Taryn and I bought a new house exactly 13 months ago. The time was great for us because we found a couple that really wanted our home and so we didn’t even have to put our home on the for sale market. We sold it by owner and saved thousands on real estate commissions. Additionally, we were able to take advantage of a slow housing market and got a great deal from a builder who needed to “unload some of his inventory.” We also were able to take advantage of the lowest mortgage interest rates in history. Now, 13 months later, mortgage interest rates are over one full percentage point lower than they were a year ago. The average for a 30 year fixed rate is around 4.89%. A 15 year fixed mortgage rate is around 4.39%.
Since I am always looking ways to save a buck, I have asked around to see if I need to re-finance my home mortgage. Here’s what I have learned.
If you do refinance your home mortgage, you want to make sure that your monthly savings from refinancing will pay back the costs that are associated with refinancing while you are still living in your home. If you move before your refinancing has paid for itself, you really won't be saving any money.
Generally, there are two types of mortgage refinancing: no cash-out refinancing and cash-out refinancing. No cash-out refinancing occurs when the amount of the new loan does not exceed the mortgage debt that you currently owe.
Cash-out refinancing occurs when you borrow more than you owe on your current mortgage. You can use the excess proceeds in any way you wish. Most people use this type of refinancing to pay off other outstanding loans, since the interest rate they pay on the extra cash they borrow will usually be less than the interest rate on the debt that they pay off (e.g., car loans, credit cards).
Also, mortgage interest is typically tax deductible, while consumer debt is not. This strategy is useful if you use it to reduce your debt payments and you do not start charging items on your credit card again.
When Should You Refinance Your Home?
1. Are the current mortgage interest rates at least 1 point less than your existing mortgage interest? If so, refinancing your home mortgage might make sense.
2. Do you currently have an adjustable rate mortgage, negative amortization or interest only loan that is due to reset or which isn't building equity? If so, today's historically low mortgage interest rates make it a great time to refinance a home loan and lock-in low rates on a standard mortgage.
3. Do you have at least 20 percent or more equity in your home? If so, you might benefit from refinancing thus reducing or eliminating PMI (private mortgage insurance) in addition to better terms and rates. PMI is a type of insurance that was added to many loans that didn't put down at least 20 percent down payment when purchasing. In exchange for less money down, the PMI provided additional insurance to banks in the event of a default. The elimination of PMI in a home refinance can reduce monthly payments from $70 to $150 per month in addition to interest rate savings.
4. Is your debt to income ratio nearing the maximum? If you refinance your home, you may actually improve your credit score by freeing up additional income and lowering the minimum monthly payment amounts of your basic bills. By keeping a solid credit score and low debt to income ratio, you will often qualify for lower interest rates on everything from credit cards to insurance… making this a strong strategic move toward lowering all of your bills at one time.
5.Do you need to pay for a large one-time out of pocket expense like major medical bills or college tuition? If so, it is often more affordable to take out money when you refinance your home rather than securing additional loans. Just keep in mind, you could be refinancing for up to 30 years so the total cost may be substantially more in the long run. Take time to calculate the cost versus savings for yourself before making a final decision.
As always, it makes “common cents” to consult a CPA before committing to any financial strategies.
DISCLAIMER: I am not a licensed
financial planner and have received no formal training or education in
finance or tax laws. Always consult your CPA and or financial planner
before making any investment, retirement and estate planning. That
makes "common cents!"
Singing News and Salem
Communications are not responsible for the content of this article, nor
financial losses/gains made by utilizing any strategies aforementioned.