Category Archives: Mortgage/Finance Info

What is a Reverse Mortgage?

reverse mortgage houseYou’ve probably seen the commercials for reverse mortgages, and if you’re a senior citizen, you may have even considered one. Unfortunately, while the commercials do a good job of making a reverse mortgage sound good, they don’t do a very good job of explaining what they actually are. Let’s dive a little deeper into exactly what a reverse mortgage is.

First of all, a reverse mortgage is basically just a loan against your house. It allows you to turn the equity you have in your home into cash. You can draw on it a little at a time, almost like if the mortgage organization was making payments to you; however, whatever you take from the mortgage becomes what you owe, and whatever you owe accumulates interest every month. Payments are not required on the loan. Instead, the mortgage is paid off in full when the house changes hands, usually because the owner either passes away or sells.

As you may have already figured out, it is possible for the amount of the loan to grow to be bigger than the value of the house. Generally the borrower, or their estate, isn’t expected to pay more than the value of the home.

reverse mortgage

You may be wondering if it is possible for you to get a reverse mortgage. Reverse mortgages actually exist in several countries, but in the United States, you have to be at least 62 years old, and you have to consider the property you want to use in the reverse mortgage to be your principal residence. It’s okay if you still owe a little on the property, but the money you receive from the reverse mortgage must be able to pay that off. If you live in a less traditional property, such as a condo or a manufactured home, you may be wondering if you can still participate. In these cases, more research is necessary, but you are likely to be eligible.

Before accepting a reverse mortgage on your house, you are required to take a counseling course, however, the required courses are often considered to be less than adequate, and it is advisable to do your own research before you apply.

9 Mortgage Mistakes to Avoid

For most Americans, it’s pretty safe to say that a house will be the biggest purchase you’ll make in your lifetime — and a mortgage will be the biggest debt you’ll ever carry. So you don’t want to mess it up.

The idea of buying a home can be intimidating if you aren’t familiar the housing market or if you don’t know a thing about what a mortgage entails. But with a little guidance, the process can be a lot easier.

mortgage mistakes

Don’t let the unfamiliarity scare you. With the right information, you can get an affordable home that’s right for you, your family and your finances.

So with that in mind, here are some mistakes to avoid when it comes time to buy a house.

1. Failing to review your credit score & credit reports first

Before you even consider buying a home, it’s important to review your credit and make sure everything is in order.

Before you start the home buying process, you’ll want to make sure your credit score is in good shape. Check your credit card or loan statement, talk to a non-profit counselor, use an online credit score service, or buy a score directly from credit reporting companies. If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you’re a couple. 

If your credit isn’t in the best shape, try getting it back on track as soon as possible.

2. Not pre-qualifying 

It’s very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.

Getting pre-approved takes this a step further. It’s good to get an idea of the loan you can get, and when your credit is in order and you’re ready to start the process, getting pre-approved will give you a much more accurate estimate of how much the bank will actually lend you.

Also, keep in mind that the amount the bank will lend you may not be exactly aligned with what you can afford.

3. Getting just one mortgage quote

Most people only get one mortgage quote. That’s the wrong way to go about it. You’ll want to get quotes from multiple lenders. Check with a local bank, as well as a credit union, and get an online quote or two. Credit unions in particular offer creative mortgages that can save you money.

But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn’t look you’re applying for multiple loans from multiple lenders each time. That will minimize any potential damage to your credit score.

4. Failing to negotiate junk fees

When you apply for a mortgage, you’ll face a variety of junk fees. Many of them can be negotiated down or away altogether, but the key is knowing what to expect so you can take action!

Here are a few examples of “junk fees” to watch out for:

  • Application fee
  • Sign-up fee
  • Broker fee
  • Document preparation fee
  • Messenger fee
  • Loan origination fee
  • Underwriting fee

5. Having no cash for a down payment

Depending on how much house you plan to buy, and where you plan to buy it, you may need a solid chunk of cash for a down payment. You will typically need a down payment of between 5% and 20% to get a conventional loan. And if you put down less than 20%, you will likely have to buy mortgage insurance.

