Refinance question/home purchase

[Aerovette]

I'll do my best to keep this condensed.

We need to pay deposits on home upgrades for home being built. We just signed the contract. I do not have the cash to do this. Fairway mortgage wants to refinance my current home and give me some operating cash from the equity. They claim a positive impact on my score because the mortgage address has 20 years of history and the cash will allow us to also pay off two car loans as well as the deposits. The theory is that the two paid off car loans have a higher POSITIVE affect than the mortgage refinance does as a new loan. I need to know if this is accurate or if a new and large debt on my report is going to negatively impact my ability to get good financing on the new mortgage. No matter how you slice it, I will need to borrow the money for the deposits but I may only borrow the deposit money and NOT pay the two cars. I'm not sure which path is the best to follow, or if it matters at all which one I choose.

[ybrew]

Another option that may not look entirely attractive, but depending on your situation may prove better in the long run -

Sell your house and use some of the equity from the sale to do your own upgrades to the house after you move in.

This obviously doesn't work well for any structural upgrades. I personally upgraded the hell out of my house so there was really nothing for us to do (other than paint) when we moved in. It makes things really easy that way, and honestly our builder's upgrade prices were generally very good. I'm sure we overpaid for the wood floors but everything else was very reasonable.

If you will have cash from the sale of your house, you can upgrade post-purchase and have way more selections to choose from. This means your house will still be under some construction after you move in (replacing counters/floors/possibly cabinets, other stuff) but in the long run it could make your house more your home and save you some money.

I don't have an answer to your original question though. I was really lucky too. My builder didn't charge a dime for any of our upgrades. One of several reasons we went with the builder we did.

[Ahntara]

"...mortgage address has 20 years of history..."

This is stupid statment and is impossible. ADDRESSES don't have history that relate to credit scores; accounts and the consumers who hold them do.

"...Fairway Mortgage wants to refinance..."

This is how they make money.

"...pay off two car loans..."

Generally, there is little score-benefit to paying off an installment loans early. If your particular loans are structured with compounding interest (like mortgage loans), then you MIGHT save some money by paying early. Read your loan papers to determine this or call the lender. (Ask them what the 'payoff' is today and next month)

"...new and large debt...is going to impact my ability to get good financing on the new mortgage..."

Do you have a construction loan that already closed and will convert (to a Conventional mortgage) after the house is completed? Or are you paying for the construction out-of-pocket? Construction loans save consumers by costing less (only one set of fees, charges and closings) and bring lender oversight into the process.

Anytime you open a new account your score can decrease. New accounts generate deductions for at least 6 mos with no additions (from other factors like payment history, amt of the loan, etc). The size of the deduction and size of the subsequent increase after that time depends on everything else in your report. It's ALL relational.

I'm confused about your current situation. But I'll caution that anytime a professional has a vested interest in helping you, know that help will come their way also. Mortgage brokers deserve to get paid too; just make sure it isn't at your expense.

[Aerovette]

Does it matter that they are getting paid? Of course they are. I would expect it. The question is whether the plan is beneficial to me. The loan is a very short term loan regardless of what the terms are. It will be paid in full in no more than 6 months. The question is whether getting that cash out as a plain Jane loan is better than getting a refinance. Refinancing frees up "trapped" equity that I need to pay for options on the new house AND it potentially reduces my monthly outlay (even for a short period). My current interest rate is 9.5 (1987 purchase). The cars are 13.5 and 7.5 with a collective payoff on both at around 19,000.00. The plain Jane loans simply ADDS a debt to my report and does nothing to reduce my debt to income ratio.

[sr28b]

Does it matter that they are getting paid? Of course they are. I would expect it. The question is whether the plan is beneficial to me. The loan is a very short term loan regardless of what the terms are. It will be paid in full in no more than 6 months. The question is whether getting that cash out as a plain Jane loan is better than getting a refinance. Refinancing frees up "trapped" equity that I need to pay for options on the new house AND it potentially reduces my monthly outlay (even for a short period). My current interest rate is 9.5 (1987 purchase). The cars are 13.5 and 7.5 with a collective payoff on both at around 19,000.00. The plain Jane loans simply ADDS a debt to my report and does nothing to reduce my debt to income ratio.

I don't think anyone could tell you with certainty, but my suspicion would be that a new first mortgage (not a HELOC) sufficient to retire your current mortgage and the two car loans would help your FICO marginally. Over the next six months it should continue to add points.

Now, if the new loan is a HELOC then watch out 'cause your score might take a small dive. Small HELOC's are viewed as credit card debt by Fair Isaac and will take a bite out of 'Amounts Owed' (30% of your credit score in teh FICO pie chart).

