Should I Refinance My House? What You Should Consider
It is always advisable to have a clear understanding of your financial health and long term objectives to avoid getting burdened with excessive debt that is difficult to repay. When you take out a home loan, you are basically making a long term commitment with the lender that primarily entails making your payments on time. Depending upon their financial situation and requirements, many people decide to refinance their mortgage. Let’s have a look at the ways in which refinancing your mortgage can actually be pretty beneficial for you.
Lower Your Monthly Payments
When you decide to refinance your mortgage you can go for a loan product that offers you a lower rate of interest. This implies that you can significantly lower your monthly repayment liability and use the extra money to make more lucrative investments that will offer you better returns.
Reduce the Total Interest Payout
By refinancing your mortgage at a lower interest rate, you can save thousands and even tens of thousands of dollars on the total interest payout by the end of the loan tenure. While the interest reduction might not seem substantial as of now, it is surely going to have an impressive cumulative effect in the long run.
Change the Plan Type
Most homeowners get lured into going for an adjustable rate mortgage given the fact that they start out at more competent interest rates in the beginning. However as the market rates spike, you might have to start shelling out major bucks without any prior warning. Refinancing your mortgage with a fixed rate loan product, will not only ensure that you enjoy maximum payment stability, but also help you in keeping up with your monthly installments without experiencing any additional financial burden.
Modify The Tenure
For people who have an existing 30 year mortgage, refinancing to a shorter tenure of say 15 years is a fairly good idea. When you make a analytical scrutiny of the two products, you would realize that you will not only be able to repay your debt sooner, but also have to pay only a little more towards the interest portion for the loan type of a shorter term.
Cash Out On Your Home Equity
The best part about refinancing your mortgage is that you stand the chance of cashing out on the equity on your home. You can avail a line of credit depending upon the amount that you have already repaid in lieu of your mortgage and the monetary worth of your property. You may use the funds for a variety of purposes such as starting a business, buying a new property, home renovation or paying for the tuition fee.
Other Things to Consider Regarding a Mortgage or Home Refi
While there is abundant information regarding mortgages, available in print and on the World Wide Web, much of it is unfounded and based on common misconceptions. It is therefore a good idea to refrain from believing everything you hear and retrieve information from authentic financial sources only. Here we will try to uncover the truth behind some of the most popular and widespread myths surrounding home loans, that a majority of people end up falling prey to.
Prequalification is Equivalent to Getting the Loan Approval
Most people are led into believing that once they are pre qualified for a specific amount, they will necessarily be able to obtain an approval for the exact amount of loan from the lender. However, the truth is that pre qualification is only the first step in your loan application process wherein the lender will determine a rough figure that you might be able to avail, based on the information that you provide him. Loan approval on the other hand is a much more comprehensive process that involves a careful scrutiny of your income and assets and a verification of your credit rating, based on which you will be granted a specific amount of credit.
Do You Need at Least a 20% Down Payment to Secure a Home Loan?
One of the biggest myths regarding mortgages is that you necessarily have to offer 20% down to secure a financing for buying a property. The fact is that there are several different plans and programs available for the benefit of borrowers that offer the facility of low or no down payment as well. For instance, the FHA loans offer as low as 3.5% down and more lenient credit guidelines for first time home buyers. However, you must be qualified as per the eligibility criteria to avail such loan programs.
Do You Must Repay Your Mortgage as Soon as Possible?
While most people think that paying off your mortgage debt at the earliest is a good idea, it is actually pretty disadvantageous in the long run. Experts say that instead of paying extra towards your monthly mortgage installment, it is advisable to consider investing that amount in a good investment plan. Considering that you will probably end up obtaining better returns on these ‘other’ investments as compared to the interest that you pay on your home loan, it will eventually be a lucrative deal for you in the long run.
Is A 30 Year Fixed Rate Mortgage is Always the Best Option?
The fact is that a fixed rate mortgage plan is appropriate only on the condition that you plan to spend the next few decades in the same home. However, in case you are planning to make another move in the next 5 or 10 years, an adjustable rate mortgage will make more sense. While a 30-year loan tenure might seem more attractive considering the smaller monthly installments, you will end up paying more in terms of interest in comparison to a home loan that is taken out for a smaller tenure of say 15 years.
What About a Second Mortgage?
Your home/apartment that you purchased with a mortgage can increase in value over time. You can use this to your advantage and take a second mortgage by keeping your home/apartment as a collateral. A second mortgage is basically a loan that you take against the value of your home, for which you are still paying the mortgage installments. You took the first mortgage to purchase the home that is secured by a lien on your home. The second mortgage taps into your home's equity that might have built up with the increase in the market value or via the monthly payments. Suppose your first mortgage amount is $100,000. Now your home is worth $150,000. Your home equity is $50,000.
The second mortgage is also known as HELOC (Home Equity Lines of Credit). Most people take a second mortgage for home repairs/renovations. However, they can be used for other purposes as well, such as for paying for your children's school/college fee, for going on a vacation, for improving your credit, for medical expenses, and so on.
The Benefits of a Second Mortgage
The interest rate for a second mortgage is comparatively lower than that of a credit card and that of some other types of loans such as payday loans and installment loans. So, if you are financially stressed, you can opt for a second mortgage. You have the option to take the second mortgage as an equity line of credit, which is especially helpful if you are looking to consolidate debt.
If you take the first mortgage and the second mortgage at the same time, you will be able to lower the interest rate. If you are able to keep the initial mortgage at or below 80% of your home value, then you will be able to avoid paying the private mortgage insurance (PMI) as well. Both of this will help you to save a significant amount of money.
For a second mortgage, in some cases, you can get a tax deduction on the interest paid. There are a number of technicalities associated with this, so check with your tax preparer before going ahead with taking any deductions.
A second mortgage lets you borrow a large amount. The market value of a home/apartment that is located at a desirable location can double or triple in a matter of years. In such cases, lenders will have no problem providing you with a large loan amount.
A second mortgage come with a lot of benefits, however, like the primary mortgage, it has its own risks. If you default on the loan, your home/apartment will be possessed by the bank. Hence, a second mortgage should also be taken after careful considerations.
In conclusion, whatever you decide to do with your home mortgage or refinance make sure you ask lots of questions and get answers that you are comfortable with before moving forward. Homes are big purchases and there is generally a lot of money involved. Make informed decisions.