Making sure you have enough cash to cover a down payment is key to ensuring a smooth home-buying process. Otherwise, you may have to put it off for a while.

6. Making yourself house poor

There are two parts to this:

  1. When you go to make a down payment on a house, you don’t want to use everything you have in savings. So while it’s crucial to save enough for that big cash payment, you really want to have more in savings than you plan to spend on the down payment.
  2. On top of that, what the bank says you can afford (based on how much they’ll lend you) may not actually be what you can afford. Committing too much of your monthly income to mortgage payments is risky — and it’s a bad idea. You only want to spend up to one-third of your monthly income on housing costs, which include mortgage payments, insurance fees and any homeowner’s association fees.

So when you’re figuring out how much house you can afford, make sure to factor in other important expenses besides just bills — things like saving for retirement, emergency expenses (medical, car repairs etc.) and even the cost of furnishing your brand new home. You probably won’t be very excited about your decision if you’re stuck in an empty house for two years because you can’t afford to buy anything to put in it.

7. Not budgeting for the costs of actual home ownership

If you’re going from renting to owning a house, the cost of home ownership can be quite a shocker. There’s no more calling the leasing office or the landlord to fix things — it’s you who’s on the hook now and you need to understand what all that entails.

Many first-time homeowners are surprised by all the expenses associated with owning a home, so it’s crucial that you are prepared — both mentally and financially.

You’ve probably already thought about the more “fun” expenses, like buying furniture, but don’t forget about all those other not-so-glamorous costs — such as replacing the water heater, hiring a plumber, hiring a landscaper, property taxes and so on. Then there are the even pricier expenses like replacing the roof. Plus, if the house is in an area that may flood, you will likely have to pay for flood insurance. 

People do it every day, you just need to make sure you are prepared when it’s time to transition to being a homeowner.

8. Not understanding the terms of your mortgage

Don’t just sign the dotted line and don’t just trust the word of the guy (or gal) who told you where to sign. You did all that hard work to make sure you got the best deal and prepared yourself in every possible way, so make sure you know exactly what you’re signing up for.

By this point, you’ll know what your monthly payments are, but that’s not enough. You also need to know if the interest rate on your mortgage can change, and if it can, you need to know when and by how much. And you need to see all this in writing. Don’t just take someone’s word for it. If you don’t quite understand the documents you’re about to sign, ask a lawyer, or even family member or friend, to review the terms of the loan with you. You can do this ahead of time, but even if you get to the actual moment of signing and still don’t understand something, don’t sign it.

9. Not shopping around for the right home

You should look at a ton of homes! You can do a lot of the preliminary search online, but then go look in person. Get familiar with the area so you know what’s a good deal and what’s not. And start to understand more about the neighborhood where you’re considering buying. Is it family friendly — or does it have all the qualities you’re looking for? Have you driven around (or even walked around) the area at night? You don’t want to buy a house and then realize you’re stuck in an area you aren’t comfortable with — and this goes for everyone in the family.

Tips for Buying a Foreclosed Home

Buying a foreclosed home is a little different from buying a typical resale.

In many cases:

  • Only 1 real estate agent is involved.
  • The seller wants a preapproval letter from a lender before accepting an offer.
  • There is little, if any, room for negotiation.
  • The home comes as-is, and it’s up to the buyer to pay for repairs.

On the upside, most bank-owned homes are vacant, which can speed up the process of moving in.

foreclosure

Buying a foreclosure is definitely a bit of a grind. You’re getting fantastic pricing, but sometimes it takes going through a lot of houses and writing a lot of offers to get the home you want.  If you’re considering buying a foreclosed home, here are some tips that may ease the process.

Get a realty broker and a lender

The first 2 steps in buying a foreclosure should happen almost simultaneously: Find a real estate broker who works directly with banks that own foreclosed homes and get a preapproval from a lender.

A good way to start searching is to first visit any site with a database of foreclosed homes. You also could look at a local real estate website that lets you filter the results to see only foreclosures. You might find the acronym REO, which means “real estate owned” (owned by a bank, that is). This signifies that a home has been through foreclosure and the lender is selling it.

