If you are on the fence about when to refinance your home mortgage, then consider these several factors. I have done a lot of real estate investing and property management, and have a good deal of knowledge when it comes to mortgages as well. There are many things you need to be careful to consider other than just a better interest rate when it comes to refinancing your home. First, ask yourself these questions:
- How long do I plan to stay in the home?
- Do I plan to use this home for a second home or investment property after I leave?
- Am I looking to get cash out of the new loan, or am I looking for a lower payment?
- If I am looking to get cash from a refinance, what will I use it for?
- When is the best time to capture the lowest possible rate?
Length of Time in Your Home
These, among other questions are good starting points before shopping rates, etc with your local lenders. The most important question is how long you are going to be staying in the home. If your kids are graduating high school and you are planning on moving, refinancing is not a good option for you. Even if you can get your closing costs down to $2,000-$3,000, you are still having to pay for 2 sets of closing costs – 1 when you refinance, and another when you sell the house. The fees to procure a new loan are just too high if you do not plan to own the house for very long.
On the other hand, if you plan to stay in the home a long time, then look at the potential savings this new lower rate will provide. You have to consider more than just the monthly savings, because you are getting a new 30 year loan, and so your payments are going to be extended by the same number of years as you have already been paying on your home (if you have been paying on your house for five years, and you get a new 30 year loan, the total amount of time paying on the house is now 35 years).
Keeping the Home After You Move
If you plan to keep the home after you move, you should consider refinancing for a lower rate. My philosophy in holding rental properties is to get the most amount of money possible in rental income every month. Some investors look for appreciation over time, but I want to see results right away. So to me, the risk involved with an investment property (tenants and damages, vacancy, etc) merits getting paid as soon as possible. Over time, the rental unit will gain equity, and can still be sold later for a profit. So when it comes to long term second homes and rental properties – yes, go for the lowest payment possible. The renter is paying all of the interest anyway, so interest charges don’t really matter in this case.
The Dangers of Cashing Out Your Equity
The third and forth question are linked. If you are planning to cash equity out of your home to pay for credit cards and other debt, DON’T. You may be ending up with a lower payment overall, but you are taking small loan amounts that are intended to be paid back over short periods of time and converting them into long term debt. Because of the much greater repayment period, you are agreeing to pay much more money in interest for the same loan amounts. That fact, combined with the tendency to run up more debt after the refinance, is a recipe for disaster. Be smart, hunker down, and pay off those cards as quickly as possible. You can use my Pay off Debt with Debt Stacking method to maximize your payments over your debts.
When the Lower Payment Makes Sense
If you are just looking for a lower payment, make sure you are getting a significantly lower payment. I’m talking about $100 or less each month. But here is an even better way to find out if it is worth it to refinance at the current interest rates. Talk to your mortgage lender, and have them calculate the length of time it would take for you to pay off the new loan if you made the same payment you are currently making on your house. If that length of time is less than it will take for you to pay off your existing loan, then it is probably a good deal.
Timing the Market
Timing the mortgage rate market is a very tricky deal. There is really no way to tell when rates will get to their lowest. However, if you just stick to the fundamentals like the calculation mentioned above about being able to pay off your new mortgage in the same amount of time or less than your existing mortgage, you will be on the right track. But I would say that any loan that is 6% or less is a really good loan.
Always remember that these tactics are based on long term financial goals. I encourage you to take a look at the big picture, and try to see 20 and 30 years down the road before making a rash decision. You’ll be much happier if you do!
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