[Aerovette]

I don't think anyone could tell you with certainty, but my suspicion would be that a new first mortgage (not a HELOC) sufficient to retire your current mortgage and the two car loans would help your FICO marginally. Over the next six months it should continue to add points.

Now, if the new loan is a HELOC then watch out 'cause your score might take a small dive. Small HELOC's are viewed as credit card debt by Fair Isaac and will take a bite out of 'Amounts Owed' (30% of your credit score in teh FICO pie chart).

It is NOT a HELOC. It is a new First Mortgage. It will pay off 2 cards, a car and provide cash out for deposits on new home options. HOWEVER, because all of the money is NOT being used to pay off ALL of the debt, my debt: income ratio will in fact worsen. I will now show to be $26,000 more in debt than I was before. My concern is the impact on my score when I go to qualify/verify for the new home 30 days before closing.

[sr28b]

..income ratio will in fact worsen. I will now show to be $26,000 more in debt than I was before. My concern is the impact on my score...

FICO doesn't consider income.

[Aerovette]

FICO doesn't consider income.

The mortgage lender absolutely will consider income. I cannot qualify if I am over the 50% mark.

[firstsource]

Have you considered going to a local bank and borrowing just enough to get the funds for the deposits?

If your home you currently live in is not sold by the time you need to finance your new home, can you qualify?

You mention the 50% DTI percentage that you can not exceed. Two questions here:

1) this implys that you are qualifying for a sub-prime or an Alt-A loan. is that the case? Why are you going that route?

2) Remember that when the loan officer figures DTI they go from what your situation will be the day you close on your new home. So if you are going to be paying off this loan, it will not figure into your DTI.

From my experience it is never a good thing to get long term financing for disposable items like cars, so if you can avoid paying them off with long term debt, that would be my advice.

Charles

[Aerovette]

Have you considered going to a local bank and borrowing just enough to get the funds for the deposits?

If your home you currently live in is not sold by the time you need to finance your new home, can you qualify?

You mention the 50% DTI percentage that you can not exceed. Two questions here:

1) this implys that you are qualifying for a sub-prime or an Alt-A loan. is that the case? Why are you going that route?

2) Remember that when the loan officer figures DTI they go from what your situation will be the day you close on your new home. So if you are going to be paying off this loan, it will not figure into your DTI.

From my experience it is never a good thing to get long term financing for disposable items like cars, so if you can avoid paying them off with long term debt, that would be my advice.

Charles

Charles,

I have read nothing but good things about the help and advice you have given people on this forum. I'd love to chat with you and really get an education. Going to a local bank and just borrowing the option money may be counter productive. The situation is this...

I have about 63,000.00 equity in my home. The payoff is $22,300.00 (been in it 19.5 years). In Texas, you are allowed to borrow up to 80% of the appraised value. My intention was to refinance and pay off the high utilization on two cards and get rid of my car payment all together. Have 3 months NEW HOUSE payments in reserve. When my home sells, I will still have the 205 equity in it for closing costs etc. The ultimate goal is to move into the new home debt free. However, that equity is trapped and I need deposits for options on the new house. The lender has convinced me that the refi will do more good than bad since it is not a HELOC. The idea is that by the time I am 30 days from closing, my credit will be improved over the current situation. I am currently a level 1 risk. Here is why...

PRELIMINARY RISK - ELIGIBILITY

4 This case meets Fannie Mae's eligibility requirements.

5 This case has been underwritten in accordance with the Expanded Approval initiative. The risk grade for this loan is Level I. There may be a rate or price adjustment associated with this loan.

6 The note rate on this loan can increase by a maximum of one percent to maintain the current risk level. If the note rate changes by more than one percent the loan must be resubmitted.

PRELIMINARY FINDINGS

7 The following aspects of the borrower's loan application had a significant adverse impact on the recommendation. Additional information about each of these risk factors can be found in the Lender Guidance For Use With Applicants section of this report:

Combined Loan-to-Value Ratio (80/20)

Months of Reserves

Credit Profile

8 Credit: The following items in the borrower's credit report had an adverse impact on the borrower's credit profile. Additional information about all of these risk factors can be found in the Lender Guidance For Use With Applicants section of this report:

Utilization of revolving credit

Percentage of accounts with delinquencies

Recency of mortgage delinquencies (Jan. – Feb. 2005)

Average age of accounts (Hooters; Target)

PRELIMINARY LENDER GUIDANCE

28 Reserves: The amount of liquid assets the borrower has after closing is very important to the underwriting recommendation. Mortgages for borrowers with minimal or no reserves represent a higher level of risk.

29 CLTV: The amount of the investment (down payment) a borrower makes when purchasing a home is very important to the underwriting recommendation. There is a greater likelihood of the mortgage going into default for loans with smaller down payments.