Get a broker on your side

The goal of combing through foreclosure listings is not to find a house; it’s to find an agent. Banks usually hire one or a few real estate brokers to handle their REO properties in a market. In a lot of cases, the buyer works directly with the bank’s broker instead of using a buyer’s agent. That way, the commission doesn’t have to be split between 2 brokers.

Most of these Realtors have a long-term relationship with these banks, and they know of listings that haven’t even come on the list yet. Call them about the listings that you’re interested in, but also ask them about listings that may be coming up because sometimes it may take a day or two or even a week before a listing actually comes onto the database.

Such a request might not always pan out. In places where thousands of foreclosed properties are for sale, you might not get much one-on-one attention from overloaded agents. To prove that you’re serious about buying, meet with the lender right before or after you meet with the agent.

Get a preapproval letter

preapprovedUnless you plan to pay cash, you’ll need a recent preapproval letter from a lender. The letter will describe how much money you can borrow, based upon the lender’s assessment of your credit score and income.

Consider your financing options before you make an offer.  All too often, a buyer wants to find the house first, and then they think they’ll work out the financing. But a really good deal on a bank-owned home will go quickly, and the buyer won’t necessarily have time to try to work out the financing afterward.

Some first-time buyers make the mistake of assuming that the bank selling the home will also finance the mortgage as part of the deal. Banks view this as a totally separate transaction, so don’t assume it will be included. The people in the bank’s REO department are not loan officers. They are getting rid of bad assets.

Pricing depends on sales pace

There’s no rule of thumb on what the bank’s bottom line is on price. Just as with any other real-estate purchase, you have to look at the recent sales prices of comparable properties, or “comps.”

You have to look at the comps in today’s current market conditions and write a competitive offer based on that. Sometimes the bank prices the homes really low, and the home will have multiple offers over list price within hours. Other times it’s priced too high, and you can come in lower. However, be reasonable with your offer.  If it’s unreasonably lower than the listed price (as much as half price), your offer won’t be taken seriously.

Don’t expect a repair discount

repairsKeep in mind that foreclosed houses generally are sold as-is. That means that you shouldn’t expect to get a discount to compensate for repairs. Consider a house listed for $200,000. All the comps are $200,000, but the home will need to be repainted, re-carpeted and treated for mold damage. Despite the impending repairs, a client’s request to take $15,000 off the price to cover the costs will be denied.

You should also look at the absorption rate for your product class, meaning you should find out how quickly comparable houses are selling. In foreclosure, a 3,500-square-foot house with a pool in a gated community might sell within days or hours, whereas more modest homes might sit on the market for weeks. Or vice versa, depending on market conditions.

If homes in your product class are selling swiftly, the best advice on a bank-owned property is to come in at your highest and best, unless the property has been sitting on the market forever with no activity. If you’re going to be upset because you would have gone $5,000 more, but you lost the property, just bid the higher price in the first place to ensure your chances.

Find tradespeople ASAP

Because repairs are almost inevitable with foreclosed houses, it is recommended that you get to know tradespeople who can assess and repair damage from pests, mold and leaks. Assume that the air conditioning needs to be fixed, and possibly the heating system, too.

It all sounds daunting. But at least you don’t have to wait for the owner to move out of the house.

5 Reasons for a Mortgage Refinance

Naturally, if you’re paying 6% for your mortgage and you can refinance at 5%, you’re gonna do it. Although cutting your monthly payment remains an important motive, there are at least five other reasons to consider a mortgage refinance, for long-term savings and convenience.

mortgage refinance

1. Change your mortgage term

If you decrease the term of your mortgage in a refinance by going from a 30-year to a 15-year, you’ll pay a lower interest rate and shorten your total interest costs. You’ll build home equity more quickly, and pay off your loan sooner, even though your monthly payments go up.

2. Move from an adjustable rate to a fixed rate

ARMs offer low introductory rates, but they also offer long periods of uncertainty that make it hard to budget. It makes sense in a mortgage refinance to go from an ARM to a fixed-rate loan during a low-interest rate environment. You’ll get emotional security and your rate won’t fluctuate with changing economic conditions.

