My wife and I built our home in 2004, at the height of the housing boom. We built as large of a house as we possibly could using creative financing, which included an adjustable rate first mortgage, and an interest-only second mortgage. This wasn’t an ideal situation, but we planned to refinance within a few years.
Unfortunately, our growing credit card debt prohibited us from being able to refinance.
With the pending completion of our debt management program, we’re finally in a position to redo our mortgage. I wanted to wait until March (when the credit card debt was completely gone), but my wife pushed to start the process in December. Though I resisted at first, I’m glad we started earlier.
Here are three reasons I’m happy we refinanced our house when we did.
1. Upwardly trending interest rates
While rates are still very low from a historical perspective, economic indicators show that they’re beginning to rise — which is bad news for my adjustable rate mortgage. For nine years straight, we’ve waited for that once-a-year mortgage adjustment letter, and we now want to be locked into a rate.
2. New debt-to-income ratios
Under the Dodd Frank Wall Street and Consumer Protection Act, which takes effect on January 10th, borrowers must have a debt-to-income ratio (DTI) of 43% or less. This means that borrowers can’t spend more than 43% of their monthly gross income on monthly debt payments. Under current rules, exceptions can be made for compensating circumstances such as large reserves, high credit scores, or the fact that debt payments will dramatically decrease in the near future. Under the new law, the 43% is a very hard line in the sand.
Our DTI currently exceeds 43%, but will drop dramatically after we make our last debt management plan payment in February. Because the underwriter could take this into consideration under the current rules, our refinance was approved. Under new regulations, we would’ve been denied, and would have had to wait several more months before starting the refinance process. (During which interest rates could potentially climb higher.)
3. New rules for self-employed borrowers
While I do have a day job, I earn significant income each month through freelance writing. Self-employed applicants must prove their income using tax returns and profit/loss statements instead of standard pay stubs and W2s. Self-employed applicants with fluctuating incomes will be scrutinized even more heavily under the new rules, as they’ll have to prove they have sufficient cash flow to make their mortgage payment each month.
Getting our mortgage refinancing completed prior to January 10th may have saved us thousands of dollars over the life of our mortgage. This is just one more puzzle piece in getting our finances on track for the long term future.
Are you in the middle of applying for a mortgage? Are the new laws going to affect your ability to be approved?