5 Reasons Refinancing Make Sense in 2018
Refinancing your home is one of the great benefits of homeownership.
Unlike most retirement accounts, you can borrow against the equity in your home at any time, without tax penalty.
In this article, we look at common reasons for refinancing, and how to determine if it makes sense to do at this time.
Remove Mortgage Insurance
Refinancing to remove mortgage insurance is the goal of anyone with a FHA home loan. Converting mortgage insurance into tax deductible mortgage interest is the motivation.
If you took out a FHA loan in the last 5 years, your interest rate is probably pretty good. It could come down to a coin toss for whether or not refinancing makes sense.
Let’s start by looking at your current situation…
You have a home loan with an interest rate, AND a mortgage insurance rate. Combining your note rate with your mortgage insurance rate will give you your effective interest rate.
Here’s an example:
- Current home loan rate: 3.75%
- Mortgage insurance rate: .85% (rate is reduced to 80% with 5% down payment)
- Your effective interest rate is: 4.6%
If you took out your home loan after April 1st, 2013, your mortgage insurance is permanent. Refinancing is the only way to remove it.
I always recommend consulting a tax professional to help you determine the best option for you and your family.
Reduce Loan Term
Now this is one you really have to take your time to consider. You always have the option of reducing the term of your loan by making additional principal payments.
The first thing you need to consider is, that in most cases, reducing the term of your loan will increase your mortgage payment.
Is it true that lower term loans have lower interest rates?
Yes, that is true in most cases. As of the writing of this article, 15 year conventional interest rates are about .50% lower than 30 year fixed rates.
If you are going into a Conventional loan, you may have additional costs due to loan to value and credit score. Do the math.
If you’re uneasy about committing to the higher payment of a reduced term loan, consider making a “higher than minimum” payment.
This will pay off the loan faster, and even $100 extra will save you thousands in interest by reducing the term.
Pay off High Interest Credit Card Debt
Sometimes life comes along and leaves you with a boat load of high interest credit card debt. In most cases, the interest on a mortgage is a fraction of the interest on your credit card debt.
Refinancing to pay off credit cards is like hitting the “reset button”, and should be considered as a last option.
Keep in mind that refinancing to pay off revolving credit cards will extend the payoff of that debt for 30 years. This might make sense to do, it might not.
Please consult a professional loan officer before making the decision to pay off revolving credit card debt. You need sound advice from someone that can explain the benefits and risks of this option.
Fix Interest Rate on HELOC
A home equity line of credit (HELOC) is an adjustable rate mortgage that typically only requires an interest only payment for the first 10 years.
After this interest only period, a HELOC will convert to a fully amortizing payment over the remaining term of the loan.
In most cases, it will become a 20 year loan with an adjustable interest rate.
Adjustable rates are not bad, so it’s important that you discuss this option with a professional loan officer that can guide you through the long and short term risks and rewards of this option.
One thing is for sure, the interest rate on your HELOC will increase in 2018 between .75% to 1.00% higher than it is today.
Adjustable mortgages are tied to same interest rate increases that the Federal Reserve has promised to raise 3 to 4 times this year.
Previous Federal Reserve rate increases have been .25% each time.
NOTE: The 2018 Tax Bill no longer allows you to deduct mortgage interest on a home equity line of credit unless it was used to purchase the property. Consult your tax professional to see how this change may affect your tax liability.
Home Improvements and Upgrades
Keeping up on the maintenance of your home is important for preserving, and increasing your home’s value. Allowing your home to age without regular maintenance and upgrades can negatively impact the value of your home.
A HELOC has always been a good option for accessing your home equity for emergencies and repairs.
HELOC interest rates will adjust upward in 2018. Additionally, the interest that you pay on a HELOC will not be tax deductible.
If you have repairs that need to be done to your home or property, refinancing to take cash out could be the best option.
Again, there are many things to consider when making the decision to take equity out of your home. It’s important that you work with a professional loan officer that can guide you through all of the risks and benefits of this decision.
ALWAYS 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.
Telemarketing mortgage companies only care about meeting sales goals, and put little effort into educating and empowering consumers.
Get Your Questions Answered
Find My Way Home is a network of mortgage professionals that are passionate about putting clients before commissions.
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.
Getting your questions answered is easy. You can either ask a question here, or below in the comments section of this article.
If you would like to have your home loan reviewed by a professional loan officer, you can also click the “Get Started” button below to get matched with someone that can help.