With interest rates still hovering at historic lows and the threat of a number of potential rate hikes looming ominously on the horizon, it could make dollars and sense to do a refinance right now.
Though traditional wisdom might say it is only a good idea to refinance in a situation in which it is possible to reduce the interest rate by at least two points, there are many other times when refinancing a mortgage could be a sound financial strategy:
- Change in personal situation, finances and/or employment. If your job or personal situation has undergone a significant change recently, it could be a good time to refinance. Being able to prove you can afford to allocate more of your income to housing each month could allow you to get a loan with a much lower interest rate. In a case where it suddenly becomes possible to spend more on housing each month, another good strategy could be to attack more of the principal with a 15- or 20-year loan. An uptick in a credit score could be a good signal it’s time to refinance in favor of a loan with better terms. This often corresponds with a positive change to an individual’s job or personal situation, but it could be the result of paying off a car loan, credit card or student loan. It could also result from simply making enough payments on time.
- Avoid PMI/the long ARM of the banks. Private Mortgage Insurance, or PMI, is a fee that safeguards lenders from borrower defaults. In most cases, mortgage insurance comes into play when a borrower can’t afford to put down 20 percent. Since it’s a monthly premium based on the amount of money that was originally financed, which does not reduce the principal or help the borrower in any way, it should be avoided at all costs, even if the only way to do so is to refinance in favor of a slightly higher interest rate. An Adjustable Rate Mortgage, or ARM, is a loan with an interest rate that can increase over previously specified periods of time. When the interest rate jumps, payments can increase substantially. Refinancing a loan to avoid a rising interest rate associated with an ARM is a common practice.
- Tap into the equity pot of gold. Chances are good, if you are a home owner, there have been lots of invitations to refinance in the mail lately. When the real estate market is rapidly appreciating, equity can seem to appear out of nowhere. Chasing the leprechaun is not without its risks, fees or closing costs, however, and a cash-out refinance should never be thought of as free money. But refinancing a loan to gain access to accumulated equity can be an effective, solid means of achieving some important financial goals, such as a home renovation, the elimination of credit card debt, or the funding of a child’s college education, because the interest rates are often lower than most other options.
The decision-making process with refinancing a loan can be extremely complex, as there are many differing factors that come into play, and all of these can vary significantly based on your financial situation or goals for the future. Check out the articles linked here, what to know about home equity loans
, and strategies for saving money when refinancing
, or give me a call at the number below for a comprehensive discussion about your options.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 18 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.