It Is Time To Refinance

Why Refinance

There are many reasons people refinance, most fit into at least one of these basic categories.  

  • You want to Reduce your monthly payments
  • You need to Consolidate your outstanding debts 
  • You would like to "cash out" some built up equity for tax purposes
  • You want to Get out of a mortgage you don't like, or that's costing too much 
  • You want to improve your home and discover it is cheaper to get a new 1st mortgage than a 2nd mortgage 
  • You have rebuilt your credit and now you can qualify for a better loan
  • You need to refinance because of a balloon payment coming due
  • You want to refinance a contract for deed, bond for deed, land contract, lease option, wrap around mortgage or seller carried financing.
  • You need to refinance due to life events such as divorce or estate settlements

Whatever group or groups you fit with, there are issues to consider. Making a hasty decision can end up costing you time and more money in the future.

Does the 2% Rule of Thumb make sense

The traditional refinance rule of thumb --  you must get an interest rate at least 2% below the interest rate you currently have -- is often wrong.  

Waiting for a two percent difference from your rate to show up in the marketplace can cost you money.  For some people, as little as one-half of one percent is enough to justify refinancing.  Because ARM's are priced below market rates, it's almost always possible to get that 2% spread.  You may or may not want to choose an ARM but it is an option more people are choosing with the current interest rate situation. The only way to determine whether refinancing is for you is to analyze the cost and benefits.

What Is Your Time Frame

Your time frame is how long you plan on holding this mortgage, although it can be more complicated than that. You might have a product that demands refinancing -- like a balloon mortgage -- your time frame is only until the balloon period runs out. If you don't have to refinance, your time frame can be as long as you plan to stay in the home you're in. When determining your time factor, it's important to be honest with yourself, the time factor will determine if and when you begin to save money. It's a fact that refinancing does cost money, so you'll want to be as certain as possible of your time frame. For example, is it likely that your employer will relocate you to another city, or that you'll change jobs soon? Do you have a physical condition that could require you to move?

More or Less Mortgage

One other factor involved in refinancing your mortgage: how much money you'll need or want to borrow. Most lenders will let you borrow around 80% of your home's current appraised value. Many will allow more, some up to 125%.   Cashing-out will mean that you'll have a larger mortgage balance than before, with a potentially higher monthly payment -- and you'll have to qualify for the new mortgage.

Cash-out Refi or Home Equity Loan

If freeing up cash in your home is your goal, you can do it without refinancing by taking out a home-equity loan. Home equity loans can be a viable alternative to a cash-out refi, although they are not without their own set of risks. Most Home Equity loans have higher rates than a simple refinance with no cash out.

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