A mortgage is generally the largest debt most homeowners have to manage. It’s a good idea to give your personal real estate finance portfolio a check-up at least once a year.
Since there are many reasons a homeowner may choose to refinance, we’ll take a look at the four most common
1. Lower Interest Rate:
Typically, the most common reason that homeowners refinance their mortgage is to secure a lower interest rate. The lower the interest rate, the less the overall cost will be. With traditional refinancing, the most often cited rule of thumb is that the interest rate for your new mortgage must be about 1 percent below the rate of your current mortgage for refinancing to make sense. However, with the newer low and no cost refinancing programs, it can be worth your while to at least look into refinancing to obtain a smaller reduction in interest rate. These low and no cost refinancing packages offset traditional closing costs with a adjustment to the interest rate.
How long you expect to stay in your home is one of the biggest factors to consider. If you’ll be moving in a few years, the month to month savings may never add up to the costs that are involved in a refinance. Pioneer can analyze your scenario to see if this would be beneficial for you.
2. Lower Payments/Reduce Loan Term:
There are two trains of thought with shortening or lengthening you mortgage term:
Some think that paying off your mortgage sooner with a shorter term is the best way to save money. Yes, your monthly payment will be higher, but you will be saving thousands by reducing the amount of interest paid over the life of the loan and building equity in your home faster.
The latter feel that lengthening the loan term, thereby reducing the monthly payment to the lowest possible, taking the monthly savings and investing it with a higher return than the interest on the mortgage is a better plan. This is dependent on the interest rate you qualify for and the rate of return for your investment choice.
Neither thought process is wrong as long as you are disciplined and stick with your strategy.
3. New Mortgage Program:
- Refinancing an Adjustable Rate Mortgage (ARM) to a new Fixed Rate Mortgage (FRM)
- Refinancing from a program that requires Mortgage Insurance (MI) to one that does not
- Combining a first and second mortgage
- Refinancing a balloon loan
4. Cash-out / Debt Consolidation:
If there is sufficient equity you may qualify to refinance for more than the balance remaining on your old mortgage. Sometimes paying off consumer debt by combining all debts into one lower monthly mortgage payment can significantly reduce the short-term deficits in a budget. However, it’s important to keep in mind the total cost of that debt by adding it into a 30 year mortgage payment. Also, we always advise our clients that running consumer debt back up after a debt consolidation can put a huge financial strain on you very quickly. This should be paramount when deciding on whether or not to consolidate consumer debt.