Home Loans, Down Payments, and Refinancing

A recent New York Times article about using gift funds for home loan down payments may address a specific issue with new purchase home loans, but there is a deeper lesson for those who go into such transactions with no plans beyond buying the home. Could a home buying strategy that also includes specific plans to refinance within the early days of home ownership make sense for some borrowers?

According to the New York Times article titled, “To Givers of Downpayments”, many house hunters turn to their relatives for help with down payments, which can be as high as 20% down depending on the type of mortgage you seek.

“In a National Association of Realtors survey of people who bought homes from July 2011 to June 2012, about a quarter of first-time buyers relied in part on gifts from relatives.” The article adds, “But mortgage lenders closely scrutinize cash gifts. That critical (down payment assistance) check from the parents may not count toward your home purchase if you can't thoroughly document its source and intention.”

For some borrowers that could mean an obstacle or two on the road to home ownership. There are the borrowers who do carefully document the source of gift funds they use for downpayments, while others may not be as meticulous and wind up having those gift funds disallowed. What is a borrower to do in such a situation?

There may not be a satisfying answer in the short term, but those who plan ahead should seriously consider adding a home loan refinance option to their financial plans. If you “bite the bullet” and make a large down payment in order to push the home loan through (rather than relying on gift funds or trying to contest gift funds that have been denied for some reason) but plan to refinance as soon as you’re permitted to do so in order to get a lower interest rate or mortgage payment, you may be able to make up that initial investment over time.

The key to this strategy is to do the math over the short AND long term. How much you put down, versus how much you might save in monthly payments after the loan has been refinanced.

This strategy doesn’t work for all situations, but for those who do the math and like the numbers they see over a 30-year loan may be tempted to simply pay the higher down payment themselves and put the money they save after refinancing back into a savings account.

The borrower who saves $50 a month on mortgage payments after refinancing five years into a 30-year mortgage would wind up with $15,000 in savings in 25 years. Can refinancing save you that much per month? Naturally much depends on your terms and conditions but as an example using an arbitrary number, that example is fairly impressive. Your own experience may vary, but the numbers are definitely food for thought.

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