3. Take out cash

With a cash-out mortgage refinance, you can turn an intangible asset—accumulated home equity—into a tangible one—cash. It makes sense for a project that will generate long-term benefits, like a home improvement or funding a child’s college education. However, don’t do it for frivolous reasons. Unless you’re extremely disciplined, you could find yourself in even deeper debt.

4. Consolidate two mortgages

When interest rates are low, a mortgage refinance lets you consolidate your main mortgage and an outstanding home equity loan to realize a lower overall monthly payment. Plus, you’ll have only one mortgage payment to make each month.

5. Recover from divorce

If your home is jointly owned with your soon-to-be ex-spouse, a mortgage refinance will turn a joint obligation into the responsibility of the person keeping the home. Nothing is more frustrating than tracking down a former spouse who doesn’t keep up with his or her end of the mortgage payment.

Lay the groundwork

If one of these reasons resonates with you, contact your current lender to see if it’ll offer you preferred rates or reduced closing costs on a mortgage refinance. But don’t assume the current lender is best: Leave no stone unturned by searching for lenders online and calling community banks and local credit unions.

No matter which lender you choose, a mortgage refinance for the right reasons can save you lots of money—and that’s the best reason of all.

Category Archives: Mortgage/Finance Info

What is a Reverse Mortgage?

reverse mortgage houseYou’ve probably seen the commercials for reverse mortgages, and if you’re a senior citizen, you may have even considered one. Unfortunately, while the commercials do a good job of making a reverse mortgage sound good, they don’t do a very good job of explaining what they actually are. Let’s dive a little deeper into exactly what a reverse mortgage is.

First of all, a reverse mortgage is basically just a loan against your house. It allows you to turn the equity you have in your home into cash. You can draw on it a little at a time, almost like if the mortgage organization was making payments to you; however, whatever you take from the mortgage becomes what you owe, and whatever you owe accumulates interest every month. Payments are not required on the loan. Instead, the mortgage is paid off in full when the house changes hands, usually because the owner either passes away or sells.

As you may have already figured out, it is possible for the amount of the loan to grow to be bigger than the value of the house. Generally the borrower, or their estate, isn’t expected to pay more than the value of the home.

reverse mortgage

You may be wondering if it is possible for you to get a reverse mortgage. Reverse mortgages actually exist in several countries, but in the United States, you have to be at least 62 years old, and you have to consider the property you want to use in the reverse mortgage to be your principal residence. It’s okay if you still owe a little on the property, but the money you receive from the reverse mortgage must be able to pay that off. If you live in a less traditional property, such as a condo or a manufactured home, you may be wondering if you can still participate. In these cases, more research is necessary, but you are likely to be eligible.

Before accepting a reverse mortgage on your house, you are required to take a counseling course, however, the required courses are often considered to be less than adequate, and it is advisable to do your own research before you apply.

9 Mortgage Mistakes to Avoid

For most Americans, it’s pretty safe to say that a house will be the biggest purchase you’ll make in your lifetime — and a mortgage will be the biggest debt you’ll ever carry. So you don’t want to mess it up.

The idea of buying a home can be intimidating if you aren’t familiar the housing market or if you don’t know a thing about what a mortgage entails. But with a little guidance, the process can be a lot easier.

mortgage mistakes

Don’t let the unfamiliarity scare you. With the right information, you can get an affordable home that’s right for you, your family and your finances.

So with that in mind, here are some mistakes to avoid when it comes time to buy a house.

1. Failing to review your credit score & credit reports first

Before you even consider buying a home, it’s important to review your credit and make sure everything is in order.

Before you start the home buying process, you’ll want to make sure your credit score is in good shape. Check your credit card or loan statement, talk to a non-profit counselor, use an online credit score service, or buy a score directly from credit reporting companies. If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you’re a couple. 

If your credit isn’t in the best shape, try getting it back on track as soon as possible.

2. Not pre-qualifying 

It’s very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.

