1. What is interesting is that refinancing a mortgage is relatively a new phenomenon. There was no need to ever refinance a mortgage from the 1950s to the 1990s. Everybody that bought a home would put a 20% down payment on the home. This was a common practice for all banks in that time period because many did not want to have to deal with a home going into foreclosure. Foreclosing on a home was a term hardly used in those years. People who bought homes had so much money invested in their down payment that they did not want to lose their home. They also had enough money saved up and had money to make the payments. Many home owners had to deal with interest rates on a 30 year fixed rate mortgage around 12%. This is almost double on what today’s going mortgage rates are at so people had to be able to afford the payment. Its kinds funny how the banks made it hard for people to get approved on a loan and in the past 8 years everybody was getting approved on homes with no money down.
2. The best reason to refinance your mortgage is to lower the interest rate. It only makes sense to do this if you can lower the interest by at least 2% from your current interest rate. There are times when lowering your interest rate by .5%-1% makes sense as long as the bank gives you a no closing cost mortgage. They can do this by working the numbers around but a lot of times you will need to have a higher balance to be able to do this. If they can do it and save you $50 a month in interest and keep your mortgage balance the same then go ahead and do it. If not, then stay where you are at.
3. With the adjustable rate mortgage coming into the public’s eye over the past 10 years many people that chose to get an ARM are now having to refinance into a 30 year fixed rate mortgage. Make sure that before you refinance into a fixed rate mortgage that it makes sense to do so. Many people that have an ARM will save money their first year by not refinancing. They could be currently locked in a ARM at 4.5% and at the first rate adjustment it will only go up 2% giving them a 6.5% interest rate. Mortgage rates right now are about the same. So why do you want to spend $3k on closing costs to do it again. The only thing you need to watch out for is if you elect to stay your payment will go up. Your loan will adjust to how many years are remaining on your amortization schedule now. This forces you to pay more. As an example a $150k home loan at 6.5% on a 30 year amortization schedule has a monthly mortgage payment of $948. If you had a 5 year ARM that adjusted to 6.5% the payment recalculates to 25 years left. Now you take the same $150k at 6.5% with 25 years left and your monthly mortgage payment is $1,012. It’s only $64 more but remember that you have paid off 5 years more of the mortgage.
4. Many people will refinance their home because they want to take cash out of the equity of their home. There are many reasons why people do this. The most common reason is to roll in credit card debt. By doing so it will improve your credit scores pretty fast and take care of some of the burden of monthly credit card bills. Some other reasons are to pay for college education, weddings, boats, rental properties, dream vacations, collections, liens, property taxes, income taxes, and pretty much anything you can think of. If you ahve the equity in your home to do it there is a mortgage company out there that will will do your mortgage for you.
5. Before looking to redo a new mortgage make sure you take a look at a home equity line of credit. A home equity loan is a quick and cost effective way to have cash on hand for emergencies like a job loss or medical expenses. They usually only cost about $100 to open which is a lot less that the normal $3k in closing cost to do a normal 30 year fixed mortgage. Plus, you only pay interest on what you borrow.
6. If you are currently in a financial crisis but pay all of your bills on time you might be interested in getting a interest only mortgage on your home. Make sure it makes sense for you first. If you do not have credit card debt or any other loans on the house or cars do the numbers first. A lot of home owners get sold into doing a interest only loan (which is a good loan) by a mortgage broker because it will save them a $100 on their monthly payments, but they fail to realize that they already have a good loan on their house. A $150k loan at 6.5% has a $948 mortgage payment. A interest only payment on $150k at 7% has a $875 payment saving the person $948 – $875 = $73 x 12 months = $876 a year in cash. As you can see even though your interest rate might be higher your required payment is lower. What you are doing is not paying down the mortgage and only paying interest. Your interest rate is fixed for all 30 years but at year 10 the loan will re-amortize into a 20 year mortgage making your payment go up. Some smooth mortgage brokers and bankers will tell you how much this makes sense because they are trying for a sale. Don’t blame them because they have a loan that achieves your goals. Instead you need to check yourself and maybe not go out twice a week or start riding your bike to work or give up on cable television. All of these things will save you more than the $73. This will let you keep your great mortgage that you have and about $3k in closing costs.
7. Divorces and marriage separations are another reason. They are trying to get their ex spouse off of the loan and title of the home. There is only one way to get somebody off of the home and that is to refinance the entire loan into one persons name. Some people are finding out now that they cannot get approved on a new mortgage without their ex’s income. This can be quite the dilemma because one person usually wants to keep the house. If their is a lot of equity in the home than the spouse that is no longer living there needs to get paid from whatevr equity that has been earned. It can be quite messy and some couples are finding out that they still have to live together until the house can be sold.
8. Sometimes people have to refinance their homes to clean up their credit report for a job. Many employers nowadays are doing credit checks on possible candidates. If they see a bunch of collections, judgments, liens, child support payments, foreclosures, and late payments on bills they may not hirer you. A quick fix to this is if you have been living in your home to do a new loan and roll all of those into one payment. Your credit report will still show whatever you had on your report for 10 years but at least now all of it will show as being paid and your credit scores should start climbing up.
9. Putting an addition on a home is sometimes better than going out and buying a bigger house. If you move than you are starting over in a whole new area and you may lose out on any tax breaks you are grandfathered into. If all you needed was another 500 square feet on your home for a nursery, office, or game room, and you have the property to do it then taking the cash out of the equity of the home will be a quick and cheaper long term fix to moving all together.
10. Refinancing your home mortgage is different for everybody. Some do it for cash and some do it for a lower mortgage payment. Make sure the reason you are doing it is in your best favor and not the banks. A lot of times your current mortgage is already a good one. You might need to trim a couple other expenses in your daily life to save the extra money you need to get by. If its something you want or need to buy try going old school and saving it up in cash. This will save you a lot of money over the years and keep you from having to refinance every 3 years.