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REFINANCING YOUR HOME
There are several financial reasons to refinance your home which include:
HOW DO I KNOW IF I SHOULD REFINANCE?
There are times when it makes good financial sense to refinance and times when it doesn't. You should have a financial objective in mind when you get ready to refinance, so that you are able to choose the most appropriate loan option for your given situation.
In getting started, you need to know how much equity you have in your property. You will need to find out what your home is worth and how much you still owe on it. To see how much your home is worth, we can have our appraisers check comps (recent sales) in your neighborhood. After you have this information, you will then be able to see what loan options are available for your situation.
 PAY OFF BAD DEBT [top]
There is definitely a difference between good debt and bad debt. All consumer debt (credit cards, auto loans, etc.) is considered bad debt. Unlike your mortgage (good debt), it is not tax deductible, is usually at a higher rate of interest, and often brings down your credit score. By consolidating debt, one often finds that they are able to get a tighter grip on their monthly cash outlay, and thus have more disposable income for savings and investments. Oftentimes, when someone pays off and/or pays down their "consumer debt," they instantly see their credit score go up rapidly.
REFINANCE FROM AN ARM TO A FIXED RATE MORTGAGE [top]
Depending on where things are at in the market, it might make sense to refinance out of your current adjustable rate mortgage. You have to evaluate where you are at currently and what kind of adjustable rate mortgage you have. What is your current fixed period rate on the ARM that you have? What is your margin? How many times per year does it adjust? You want to grab a copy of your "note" from when you took out the loan to answer these questions. It could possibly adjust to a rate that is higher than what a current fixed rate mortgage would be. You still want to consider how long you will be staying in your home. If you are going to stay for only a few years, you may want to keep your existing ARM.
Refinancing to a fixed rate loan is a very popular option on home equity lines of credit (2nd mortgages) when the prime rate keeps going up. On the flipside, when market rates are coming down, you will then see your interest rate and monthly payment decrease and you wouldn't necessarily need to refinance.
REFINANCE FROM A FIXED RATE MORTGAGE TO AN ARM [top]
A huge consideration here is how long you plan to stay in your home. It doesn't make sense to pay the additional interest and higher mortgage payment on a 30-year fixed if you know that you won't be staying in your home for anywhere near that length of time. If you are planning on being in your home for 10 years or less, then there is an ARM loan product that could save you money.
REFINANCE TO TAKE CASH OUT FOR HOME IMPROVEMENTS [top]
It is no great secret that home improvements will increase the value of your home.
Most appraisers will tell you that things like room additions, decks, upgraded patios, bathroom and kitchen remodeling, landscaping, etc., will all increase the value of your home by thousands of dollars and make great selling points when you get ready to sell.
REFINANCE TO TAKE CASH OUT FOR A 2ND HOME OR INVESTMENT PROPERTY [top]
If you are enjoying watching the home that you live in go up in value year after year, why not own another one and watch it do the same thing? It is very common for someone who sees the exponential rate of return on real estate investments to want to purchase more real estate. Most people don't have the extra cash laying around for the down payment to buy another home. What many people have done is get creative, and utilize the equity in their primary residence to get leverage on a loan for another piece of real estate. The advantages of real estate investing are many. There are considerable tax advantages, and real estate has been a safe investment over the long haul. Why would a lender lend you so much money, with such a small down payment and at such a low rate of interest? It's because they know that loans backed by real estate are safe.
REFINANCE TO LOWER YOUR INTEREST RATE [top]
This is obviously going to depend on where the market is at when you are thinking about refinancing. There are, however, loan options that will lower your monthly mortgage payment regardless of where the market is at the present time.
REFINANCE TO LOWER YOUR MONTHLY MORTGAGE PAYMENT [top]
A drop of just ½ to ¾ of a percentage point in interest can noticeably reduce your monthly payment. When rates drop quite a bit, it can be costly to stay in a higher interest loan. There are a several ways to lower your monthly mortgage payment:
- Refinancing to a new lower rate of interest means a lower monthly mortgage payment.
- You can change the terms of your loan. If you currently have a 15 year loan, you may want to extend that to a 20 year, 30 year, 40 year, or now even a 50 year loan to lower your payment. You can then always pay extra if you want to build equity more quickly.
- By refinancing into an interest only loan, you are then only required to pay the interest on the loan for a set period of time, usually for 10 years. This will, in turn, reduce your monthly mortgage payment by as much as several hundred dollars per month. Lenders often qualify you at the lower payment thus enabling you to qualify for a larger loan if that is what you are looking for. You always have the option of paying extra on these loans at any time, thus reducing your principle balance and lowering your monthly mortgage payment the following month (interest only loans are calculated on existing principle balances).
REFINANCE TO DROP YOUR PRIVATE MORTGAGE INSURANCE (PMI)
OR TO COMBINE YOUR TWO LOANS INTO ONE [top]
If you originally took out a loan on your home that was greater than 80% of the value of your property, chances are that you are paying for private mortgage insurance with every payment that you make. In some cases you might be paying hundreds of dollars extra every month that has no direct benefit for you; it only protects the lender in the event that you default on the loan. With property values escalating so fast, there's a strong chance that you have enough equity in your property to be able to drop the PMI that you are paying on your current mortgage.
Also, you may have enough equity in your property to combine your two loans into one loan. This would make even more sense if you have a home equity line that is adjusting upward and keeps increasing your monthly payment.
REFINANCE TO HAVE AN EMERGENCY LINE OF CREDIT AT YOUR DISPOSAL [top]
The best time to borrow money is when you don't need it. There are low cost/no cost home equity lines of credit that cost you nothing to open, which are good to have available in the event an emergency should arise (job loss, medical emergency, etc.), or if an investment opportunity should come up. You don't pay anything until you actually use them.
REFINANCE TO A SHORTER TERM LOAN IN ORDER TO BUILD UP EQUITY MORE QUICKLY [top]
If one of your financial goals is to pay off your home, you may want to refinance from an existing 30-year fixed loan, to a 20-year, 15-year, or even a 10-year mortgage. This will save you thousands of dollars in interest over time.
Deciding on when to refinance your mortgage will depend on the circumstances of your situation, how long you'll be in the home, what your financial goals are, whether interest rates are dropping, etc.
If you would like to learn more about whether or not it is advantageous to refinance at this time, call us at 888-4BICOASTAL. We would enjoy discussing your situation with you to see if it would make good financial sense for you to do so at the present time. |
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