If you have a mortgage, you may wonder whether you should refinance, having heard that everyone's doing it these days. But is a refi right for you?
Mortgage refinancing is where you apply for a new loan on a home you already have. People refinance for many reasons—namely to save money or tap in to their home equity—but whether this decision is in your interests depends on your own personal circumstances.
One smart first step to understanding mortgages is a mortgage calculator or a refinance calculator, where you can plug in a few numbers to learn how refinancing will affect your house payments and how much money you could save. Also check out this handy list of some smart reasons to refinance that might persuade you to apply for a refi sooner rather than later.
1. You want to get rid of credit card debt
While interest rates on home loans are currently in the single digits, credit card interest rates often ride well into the double digits. All things being equal, it's better to owe 4% interest on a loan rather than 18% on a credit card.
As an added benefit, the interest you pay on your mortgage is tax-deductible; the interest you pay on plastic is not, says Kristen Euretig, a certified financial planner and co-founder of Brooklyn Plans.
Of course, this is assuming you won't just run up more credit card debt once you've refinanced, so be sure to curb your card use and/or get in a debt management program to keep your spending in check.
2. You want to save more for retirement
Similarly, if you are falling behind on retirement savings, you may want to use the savings from a refi to make contributions to your 401(k)—after all, these contributions are not taxed, and if your employer matches your contribution, your savings work double time, points out David Schneider, a certified financial planner and founder of Schneider Wealth Strategies in Manhattan.
Also, as a third benefit, since your 401(k) is withdrawn from your paycheck before it is taxed, your overall income is lower and your tax bill is smaller at the end of the year.
3. You're underwater on your mortgage
Being "underwater" is where a property's value has slipped below the cost of its mortgage. In such cases, traditional refinancing through a bank is pretty much off the table. Yet there are places you can turn to that could help refinance—namely the Freddie Mac Enhanced Relief Refinance program.
The relief program is designed to help people who are underwater by offering more affordable mortgages with lower monthly payments. The program also nixes certain requirements in most instances that are standard in other refinance programs such as appraisals and minimum credit scores. This can help make it easier for underwater borrowers to qualify.
However, borrowers do have to meet some requirements: The program is available only to those whose mortgage applications were received on or after Nov. 1, 2018. Additionally, you must have made timely mortgage payments for at least six months, and you can't have been more than a month late more than once in the 12 months before you apply.
In a nutshell, the Freddie Mac program's flexible eligibility guidelines make it a compelling option for people who may struggle to qualify for standard refinance programs. The main drawback is that refinancing won't reduce your principal balance, and you must typically have equity in your home to be approved.
4. Your current mortgage interest rate isn't great
Just because you have a decent 30-year fixed mortgage rate and you are happy in your home doesn't mean you should become complacent. It's in homeowners' interests to keep a watchful eye for a better deal by checking current mortgage interest rates, as the savings could be significant.
For instance, if you borrowed $100,000 with a 4% rate, you would pay just shy of $335 per month and nearly $120,000 in interest over the life of the loan. But if you borrowed that same sum with a 3.09% rate, your monthly payments would come to just a little over $257 per month, and you'd pay roughly $92,700 in interest. That's a savings of $27,300.
5. You have an an adjustable rate mortgage
There's a reason why most financial advisers recommend clients steer clear of adjustable-rate mortgages, or ARMs: It's a high-risk loan where the interest rate "adjusts" after a certain period of time. If that rate balloons, borrowers could easily lose their homes if they can't make monthly payments.
For many first-time buyers, ARMs are the only way they can afford to get into the market. Yet if interest rates are rising, this may be an optimal time for ARM holders to secure a less risky, low-rate mortgage.
“If you have an adjustable-rate mortgage, you might try to lock in a fixed-rate mortgage," says Schneider. “Particularly if something is changing in your life, like if you're about to retire or you're on a fixed income."
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