Getting pre-approved takes this a step further. It’s good to get an idea of the loan you can get, and when your credit is in order and you’re ready to start the process, getting pre-approved will give you a much more accurate estimate of how much the bank will actually lend you.

Also, keep in mind that the amount the bank will lend you may not be exactly aligned with what you can afford.

3. Getting just one mortgage quote

Most people only get one mortgage quote. That’s the wrong way to go about it. You’ll want to get quotes from multiple lenders. Check with a local bank, as well as a credit union, and get an online quote or two. Credit unions in particular offer creative mortgages that can save you money.

But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn’t look you’re applying for multiple loans from multiple lenders each time. That will minimize any potential damage to your credit score.

4. Failing to negotiate junk fees

When you apply for a mortgage, you’ll face a variety of junk fees. Many of them can be negotiated down or away altogether, but the key is knowing what to expect so you can take action!

Here are a few examples of “junk fees” to watch out for:

  • Application fee
  • Sign-up fee
  • Broker fee
  • Document preparation fee
  • Messenger fee
  • Loan origination fee
  • Underwriting fee

5. Having no cash for a down payment

Depending on how much house you plan to buy, and where you plan to buy it, you may need a solid chunk of cash for a down payment. You will typically need a down payment of between 5% and 20% to get a conventional loan. And if you put down less than 20%, you will likely have to buy mortgage insurance.

Making sure you have enough cash to cover a down payment is key to ensuring a smooth home-buying process. Otherwise, you may have to put it off for a while.

6. Making yourself house poor

There are two parts to this:

  1. When you go to make a down payment on a house, you don’t want to use everything you have in savings. So while it’s crucial to save enough for that big cash payment, you really want to have more in savings than you plan to spend on the down payment.
  2. On top of that, what the bank says you can afford (based on how much they’ll lend you) may not actually be what you can afford. Committing too much of your monthly income to mortgage payments is risky — and it’s a bad idea. You only want to spend up to one-third of your monthly income on housing costs, which include mortgage payments, insurance fees and any homeowner’s association fees.

So when you’re figuring out how much house you can afford, make sure to factor in other important expenses besides just bills — things like saving for retirement, emergency expenses (medical, car repairs etc.) and even the cost of furnishing your brand new home. You probably won’t be very excited about your decision if you’re stuck in an empty house for two years because you can’t afford to buy anything to put in it.

7. Not budgeting for the costs of actual home ownership

If you’re going from renting to owning a house, the cost of home ownership can be quite a shocker. There’s no more calling the leasing office or the landlord to fix things — it’s you who’s on the hook now and you need to understand what all that entails.

Many first-time homeowners are surprised by all the expenses associated with owning a home, so it’s crucial that you are prepared — both mentally and financially.

You’ve probably already thought about the more “fun” expenses, like buying furniture, but don’t forget about all those other not-so-glamorous costs — such as replacing the water heater, hiring a plumber, hiring a landscaper, property taxes and so on. Then there are the even pricier expenses like replacing the roof. Plus, if the house is in an area that may flood, you will likely have to pay for flood insurance. 

People do it every day, you just need to make sure you are prepared when it’s time to transition to being a homeowner.

8. Not understanding the terms of your mortgage

Don’t just sign the dotted line and don’t just trust the word of the guy (or gal) who told you where to sign. You did all that hard work to make sure you got the best deal and prepared yourself in every possible way, so make sure you know exactly what you’re signing up for.

By this point, you’ll know what your monthly payments are, but that’s not enough. You also need to know if the interest rate on your mortgage can change, and if it can, you need to know when and by how much. And you need to see all this in writing. Don’t just take someone’s word for it. If you don’t quite understand the documents you’re about to sign, ask a lawyer, or even family member or friend, to review the terms of the loan with you. You can do this ahead of time, but even if you get to the actual moment of signing and still don’t understand something, don’t sign it.

9. Not shopping around for the right home

You should look at a ton of homes! You can do a lot of the preliminary search online, but then go look in person. Get familiar with the area so you know what’s a good deal and what’s not. And start to understand more about the neighborhood where you’re considering buying. Is it family friendly — or does it have all the qualities you’re looking for? Have you driven around (or even walked around) the area at night? You don’t want to buy a house and then realize you’re stuck in an area you aren’t comfortable with — and this goes for everyone in the family.

