When homeowners think of refinancing their mortgage the reason most often cited is to lower the interest rate on their loan. Lowering one’s mortgage loan rate is one of the most popular reasons to refinance but not the only reason. There are several good reasons to begin a mortgage refinance and the following are five smart reasons to refinance a mortgage.
Refinance for a lower rate
Over the past several years we have had multiple opportunities for homeowners to take advantage of low interest rates. The most recent was the summer of 2020 when the COVID pandemic ushered in some of the lowest interest rates we have seen in the U.S. in more than 50 years. When these low interest rate opportunities present themselves, homeowners with interest rates higher than the current rates should take advantage of the opportunity while it is there.
Managing your mortgage to take advantage of low interest rates is one of the best financial planning tools available to a family. For most of us, our home is the largest asset in our financial portfolio so optimizing your mortgage when the opportunity presents itself should be at the top of everyone’s financial planning list.
In addition, I am also a big fan of refinancing from a 30 year loan to a 15 year loan when your income has increased and the interest rates are attractive. Placing your family on a track to paying off your home as you enter your retirement years is one of the best financial planning moves that you can make. Speak to your loan officer to ask for a rate quote to see if you can save money on your payment or shorten the term of your loan.
Convert from an Adjustable-Rate Mortgage (ARM) to a Fixed Rate loan
While not as popular today as in years past due to very attractive interest rates on fixed rate loans, ARMS were a viable option for mortgage borrowers before we entered the era of low mortgage rates in the broader housing market.
Many of the last remaining folks who got in to ARM’s several years back, are now wanting to lock in a more stable fixed rate at today’s low interest rates. People who are in 5/1 or 7/1 ARM’s where the loan is nearing the end of the fixed term and getting ready to adjust should be looking to lock in a low fixed rate for a 15-or-30-year term.
Cash Out Refinance to Consolidate Debt or Finance Home Improvements
Back in the housing boom of the early 2000’s homeowners did cash out refinances in droves to consolidate debt, or finance home improvements. With home prices rising back then seemingly on a monthly basis the value was always there to pull out more equity. In the housing boom of 2020 – 2021 we are seeing a similar home appreciation phenomenon with home prices rising 10% – 20% in some areas due to the shortage of inventory and rising demand for more space at home. Cash out refinances are once again “a thing” and homeowners are taking advantage of low mortgages interest rates to tap in to their equity to once again pay down debt and finance home improvements.
If you have credit card, auto loans, or other high interest debt that is putting a squeeze on your monthly cash-flow, then you may want to consider a cash out refinance loan. Most homeowners that have been in their homes for two+ years have enough equity to do a cash out refinance. However, I only recommend tapping the equity in your home if you plan to pay off high interest debt or make home improvements. Buying cars and taking vacations are not a good use of funds pulled from your home equity.
Cash Out to Purchase another Property
“We are seeing folks with substantial equity in their primary homes looking to pull out funds to purchase second properties to use either as a vacation home or an investment property” says Stephen Khan, a Phoenix, Arizona based mortgage loan officer. We are seeing a steady level of second home purchases that is consistent with or maybe slightly above what we have seen in the past. With many homeowners sitting on large amounts of equity, we are now seeing clients more focused on building a real estate portfolio for the long term by purchasing single family rental properties or small multi-family units.
If you are a homeowner that has lived in your home for some time and you are thinking of tapping your equity to purchase another home, this can be an effective long term real estate investment strategy for borrowers with a solid income and strong financial profile. Historically and over the long term, real estate has performed as good or better than the stock market and with real estate there is income potential and tax benefits for owning these types of investments. I highly recommend you speak to your tax accountant for the best tax advice.
Refinance from a 30 Year Mortgage to a 15 Year Mortgage
I am a big believer of homeowners taking on the mindset that the goal one day will be to have a paid off house as they move in to retirement. In the past this was difficult to do because Americans moved so much from city to city and state to state for work and family reasons. But nowadays, Americans are staying put longer in their homes and they are staying in one city longer than at any time in recent memory, so striving to one day pay off your home is within reach for focused homeowners.
The ideal way to place yourself on track to a paid off home is to refinance your 30 year mortgage down to a 15 year mortgage. By shortening the term of the mortgage, the monthly mortgage payment will increase slightly, but the total interest paid over the life of the loan will be reduced significantly, saving the homeowner thousands of dollars.
Wouldn’t it be nice to follow a financial plan that has you mortgage free by the time you hit retirement age? Speak to your loan officer to have him or her put together a mortgage quote for you so you can see if this is a smart financial move for you to make.
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