Both consumers and the majority of Mortgage Lender view a mortgage application as a singular transaction. And for the most part, that might seem reasonable as mortgage loans have a relatively short shelf life compared to the full term of the loan. All too often however, a borrower completes a loan application and hands it over to the loan officer, the loan is approved and the deal is closed. This type of loan officer is really nothing more than a transaction coordinator as well as a loan originator. Once the deal has closed and funded the loan officer works on another file.
An experienced loan officer know that longevity in the industry means regularly tapping into the database of previous clients and referral sources with various marketing letters, birthday cards and so on. And while that might help keep that loan officer at top of mind it may not help the consumer other than a reminder that says, “Hey, if you ever need me, don’t forget that I’m here!” And while that’s certainly good marketing advice, leaving it at that really is doing an injustice to the client without either the loan officer or borrower realizing it.
Loan officers that are regularly in the top tier of lending professionals go beyond sending regular reminders to past clients but instead evaluate each and every loan file once a year to see if someone’s existing mortgage needs a change. When changing an existing mortgage by refinancing there needs to be a bona fide reason for doing so but again most loan officers don’t go the extra mile. In fact, banks and many mortgage companies would rather an existing loan stay right where it is, drawing interest over time and not losing the loan to another lender by way of refinancing. But that’s too selfish of an approach. There could very well be situations that dictate a need for a refinance. Here are just a few.
Goodbye FHA, Hello Conventional
FHA loans are popular, especially for first time home buyers, due to their competitive interest rates and low down payment requirements. Unless someone is VA home loan eligible or is buying a property in a rural area and taking advantage of the USDA home loan program, the FHA product is perhaps the best choice among all other available mortgage programs due to the low down payment requirement of only 3.5%.
Yet an FHA loan also has two separate types of mortgage insurance. One that is paid upfront and rolled into the loan amount and an annual premium paid in monthly installments. For all FHA loans that were funded in 2013 and beyond, this monthly premium payment is required for the life of the loan. Prior to that time, rules required the monthly premium automatically drops once the loan balance fell to 78% of the original loan amount.
Let’s take someone who purchased a home back in September of 2013 and financed the purchase with an FHA loan and the 30 year fixed rate at that time was around 4.50%. The annual premium then was 1.35% making the annual monthly premium payment on a $300,000 loan amount of about $337. That’s in addition to the principal and interest payment of $1,520 for a total of $1,857. Had this loan originated one year earlier, while the annual premium was a bit lower the monthly premium could eventually be removed. Not so since 2013.
The borrowers might not just consider refinancing to a lower rate but getting out of an FHA loan entirely and the monthly premium requirement that adds to the cost of home ownership. Even today with the annual premium of 0.85%, that’s still an additional $2,500 per year. FHA loans are an excellent choice for those needing a very low down payment but there is an additional cost involved.
Refinancing from an FHA loan to a conventional can get rid of the annual premium given sufficient equity in the home. An experienced loan officer can look at refinancing an FHA loan into a conventional one without having to have a mortgage insurance payment. Conventional loans only require mortgage insurance when the first lien is above 80% of the current value of the home. If the home does not appraise high enough to meet the 80% mark and remove mortgage insurance, another option is to combine two mortgages, a first and a second. The first mortgage amount would remain at 80% of the value with the second lien taking up the rest.
This strategy works regardless if the existing loan is an FHA loan or any other. Property values have increased in recent years in San Diego County and this recovered equity along with a strategy to reconstruct an existing loan can help borrowers save thousands of dollars.
Coming to Terms
An oft-overlooked strategy to save interest is to change the loan term. Most lenders when they promote their interest rates typically present the 30 and 15-year options. The 15-year rate will be slightly lower than the 30 year but because the loan term is compressed with the 15 year the monthly payments will be higher. So much so that borrowers may not have the option of refinancing in order to save interest because the payments are too high. Yet they might be able to accomplish saving interest and shortening the loan term by choosing a 20 or 25-year loan.
Let’s look at the amount of interest paid on a $300,000 loan over 10 years and the outstanding balance.
| Term | Rate | 10 Yr Interest | Balance after 10 Yrs |
|---|---|---|---|
| 30 yr | 3.50% | $93,936 | $294,242 |
| 25 yr | 3.50% | $90,307 | $293,648 |
| 20 yr | 3.375% | $81,520 | $175,040 |
| 15 yr | 3.25% | $69,554 | $116,593 |
| 10 yr | 3.00% | $47,618 | -0- |
A common loan officer probably wouldn’t think of contacting a previous borrower if mortgage rates haven’t changed all that much since the loan first funded but changing the loan term can provide a dramatic change. Maybe a jump to a 10 or 15-year term is a bit too much for some but a 20 or 25 might make sense.
Another option might be to consolidate an existing HELOC with a first lien and have just one low fixed rate instead of a first and an adjustable second. Home improvement loans can also be consolidated with a first lien. If the borrowers are refinancing to get a lower rate or changing loan terms they may also pull out extra cash to pay off outstanding credit card debt, an automobile loan or student loans.
