The 12 Reasons to Refinance and When they Make Sense!
There are many reasons to refinance your home, but I've seen just about every situation in the last decade. Some reasons are more popular than others and there are pros and cons to every scenario. Take the time to think about your personal situation and make an informed decision when it's time to refinance your home.
1.CASH OUT FOR INVESTMENT. Typically these come from my clients who already have investments and realize the opportunity, but occassionally it comes from someone who feels like their retirement plans are woefully behind and they need to play catch up. The logic is that you can borrow the money against your house, likely at a rate in the low 4's or high 3's and then invest the money in the market for an average rate of return above 5. The interest on the mortgage is tax deductible and will offset the dividends and interest income tax. The result is hopefully 2% net Return on Investment. The downside is that we can't predict what the market will do, your rate of return could be much less or you could even lose in the market. We also see this scenario when a homeowner wants to take out cash to invest in a new business, another home or some other business opportunity. Whatever the opportunity, there is still some risk involved.
2.CASH OUT TO CONSOLIDATE DEBT- These customers don't always know how much total interest they are paying but the total outgoing payments are too high. We take some inefficient debt, like your credit cards, personal and auto loans and turn them into tax efficient debt with the mortgage. The monthly cash flow situation is instantly resolved. These are typically longer terms like 30 years, but I've seen an uptick in 15 and 20 year terms for these. The downside of course is that you could end up paying more in the long run, financing your car for 15 or 30 years will lower your monthly obligation and sometimes that's more important than the long term impact. Cash flow flexibility is important and as they say, "Cash is King".
3.CASH OUT FOR FAMILY REASONS- We see these as emergency situations. Divorce, Death, College Tuition, Medical Bills, these situations weren't part of the plan but we need to take action now. We need to pay off your ex-spouse, get the bills paid or re-balance your debt load now. If you need this type of refinance it's too late to second guess, we are just lucky that you have equity in your home and can qualify for the mortgage.
4.CASH OUT TO COMBINE 2 LOANS- Up until about 2006 it was standard practice to offer 2 loans on a purchase transaction, called an 80/20 or an 80/10. Even more folks took out Equity Loans or Home Equity Lines of Credit (HELOC) and now that values are finally creeping back up it's time to get out of those higher interest rate 2nd mortgages.
5.CASH OUT FOR HOME IMPROVEMENT- More home owners decided not to move this last year and instead of moving to a new home folks are opting to improve their current home and make it work. That new kitchen or an addition is less expensive than a new home right now and many sellers are choosing to keep their homes longer in hopes that the market will rise.
6.(CASH OUT) TO MANAGE CASH FLOW- Many homeowners are looking into Reverse Mortgages and their popularity seems to be rising. Reverse Mortgages give cash back to a homeowner either in a monthly amount or in a lump sum. In either case, the funds are used for living expenses and supplements income. We see the occasional cash out request just to replenish the savings account for emergency purposes, but the funds are there in reserve just to use if there is a job gap or medical issue. In that case, the funds are held for future living expenses. The Cash Flow Reason can also be used for a a rate and term reduction where we don't take out cash, but instead just lower the monthly payment and the different in payment is used to improve the quality of life.
7.GET OUT OF PMI- As the values are rising again there are more homes eligible with 20% equity. You may very well have a home loan from 2009 that now has enough equity to finally refinance and remove Mortgage Insurance.
8.SHORTEN THE TERM- Chances are good that you or someone you know has recently shortened their term. I've written extensively on why I believe more people should do so and I feel that many more will in the coming years. I affectionately call these clients "Mortgage Burners", their goal is to pay off the home in as short a time period as possible. The shorter term loans have better interest rates and it's entirely possible that you can shorten your term and actually pay the same or possibly even less per month, eliminating a huge chunk of interest paid. The downside here is that sometimes the payments go up slightly which could have a month to month impact on the budget.
9.CONVERT FROM AN ARM TO FIXED- Tick, Tick, Tick, Boom. The Adjustable Rate Loans from 2002- 2010 are all in various states of adjustment. When the markets start to tick back up those payments will go up quickly. If you currently have an ARM it may be best to control how much your payment goes up and when. This way you can lock into a reasonable fixed rate and save more in the long run. The payments might go up a little now, but it's possibly better than what the rates will adjust to in a few years.
10.CONVERT FROM AN ARM TO ANOTHER ARM- You may already be aware of the impending rate hikes, but you only need temporary protection from it. You may be paying your home off in a few years or selling the home completely. In this case you only need to lock into a rate for the next 5-10 years and bide yourself some time. If you are wrong though and you end up keeping the home, you'll either have to Re-ARM again or eventually lock into a rate and the markets could be vastly different in 5-10 years. You've just kicked the can down the road for a few years.
11.THE CASH IN LOAN - Did you just get an inheritance or sell a business? Many people have liquidated their lives and are working hard to reduce debt. If you have excess reserves and your old loan couldn't be refinanced due to high balance, this might do the trick. You could bring in cash to reduce the loan amount so that the 15 year loan payment is lower and makes more sense. You could bring in cash to close to eliminate PMI. Maybe you are upside down on your home and stuck at 8% on an old 30 year loan, bring in the cash to close so that your loan amount is 97.75% of the value and get into an FHA with a low rate in the 4's.
12.THE BAD SERVICE REFI- This is probably the least often heard reason, but I still get this request at least once per month. Someone somewhere is terribly upset at their current lender and wants to pull their business away from them. Usually we can make it worthwhile and accomplish some other goal along the way, but if that other institutions service wasn't so bad I never would have gotten the call. It's not always an opportune time but the benefits aren't the motivational factor here and we get that.
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