow everyday consumers to leverage borrowed money at a cheaper rate. We can’t expect this to last forever, though. As rates continue to rise and the opportunity to borrow money at historical lows closes, we sat down with Corina Vaquera Dlugosz to discuss refinancing and weed out some misconceptions for this blog post.
Corina Vaquera Dlugosz is a branch manager with Zero Point Mortgage Services here in Phoenix. Corina’s team at ZPMS and Sun Valley Financial work together to bring lending solutions to our clients through innovative products and solutions. It is important to note that Sun Valley Financial is not a loan originator, nor is it licensed to originate loans. The close relationship between Corina’s team and SVF allows us to better serve our clients. During the financial planning process, we look at various ways to improve our clients’ financial futures through the use of tools and resources. In doing so, some clients have benefited from refinancing to lower their monthly payment, consolidate debt, make home improvements or lower the overall cost of borrowing to purchase a home. Without further ado, here is our conversation with Corina.
Pablo: Corina, what are some pros and cons of refinancing?
Corina: While there are pros and cons of refinancing, they are specific to each individual’s situation and personal goals. A pro of refinancing into a 15-year mortgage is that you’ll pay far less interest than a longer 30-year term, but the con could be that your payment will go up quite a bit compared to the 30-year payment. However, if your goal is to pay off your mortgage in 15 years, then the higher payment may not necessarily be a con to you personally, but it may be to someone whose goal is different.
Pablo: What is a refinance, and how does it differ from a cash-out refinance?
Corina: Generally, refinancing is simply paying off existing debt with new debt. There are several types of refinancing programs such as “rate and term,” which only changes the rate and/or term of your mortgage loan; no cash is received at closing. A “cash-out” refinance is where you take out part of the equity in your home and convert it to cash you receive at closing. There are other programs that allow you to use equity in your home to complete home improvement projects without necessarily receiving cash out at closing. This program is called a “renovation loan” and can be used to refinance and improve an existing home or use the same program to purchase a fixer-upper and have the costs of those improvements built into the loan from inception.
Pablo: Does a homeowner have to take out cash when refinancing?
Corina: No, a borrower is never required to take cash out (equity) from their home.
Pablo: What are some common misconceptions and missteps in regards to refinancing?
Corina: A common misconceptions about refinancing is that you can’t refinance your home until after a certain period of time. This isn’t true. You can refinance your mortgage at any time, for any reason. Another one would be that you’ll also save money or lower your payment when you refinance. Your interest rate, loan balance and term length all factor into your payment. The best way to avoid missteps when refinancing your home is to talk with your home loan consultant about what the goals of your refinance really are, both long-term and short-term. It doesn’t always make sense to refinance, such as if you plan to move or sell in a few years. However, if you have an emergency for which you need to take cash out of your home, for example, then it may make sense to refinance if your goal is solve the emergency and move on with your life.
Pablo: Are there true “no-cost” loans out there?
Corina: Considering there is no such thing as a free lunch, I’d have to say no. Some home loan consultants use “no costs” or “no charge” to mean “no out of pocket costs,” or you don’t have to bring money to close the loan. The way to achieve that is through the borrower taking a higher interest rate than they would otherwise qualify for in exchange for the bank giving them credits toward their closing costs. Therefore, while there are no out of pocket costs to the borrower, the true costs are actually rolled into the loan in the form of a higher interest rate, which increases your monthly payment. Generally, “no-cost” loan strategies are employed during purchase transactions where a borrower may not have much cash available to close the deal but has room in their monthly income to tolerate a higher payment.
Pablo: What are some less commons reasons a homeowner might want to refinance?
Corina: A less common but highly recommended reason to leverage your home equity is refinancing to take cash out to begin or continue your real estate investment portfolio. It’s a strategy my immigrant parents, myself and many other families have used to make the investment to purchase income producing properties. Leveraging the equity in your home to create more income is a great wealth-building strategy. There are many other reasons why folks refinance such as paying for college, helping a child buy their first home, financing a home remodel or addition, or adding a pool or solar to your home. Refinancing is a very personal decision, and your short-term and long-term financial and personal goals should be paramount when considering whether refinancing will help you meet those goals.
Pablo: Why might a homeowner want to work with a broker versus a captive loan officer?
Corina: Simply put, brokers are better. When you work with a mortgage broker, you are their customer, and they work for you. When you work with a retail loan officer, such as one from major banks or loan officers who only represent one company like Rocket Mortgage or Guaranteed Rate, those loan officers work for those companies and must act in the best interest of their employers. As a broker, I work on your behalf and in your best interest by shopping the market and offering you the best rates and the best product to meet your needs. Additionally, working with a broker means you are getting wholesale pricing, which is almost always better than retail pricing. I also have access to 30 different banks with a variety of appetites to meet the needs of borrowers with low FICO scores and minimal credit but solid job history and income. In other words, I can find a solution to nearly every mortgage need. When you work with a retail bank, they can only offer you their products. Additionally, retail banks and mortgage companies tend to have more conservative underwriting guidelines that may not work for your unique situation.
That does it for this blog post. If you or someone you know has questions related to refinancing or how to better use the equity in a property, please reach out to Sun Valley Financial. Our goal is to work with our clients to help them find long-term solutions to match their goals and objectives. Until next time, take care!
If you’d like to contact us, you can reach Sun Valley Financial in Scottsdale and Phoenix, Arizona by calling 602.960.0362.
Investment advisory services are offered through Northsight Wealth Management, LLC (NSMW), a Registered Investment Advisor. Northsight Wealth Management, LLC will only provide investment advisory services in jurisdictions where it is registered as an investment adviser or exempt from registration. Insurance products and services are offered and sold through individually licensed and appointed insurance agents. NSWM does not provide legal or tax advice. Sun Valley Financial, LLC is a dba of NSWM. SVF and NSWM are not licensed to generate or originate loans.