An interesting headline making its way around the interwebs caught our attention at Lenda HQ. The headline was "Why Ben Bernanke Can't Refinance His Mortgage." It was a short article that showed up at the New York Times but they originally came across the story from Bloomberg.
We thought Ben Bernanke was doing OK financially... why would Mr. Bernanke not be able to refinance a mortgage?
The issue seems to be that Ben had changed careers recently. He went from being chairman of the Federal Reserve to getting a book advance and hitting the speakers circuit. Despite his refinancing issues we shouldn't worry too much about Ben's financial health. He recently signed a book deal that is "at least $1M" and he does speaking engagements at a paltry $250,000 per engagement. He does five to six speaking engagements per year. So, from our perspective, we're pretty sure Mr. Bernanke's financial footing is on solid ground.
What gives? Why did he say he tried to refinance his home in couldn't? Switching jobs can raise a red flag for a lender, especially if you're going from a stable and consistent income to one that might be more sporadic.
Does it have something to do with the mortgage he's trying to refinance? Let's look at the numbers...
He bought his home in 2004 for a reported $839,000. It's a 3 bedroom with 2.5 baths at 1,842 square feet. He then refinanced his mortgage in 2011 going from an interest rate of 5.375% to a rate of 4.25%. Not too bad considering rates on 30 year mortgages just dropped below 4.20%. The estimated value of the home is approximately $965,468 according to Zillow. When he refinanced in 2011 it's reported that his mortgage was down to $672,000.
So two things jump out at me...
1. He's got plenty of equity. He's well below the 80% loan-to-value that triggers extra costs like private mortgage insurance (PMI).
2. Most likely he's not going to refinance into a new 30 year mortgage if he's already lived in the home for 10 years. Sure, he refinanced in 2011 but it's not certain what the loan length was on that new mortgage. I'm assuming it was probably a 25 or 20 year team. Maybe an ARM (adjustable rate mortgage). We don't have all the facts so we can't speculate about the reason why Bernanke wants to refinance in the first place.
What he's got going against him is the fact that he has zero years of service in his new business ventures as an author and speaker. Plus he's self-employed. Both of these things can make it more difficult to refinance. But impossible? Not really.
If we were just going off the numbers Ben should be able to refinance. Any lender would be able to see that Ben has a financially stable situation. We would ask him to show us the income from his most recent speaking engagement. Let's say he spoke back in August and earned $250,000 for it. He could simply show us paperwork to verify that income. The next question of course would be about future speaking engagements. Does he have future gigs scheduled? The answer is most likely 'yes.' Then we would just ask to see some paperwork for the future speaking gigs.
Of course all the other typical considerations would come into play such as financial assets, other sources of income and credit score. He did switch jobs but he's continued to work and he could easily prove that he has steady income coming in.
The point is that, given the information we have, he probably could refinance. There might have been some other issues that made the numbers not make sense to refinance or he was just trying to get a point across. Switching careers or being self-employed will definitely make the refinancing process a little more complicated but not impossible.
If you're thinking about refinancing your mortgage there are a few things you should know...
- Know what your loan-to-value ratio is and strive to have it to at least 80 percent or lower. High LTV's and homes that are underwater can be a lot more difficult to refinance.
- Make sure your credit score is in good shape. If you have really poor credit then you will have a hard time refinancing. Pay those bills on time!
- Unemployed or choppy job history. If you don't have a job then providing the necessary income to get a mortgage could be tough. If you have a co-borrower you might be able to get the job done. Your debt-to-income ratio is an important consideration when it comes to refinancing a mortgage.
- Lack of other financial assets. You need to be able to show the bank that you have the means to pay your bills even if you do lose your job.
Do the math for yourself and see what your options are. If you're able to make a solid case for why a bank should allow you to refinance you might be able to pull it off.
As for Ben... I wouldn't worry too much about Ben. I think he'll be just fine. If he really wants to refinance he can give us a call.