Which should be first? Refinance our primary home or purchase a new home?

Question

Hi Folks,

Here is our situation: My husband and I have a 6.75% 30-year fixed rate mortgage on our primary home; thus, we signed a contract on purchasing a new construction home last month, and the construction will be completed by the end of the year.

Both of us work W2 jobs for years with good tax returns and 780+ credit scores. We are am planning to move to the new home and rent out our current one. We have heard that some lenders provide both refi and new loan at the same time. If not, we are looking for 30-year fixed rate mortgages for both properties, which should we get first? Refi or New home loan?

Thank you so much :)

-Stephanie

Derek Brickley · Answer

Hey Stephanie!

You can do both at the same time, but you wouldn't be able to do it both as a primary residence. Once you buy another home as a primary residence, you would need to refinance the current home as an investment which would have higher rates. Depending on your time frame, refinancing the current home first as a primary residence and waiting to buy another primary residence would be the way to get the best terms. If it's more important to get another home first, then go ahead and do that. Just know the refinance will need to be done as an investment if done after the fact.

Erik Estrada · Answer

Hi Stephanie,

I would hold off on the refinance unless it's a cash out needed for the purchase of the new home. Your rate at 6.75% is fair. You must factor in the total closing costs of the refinance to justify a rate and term refinance. Also if your goal is to pay down the balance you would hit reset on the mortgage amortization and start fresh. A refinance may make sense if you need cash out or need to decrease the loan term to pay down the balance quickly.

Derek Brickley · Answer

Yes exactly right. Now if there is a justified reason for moving (increased family size, job relocation, etc.) then that makes sense for buying a new primary after the fact. Otherwise, some time would need to pass, generally 12 months, but that is not a hard set guideline.

I know the national "average" for a conventional is around 6.25% right now... but that doesn't take into account paying points to buy down the rate or your specific situation. To make refinancing out of 6.75% worth it without paying points the market isn't quite there yet. With how soon your new construction will be finished, I wouldn't recommend risking that over trying to get .5% better in rate (probably would end up paying points for that too).

Happy to discuss what refinancing that as an investment property would look like for you or showing more detail on the numbers either way!

Stephanie Joe · Answer

Hi Derek,

You have read our minds! That's exactly what we thought about. However, when we decided to buy a new property, we didn't plan for lower interest rates. Its challenging for us to time it.

To be clear, if we do refi as a primary home first, a lender will assume we intend to live in the current property for at least another 12 months, is this correct?

Thank you so much!

-Stephanie

Stephanie Joe · Answer

Thank you so much for your detailed suggestion! I'll connect with lenders.

-Stephanie

Jasper K Juhl · Answer

@Stephanie Joe, you're in an exciting position with a new construction home on the way and a potential rental property in the mix! Here's a breakdown of how you might approach your decision:

• New Loan vs. Refinance: Securing the loan for your new home first could be beneficial, especially if you're planning to rent out your current home. Many lenders will allow you to count future rental income as part of your debt-to-income ratio, which might make it easier to qualify for the new loan. This could help you secure a better deal on your new mortgage, especially with your strong credit score (780+).
• Current Market Trends: Rental prices are in a bit of a flux right now. While some markets, especially in tech-driven areas like Austin, have seen a drop in rent prices (down 5.6% year-over-year in Austin as of May 2023), other areas are still experiencing steady rental growth. This may impact how much rental income you could expect from your current home​.
• Concurrent Loans: It’s definitely possible to refinance and secure a new home loan at the same time. Several lenders offer programs designed to help streamline the process. However, you’ll want to compare closing costs and ensure the timing works with your home’s construction schedule.
• Refinancing Your Primary Home: With your current mortgage rate sitting at 6.75%, refinancing could lower your monthly payments significantly, especially if you can lock in a lower rate. On the other hand, if interest rates are expected to rise, you might want to prioritize the new home loan before refinancing.

I recommend speaking with a mortgage broker who can provide specific advice based on today’s rates and your long-term goals.

P.S.: If you're planning to rent out your current home, keep in mind that many landlords in 2023 are adjusting their rent expectations due to a shift in market dynamics, with vacancy rates creeping up as more rental units come online​(. This is something to factor in when setting your rental price.

Good luck with your new home and feel free to ask if you have more questions!

Which should be first? Refinance our primary home or purchase a new home?

Which should be first? Refinance our primary home or purchase a new home?

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