MORTGAGE REFINANCE: EVERY PENNY COUNTS
Your home is obviously important to you, and what you pay for it is often a determining factor for many other things in your life. With so many lenders out there pushing you to “save money” on your mortgage, the true value of the loan becomes somewhat confusing. I mean, if you own a home, you know that mortgage industry professionals don’t work for free, so how are they offering you these crazy deals? Well, let’s break it down.
Overall Factors to Consider
Generally, we only advise to refinance because of a few different scenarios: savings, investment or consolidation*--and notice, I put a star next to consolidation.
Savings: This is purely because of overall savings on the mortgage. Based on your motivation—whether it be short term or long term—a rate and term refinance may be helpful. If you don’t plan on being in the home for long, it’s important to understand that a monthly savings may not outweigh what you could lose in equity because of the refinance. However, if your home’s value has risen substantially, and we can get you into a better product, it could be a great opportunity to lower your payment with little to no overall hit.
Investment: The word “investment” is key because you have to analyze whether or not using equity is smart in regards to your goals. It’s never intelligent to use your house an ATM. If you have plans to make upgrade or add to your home in a way that will increase its value, a cash-out refinance is a great option. However, it’s important to take a long look at your goals for the property. The last thing you want to do is put yourself in a position that you weren’t ready for.
Consolidation: Many banks or mortgage companies push refinances for debt consolidation purposes. However, it’s not always a smart idea. Yes, a mortgage interest rate is lower than a credit card interest rate. And yes, it’s generally amortized over thirty years, so the impact to your payment will be minimal. But you have to remember, there is a big difference in consolidating debt that has added to the value of your home versus debt because you wanted a new wardrobe. If you can’t trust yourself not to rack it up again, you will begin a cycle that leads many to bankruptcy and/or mortgage defaults.
Other Factors to Consider
Mortgage Insurance: Mortgage insurance is absolutely useless from the point of view of the homeowner. It was put in place to protect investors in case you—the homeowner—default on the loan. It’s an understandable price to pay for low down-payment loans, but it is definitely not a wise investment, either. If you can get into a loan that does not require mortgage insurance, it’s a much better option (most of the time). Generally, it will save you some cash per month, and it will direct your payment more toward the principal of your loan.
Better Interest Rate: This can relate to several different scenarios, but it’s mostly in regards to those that are in a sub-prime loan or took a higher interest rate because of bad credit. If you’ve spent some time bettering your profile, you should definitely take the opportunity to show that off to your lender. In most cases, twenty to forty credit score points can make a significant difference in your interest rate.
Things to Watch Out For
No Fee Loans: This one is the favorite for marketing purposes. You probably see these types of loan offerings in your mailbox at least twice a month. The catch behind insanely low rates and “no closing costs” is that the lender almost always incorporates all your closing costs into your new loan amount. This can be dangerous because it subtracts from your home’s equity; and not to mention, you’re now paying interest on those closing costs, which in the long run makes them exponentially more expensive.
Tax Advantages: Before refinancing your mortgage, it may be a good idea to consult with your accountant. Mortgages can have substantial write-off potential, and it may be more beneficial for you to pay a slightly higher monthly payment in order to take advantage of the tax benefits.