30 Credit: The borrower's past experience in managing his or her debts and financial obligations has proven to be an important indicator of how a borrower is likely to repay future debts, including mortgage debts. Verify with the borrower that the credit data is accurate. If there are material and substantiated derogatory credit errors in the credit report, evaluate the borrower's credit outside of Desktop Underwriter.

31 Credit: The percentage of the unpaid balance to the maximum credit limit on revolving accounts is high. Historically, mortgages for borrowers with high revolving utilization rates have experienced an increased incidence of mortgage default.

32 Credit: The credit report indicates there are late payments on mortgage accounts. The recency of these late payments contributed to the determination of the borrower's credit profile as higher risk. Late payments on mortgage accounts have a greater impact on the credit profile than late payments on other types of accounts.

33 Credit: The percentage of accounts with late payments contributed to the determination of the borrower's credit profile as higher risk.

34 Credit: Mortgages for borrowers with a limited credit history, as measured by the number of accounts and length of time opened, represent a higher risk.

They are offering an 80/20 at 7.1% on the 80 and 7.85% on the 20. The lender feels that I can do better if I follow his guidelines and refinance. Use the equity to build the reserve dollars and pay off/down the high utilization.

What's your take? My 3in1 scores are 660,668,651 but they are much different on his report.

[firstsource]

If I understand this correctly, the new loan is an 80/20?

My suggestion is that I would go with it and when your home sells, then pay off the 20%. Historically 7.1% financing for a home is a great rate. The amount of money you are going to be spending to lower your rate on the first wont be worth it in my opinion.

With the Texas cap on the amount of closing costs (3%) that can be charged for cash out refinances, it is still a lot of money to spend for not much difference in payments.

Talk with the builder and see if he will do the upgrades and for collateral use your existing home. Or back to the local bank idea.

Charles

[Aerovette]

Interesting. I did not think 7.1 was so great. I was given a good faith estimate not long ago (weeks) that was 6.25. However, the 2nd was high. It was 9.25. What is the advantage to paying off the 2nd? That interest is deductable and it seems I would do better to invest that money in something where it will grow. Between my fiance and I we will need all of the proceeds form house 1 to clear our debt and have 4 payments in reserve. I don't think I could pay the 2nd if I wanted to. If I could, I would just put it as a down payment. The house is on a contingency contract. If I don't sell mine, the deal is null and void.

[Aerovette]

The amount of money you are going to be spending to lower your rate on the first wont be worth it in my opinion.

Can you explain? The $2100.00 cost to process the refi is rolled into the refi.

The refi loan will be paid in 90 days, possibly less. Borrowing from the bank incurs another new loan with no change in utilization (in fact worse because the new loan is considered to be at 100% of its limit correct?). I don't see that as a solution. Maybe I am missing something.

FYI, the second (20%) on the new home would be over $55k and there is no chance of paying that much off early

[jq26]

Can you explain? The $2100.00 cost to process the refi is rolled into the refi.

If I am following correctly, you are paying a fee of $2100 to lower your rate from 7.1% to maybe...6.5%? Unless you are taking out a jumbo loan, the $2100 refi isn't worth the half point reduction on a small amount of borrowed funds. Its too much cash upfront to save a small amount of cash over time.

What is the advantage to paying off the 2nd? That interest is deductable and it seems I would do better to invest that money in something where it will grow.

The second is at 9.25%. And you are paying significant interest on that. The fact that it is tax deductible means that you are only receiving a partial credit back for the interest you pay. Most people receive a 28% refund on the money they pay towards interest due to their marginal tax rate. The other 72% is never recaptured and is lost forever. Its difficult to invest in something safe with comparable yields. Paying the loan down is the same as an ultrasafe 7.0% post-tax investment, which is hard to find, and has the effect of making future payments reducing the principal faster and faster. Besides, other investments with comparable yields are not sure bets like paying down the 9% loan is- look no further than the equity markets today! Bottom line- when you pay down your 2nd mortgage, your accumulated wealth is growing...likely faster and safer than external investments. So your money is "growing" plenty.

[Aerovette]

If I am following correctly, you are paying a fee of $2100 to lower your rate from 7.1% to maybe...6.5%? Unless you are taking out a jumbo loan, the $2100 refi isn't worth the half point reduction on a small amount of borrowed funds. Its too much cash upfront to save a small amount of cash over time.

Still some confusion I think. My CURRENT mortgage is a 9.5% loan. The 2100.00 is to a) reduce the overall rate from 9.5 to 7.5 on my CURRENT mortgage and get me cash to pay options on the NEW loan which is an 80/20 at 7.1 and 7.8 (if I recall without reading back through my post)

As for the early payoff, I agree, but I will never be in a position to pay $55,000 early.