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?
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When I purchased my house in August 2010, with a tax abatement for 10 years and a 5.25, 30 year fixed, with no points. I refinanced in January 2013 at 3.625%, 30 year, no points. Principal increased by about $2,000.00 and I got $1,800.00 back. I was very happy with that and very thankful for this rate. It is not a big house but it is newer and only 15 minutes from downtown Portland, Oregon.
Sounds like a win/win scenario, Phil! 3.625 is a FANTASTIC rate!
We bought a house in the summer of 2013… our rate is 2.93% for a 15 year. I don’t think we’ll ever see those rates again.. or at least for a very long while.
That’s definitely a great rate, Michelle – congrats on locking in on that AND taking the shorter term of 15 years!
Buying a house and take a bank loan requires a lot of thinking and calculated on the present and future interest rates from banks and the state. Even the government’s budget and financial muscle to help banks if problems arise affecting banks’ interest rate, so the best bank today may not be there in a few years.
I’m not sure I agree with that, property marbella, the bank we refinanced with has been around forever and a day. I don’t think there’s any chance of it going away. Thanks for your perspective though!
We built a house in late 2012 / early 2013. The loan closed in April of 2013 with a 3.25% 30 year fixed rate mortgage (no points). The rates immediately shot up about one month after our closing. I knew it was a once in a lifetime opportunity to lock in a rate that low. Very fortunate.
Wow, that’s a SPECTACULAR rate, Trace! We’re locking in at 4.875, which historically is really good…but it’s nowhere near what you got!
Congrats on your recent refi Travis,
It sounds like you are opting for a fixed rate mortgage this time, and it’s always a good feeling to know what your payment will be no matter what interest rate does. And with inflation eroding the purchasing power of every dollar, you’ll be happy years later that you locked in your payments now.
Thanks, David! Yes, we are going with a fixed rate this time….we had to go with the ARM the first time because that was the only way we could build the house we were looking at (although that could make a person wonder whether we built too expensive of a house to begin with). As mentioned in an earlier comment the ARM treated us pretty well over the last 10 years, but it’s time to lock in – and have that mortgage payment be a constant amount to make our budgeting much easier!
Everyone who went with ARMs made out great versus going with a fixed rate over the past few decades because of steadily falling interest rate, but you are smart in fixing it now that the rate is practically not going any lower.
Next time you’re rejoicing we will be talking about you paying off your mortgage!
You made a great decision. The global economy is picking up (it’s the same here in the UK with interest rates) and house prices are recovering. Loan inetrest rates are starting to trend upwards and I agree that means higher repayments. 🙂
Our adjustable rate mortgage has treated us pretty good over the last 10 years. It wasn’t able to adjust the first 5 years, but then adjust downward for the next 3 years, then stayed the same this year. Trends are moving up, and we’re definitely tired of playing the ARM game. Time to lock in! Thanks for stopping by!
Glad to hear that you were able to get your refi taken care of Travis, especially being able to get it in under the wire like that. We’ve unfortunately not been able to take advantage since we’re self-employed. We already have a pretty good rate, historically speaking, but would like to get it lower – but no such luck.
Some places might be more lenient than others, so have you checked at different institutions? Every time I refinance, I could use past 2 year’s tax returns instead of pay stubs to qualify, so that might be another option to refinance if you don’t have payroll records.
We were lucky, John….we didn’t even know about the rule changes when we started, but our mortgage agent mentioned them during one of our meetings. I did a little searching because I was curious. The more I read, the more happy I was that we were getting it done!
Wow you actually had a face-to-face meeting? I remember when I applied for a mortgage the guy ignored my multiple request to meet face-to-face!
As we went through underwriting there was a lot of email correspondence, but the first few meetings were face to face. In those meetings our agent printed of different options, and discussed our situation with us. I’m not sure I’d like having to do everything virtually – seems odd that they would ignore a customer request!
Exactly. That’s why he’s far form the top of the list if I ever need mortgage options!