Right now we are seeing advertisements all over the place advertising home refinancing, and this is motivating a lot of people to do internet searches and asking: Should I Refinance My Mortgage? There isn’t a one-size-fits all box to check, so, there isn’t going to be a cookie cutter answer.
You should never do a loan just to do one. Nobody takes out debt as a hobby. What you need to be considering, in what ways does your current mortgage not work for you? Have you moved to fixed income and now the budget is tight? Have you added income to your situation, and now you are looking to get debt free? Are you considering buying a vacation home for the summers? These are all questions that should be able to help you decide if refinancing is going to be worth it to you. Don’t let a salesperson talk you into a loan that you don’t need.
Here Are the Top 5 Reasons That You Should Refinance Your Home:
This is the reason that consumers are taught is the main focus of the loan, but it’s not. Yes, it is an important feature. However, shopping on rate alone, could save your one place and cost you in another. Mortgages are built with sliding scales where one area will affect another.
Let’s explain further. Many people looking to refinance will request numbers that will let them lower their rate and shorten their term. (This is a unicorn situation if monthly savings is the goal. Very rarely can you reach both financial goals.) From a much broader perspective, you are doing two things. 1. You are lowering the rate. Therefore, your payment should go down. 2. You are shortening the amount of time that the mortgage is paid. Hereby, increasing the payment. They often end up cancelling each other out.
When looking to save money on our mortgage, take a moment to layout what your financial goals are for the savings. This will help your loan officer build a much better custom plan for your situation.
Your term is a fancy way of saying how many months you will be paying your loan back. The most common will be your 30-year, but most banks will offer a 25-year, 20-year, 15-year, and sometimes a 10-year. These are your standard mortgage terms. Moving your mortgage to a different term from where it is today could either increase your payment, decrease your payment, or keep it about the same. Confusing? Again, it’s going to depend on your financial goals. What works for one person may not work for another.
Here is an example. Let’s say that you’ve been in a 30-year mortgage for 14 years, and you are unhappy with your 6% rate. You are comfortable with the monthly payment that you are making now, and you really just want to get the mortgage paid off. You opt for a 10-year mortgage at a much lower rate that allows you to keep your monthly payments about the same while saving six years of interest payments on your old loan. This is a loan with benefit.
Many people have no idea that you can leverage the equity of your home to save money in the monthly budget. If you have high balances on your credit cards, high interest personal loans, or you are just struggling to make ends meet each month, this might be your better option. However, you will be capped on how much money you can borrow. Most programs are going to allow you to borrower up to 80% of the home’s value on a cash-out loan. However, that percentage would have to also cover the payoff of your current mortgage.
For instance, you own a home valued at $250K, but you owe $125K. Your monthly bills include a mortgage at $1300, credit cards at $280, and a personal loan at $400. That’s almost $2K a month on debt. Once those debts are folded into a new mortgage, you find out that you qualify for a monthly payment of $1200. That’s a monthly savings of about $800. When you go from barely making ends meet to free up $800, is that worth it to you?
Believe it or not, many people turn to credit cards for home improvements long before they will consider the equity in their home. So, they end up paying compound interest on the value that they are adding to their home. This isn’t always the best option.
Instead of turning to revolving accounts, try putting some time into your planning. Figure out your budget, the costs of materials, and labor. The number you come up with will be important when speaking to your loan officer. They should be able to come up with options that will allow you to restructure your current mortgage, give you the cash that you need for the improvements, and find a payment that you are comfortable with. The money in your walls isn’t doing anything for you. By leveraging the equity in the home for the home, you are keeping the debts associated with the home together without compound interest.
You have to know how to leverage your assets. Many people think that mortgages are just a race to the finish without considering the overall financial scope of their situation. The equity in your home can be used for investing and setting you up for greater successes.
Let’s explain an investment scenario. You own that same $250K home free and clear, and you are considering buying an investment property for $180K. You have access to the down payment money, but you’ll have to pull it from retirement accounts and high-yield savings accounts. Your loan officer tells you that you qualify for a new loan, but the interest rate is a little higher than you would like at 4.5%. (Remember: Pricing is done in tiers based on the type of home. Primary is the cheapest. Second homes will be just a step up from there. Investment properties are at the top.) However, you get a wild card offer to instead take money from your primary home at 2.75% and pay cash for your investment property. This saves you money and interest and the taxes you would ultimately end up paying for pulling money from a retirement account. This is your smarter option.
Mortgages don’t have to be rocket science. You just have to know how to leverage them the correct way and make educated decisions for your situation. Make sure to work with a loan officer that will answer your questions, explain the benefits to their options, and understands your financial goals. If they don’t spend more than 15 minutes going through all of this with you, find yourself someone who will.