There are multiple reasons homeowners consider refinancing. Maybe you have a first and a second mortgage and if you combine the two into one “blended” rate, the total monthly payments are lower. Perhaps you took out a “balloon” mortgage and the note is coming soon down the road and you’ve decided to stay. Of course, the most common reason is because interest rates have fallen.
Refinancing to Combine a First and Second Mortgage
A first and a second mortgage, depending upon when the notes were recorded, will almost always result in a lower total monthly payment. Why is that? Second mortgages, or junior liens, will have higher interest rates compared to a first mortgage. The reason for that is the additional risk factor a lender takes when issuing a second mortgage on the same property. A second mortgage will be subordinated to the first. That means when the property is sold, the first mortgage is paid off before the second. This is usually not a problem but if there are some valuation issues, there may not be enough funds remaining after paying off the first to cover the total balance of the second. If the owners are considering a foreclosure the same concept applies. When the home is ultimately sold to satisfy the lien holders, the first is paid off, and then the second. Refinancing can lower the overall monthly payments by combining both loans into one single mortgage.
Getting Rid of a Baloon Mortgage
There are also “balloon” mortgages that can be resolved by refinancing. A balloon mortgage is one where the initial interest rate is lower compared to a longer-term 30 year fixed rate loan. With a balloon, the total amount due comes at a predetermined date, sometimes five or seven years. Buyers take out a balloon thinking they’ll sell the property before the balloon period arrives. If things change and a move is not definite, refinancing is the likely answer. Otherwise, the homeowners would have to settle the outstanding mortgage balance with a cash payment.
Mortgage Rates are Lower
Finally, when rates fall below what the homeowners currently have, refinancing might be in order. Lower rates mean lower payments which saves the borrowers cash every single month. Homeowners may also refinance an existing loan to change loan terms. Switching from a 15 year term to a 30 year means payments will drop by nearly half. There is more interest paid over the long term, but payments are much lower. Conversely, homeowners with a 30 year loan may want to refinance into a 15 or even a 10 year term to save on interest each month. This is a common strategy for those who plan to retire in 10 or 15 years.
These are all good reasons to consider refinancing. But when things change and refinancing is no longer an option, there are some other implications.
When Refinancing isn’t the Best Option
Let’s now look at a scenario where a couple has had their home on the market. Perhaps they had an ideal sales price in mind. The home was listed at the desired price but after a few months there were very few inquiries. Maybe they had the home priced too high or the real estate market was in somewhat of a slowdown. Instead, they decided to take the home off the market and refinance instead. And herein lies the rub.
When a lender accepts a loan application for a refinance, an appraisal will be ordered. On that appraisal it can show whether or not the home has recently been listed. Worse, an appraiser can visit a property and there is still a “
For Sale” sign in the yard. Lenders can also access the MLS to see if the home has been listed. So?
Lenders don’t like short term loans. It can take up to two years for a mortgage company to recover the costs of originating and funding a home loan. Lenders make money both from the interest from the note and from selling the note. In this example of taking a home off the market and instead applying for a refinancing loan, the lender will be very leery of the situation. What if the lender does approve refinancing and then a couple of weeks later a buyer pops up and makes an offer which the sellers accept? The lender would lose money in this situation and this is why mortgage companies approach such a scenario with caution.
We Can Help
However, I can help in this scenario. If you can show why you listed the property in the first place and the reason you too it off, we can together craft a letter to be included with your loan file. The letter could simply say that they had thought about selling and were just curious but the only way to find out was to put it on the market. Or, sellers simply get completely tired of the process, having to keep the home “visitor ready” and clean as well as staged each time someone wants to see the home. Trust me, this is more common than you might think.
Together however, we can help put together a proper explanation letter that will put your new lender at ease. If you’re not sure about listing your home while also thinking about refinancing- you and I need to talk.