Last Chance to Strategically Refinance?
Smart Reasons to Strategically Refinance Before Interest Rates Rise Much Higher.
Interest rates continue to rise as we move into the last few months of the year. Only a week ago, interest rates hit the highest they’ve been in almost 10 years.
After a small bounce off of this interest rate high, there may be a window here to consider what might be your last opportunity to take advantage of what are still relatively historic lows for home loan mortgage interest rates.
- Your Home as a Long Term Investment
- The Low Cost of Proactive Refinance
- The High Cost of Reactive Refinance
- Interest Saving Rate and Term Reasons
- Deliberate Debt Consolidation Reasons
- Creative Cash Out Reasons
Your Home as a Long Term Investment
If you bought your home after the market crash of 2008, chances are you’re sitting on a nice little bit of equity right now.
There is no better investment than homeownership over time. Even if the value of your home never increases, you are building equity every month by paying down your mortgage.
Over time, real estate as an investment has doubled in value over a 10 year period. Now, there are certainly exceptions during downturns in the economy that can impact this growth.
It is rare that home values will drop significantly in a normal cyclical market. More common is that home values (prices) will flatten.
Many times when you hear that home values are dropping, it’s really just that home sellers are asking too much, and they must lower the price in order to sell.
This isn’t always a decrease in the value of your home, it is more of an adjustment in the expectations of home sellers that may temporarily slow the growth rate of our home’s value.
The bottom line is that over time, owning your home is the best long term investment you can make for your family.
The Low Cost of Proactive Refinance
Having equity in your home is a great safety net in the event of an emergency. In many cases, being proactive about how you leverage your equity will actually help you avoid emergencies.
Your net worth over time is as much about being smart about leveraging your equity as it is simply living in your home over time.
When you are proactive about either saving or spending your equity, you can take the time to make well thought out decisions about how your actions will benefit you in the long term.
The High Cost of Reactive Refinance
Listen, emergencies happen. If you are fortunate enough to have equity in your home that you can access, sometimes an emergency refinance can get you out of a tough, temporary situation.
More often than not, if your emergency is one of a credit or income nature, you will be unable to refinance to take cash out of your home in a cost effective way.
If you ignore difficult financial decisions, it often leads to maxing out credit cards first, then eventually having late payments on that debt.
Once that happens, your credit scores drop, and your options for accessing the equity in your home are rapidly reduced.
Being proactive, and not letting yourself get into this situation is not as difficult as it may seem, but it does require being honest about your situation, and making educated and informed decisions.
I almost never see reactive refinancing turn out well. It’s more expensive, your options are often limited, and it can even make it harder to recover financially in some cases.
Interest Saving Rate and Term Refinance
As interest rates continue to rise, a very smart proactive refinance opportunity is to reduce the term of your current loan.
Paying your home off sooner is not always the best option for all homeowners because in many cases, it can cause your monthly payment to increase.
If you’ve been paying on your current mortgage for more than 5 to 7 years, it may make sense to refinance into a 20, or even a 15 year loan.
Most lenders today will allow you to set your loan payoff term to almost any number of months, but you will not see a difference in the interest rate unless you choose a 10, 15 or 20 year term.
For example, if you’ve had your current loan for 3 years, you can refinance into a 25 year term to save 2 years of interest. The interest rate on a 25 year term is going to be the same as a 30 year fixed.
In this case, we would just want to do the math to determine if it makes sense to reduce the term, or simply add extra principal to your payments as a path to reducing the term.
If you’ve been paying on your home for 7-10 years, I would seriously consider refinancing into a 15 year term.
Interest rates on a 15 year term tend to be between .25% up to .50% lower than a 30 year fixed interest rate.
Deliberate Debt Consolidation Reasons
Nobody sets out to max out your credit cards. Stuff happens, and the next thing you know, all of your credit cards are charged up.
Not only does this hurt your credit scores, it leaves you very little wiggle room should an emergency occur that requires quick cash to catch up, or prevent you from spiraling into even more debt.
Interest rates on credit cards are usually double digits, and in many cases, as high as 24% or more!
Using a cash out refinance to pay off all of your revolving debt will not only reduce the interest rate you’re paying on those cards, it will also give you an instant credit score boost.
This strategy does come with consequences, and it’s not always a great option. The decision to pay off revolving credit card debt should be carefully considered, and only done as a proactive effort to avoid a potentially more challenging financial hardship in the future.
Sometimes the breathing room is worth the cost, and make no mistake, there is a cost.
Not only are you increasing your loan amount, and using your home equity, you are also converting revolving debt into long term fixed rate debt.
Reasonable credit card balances can often be paid off with a few years of laser focused savings and payment discipline. By rolling this debt into your mortgage, you are paying it over 30 years.
Deliberately consolidating debt can be a massive life saver if it prevents you from refinancing in the future because of the likelihood of not being able to keep up on your payments should you find yourself in a financially strapped position in the future.
Having a conversation with a professional mortgage expert will help you explore all of your options. If you are working with any mortgage Joe or Jane at a big box refinance factory lender, they will not have these conversations with you.
Inexperienced tele-mortgage types are interested in one thing only, and that’s to entice you with perceived “savings” from paying off credit card debt, without having a serious conversation about the short and long term consequences of this decision.
Be careful, be wise, make educated and informed decisions and deliberate debt consolidation refinancing can be a very good option under the right circumstances.
Creative Cash Out Reasons
The equity you earn in your home over time will benefit you well into your retirement years in many ways.
If you pay the home off, you can roll into retirement with very low fixed housing expenses for the rest of your life, limited to only property taxes and homeowner insurance.
For more investment minded homeowners, equity in your home can be leveraged to invest in rental properties that will amplify your cash flow and net worth as you earn equity across your real estate portfolio as you move into retirement.
Many homeowners take the approach of renting out your current home, and buying a new primary residence. This strategy allows for lower interest rates and lower down payment requirements.
If you’re already in your dream home, taking equity out to buy rental properties will require higher down payments, and will require slightly higher interest rates.
Either path you take, reinvesting the equity in your home, when making calculating, informed decisions, is a very smart way to increase net worth, and ensure greater cashflow in your retirement years.
Mortgage Financial Planning
Your home is probably your greatest asset, and may represent your largest savings account, in addition to being the primary vehicle for your retirement account.
There is a lot riding on the smart management of your home’s equity. Maximizing your equity means taking advantage of strategic refinancing opportunities when it makes sense.
Even in a rising interest rate environment like we’re seeing today, these refinance strategies can put you and your family in an even better financial position that you would be if you do nothing at all.
Mortgage financial planning requires that you have a relationship with a mortgage professional that specializes in long term mortgage management.
Consult a Professional
I’ve mentioned it many times, and I cannot stress enough the importance of consulting a professional loan officer when refinancing your home.
The lenders that you see advertising on TV, radio, and the internet, are primarily services that sell your information to telemarketing companies. These companies spend a lot of money to get you to pick up the phone or fill out a form.
These “big box” lenders can offer you a mortgage the same way that McDonald’s can offer you a hamburger.
You can eat a McDonald’s hamburger and be full, but is it really the best decision for your long term health? Probably not.
Professional loan officers are more likely to help you understand the risks and rewards of any financial decision you make regarding your home loan.
Professional loan officers solve home loan financing issues for a living, and look at homeownership as a long term path to building wealth for you and your family.
Free Home Loan Analysis
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If you are considering any of the above refinancing options, we are here to help answer your questions, and can even introduce you to a professional that can help, if you would like.
It doesn’t cost more to use a professional loan officer, and not using one could put you at risk of not having all the facts when making a decision about the best way to reach your refinancing goals.
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