Tips for Buying a Foreclosed Home

Buying a foreclosed home is a little different from buying a typical resale.

In many cases:

  • Only 1 real estate agent is involved.
  • The seller wants a preapproval letter from a lender before accepting an offer.
  • There is little, if any, room for negotiation.
  • The home comes as-is, and it’s up to the buyer to pay for repairs.

On the upside, most bank-owned homes are vacant, which can speed up the process of moving in.

foreclosure

Buying a foreclosure is definitely a bit of a grind. You’re getting fantastic pricing, but sometimes it takes going through a lot of houses and writing a lot of offers to get the home you want.  If you’re considering buying a foreclosed home, here are some tips that may ease the process.

Get a realty broker and a lender

The first 2 steps in buying a foreclosure should happen almost simultaneously: Find a real estate broker who works directly with banks that own foreclosed homes and get a preapproval from a lender.

A good way to start searching is to first visit any site with a database of foreclosed homes. You also could look at a local real estate website that lets you filter the results to see only foreclosures. You might find the acronym REO, which means “real estate owned” (owned by a bank, that is). This signifies that a home has been through foreclosure and the lender is selling it.

Get a broker on your side

The goal of combing through foreclosure listings is not to find a house; it’s to find an agent. Banks usually hire one or a few real estate brokers to handle their REO properties in a market. In a lot of cases, the buyer works directly with the bank’s broker instead of using a buyer’s agent. That way, the commission doesn’t have to be split between 2 brokers.

Most of these Realtors have a long-term relationship with these banks, and they know of listings that haven’t even come on the list yet. Call them about the listings that you’re interested in, but also ask them about listings that may be coming up because sometimes it may take a day or two or even a week before a listing actually comes onto the database.

Such a request might not always pan out. In places where thousands of foreclosed properties are for sale, you might not get much one-on-one attention from overloaded agents. To prove that you’re serious about buying, meet with the lender right before or after you meet with the agent.

Get a preapproval letter

preapprovedUnless you plan to pay cash, you’ll need a recent preapproval letter from a lender. The letter will describe how much money you can borrow, based upon the lender’s assessment of your credit score and income.

Consider your financing options before you make an offer.  All too often, a buyer wants to find the house first, and then they think they’ll work out the financing. But a really good deal on a bank-owned home will go quickly, and the buyer won’t necessarily have time to try to work out the financing afterward.

Some first-time buyers make the mistake of assuming that the bank selling the home will also finance the mortgage as part of the deal. Banks view this as a totally separate transaction, so don’t assume it will be included. The people in the bank’s REO department are not loan officers. They are getting rid of bad assets.

Pricing depends on sales pace

There’s no rule of thumb on what the bank’s bottom line is on price. Just as with any other real-estate purchase, you have to look at the recent sales prices of comparable properties, or “comps.”

You have to look at the comps in today’s current market conditions and write a competitive offer based on that. Sometimes the bank prices the homes really low, and the home will have multiple offers over list price within hours. Other times it’s priced too high, and you can come in lower. However, be reasonable with your offer.  If it’s unreasonably lower than the listed price (as much as half price), your offer won’t be taken seriously.

Don’t expect a repair discount

repairsKeep in mind that foreclosed houses generally are sold as-is. That means that you shouldn’t expect to get a discount to compensate for repairs. Consider a house listed for $200,000. All the comps are $200,000, but the home will need to be repainted, re-carpeted and treated for mold damage. Despite the impending repairs, a client’s request to take $15,000 off the price to cover the costs will be denied.

You should also look at the absorption rate for your product class, meaning you should find out how quickly comparable houses are selling. In foreclosure, a 3,500-square-foot house with a pool in a gated community might sell within days or hours, whereas more modest homes might sit on the market for weeks. Or vice versa, depending on market conditions.

If homes in your product class are selling swiftly, the best advice on a bank-owned property is to come in at your highest and best, unless the property has been sitting on the market forever with no activity. If you’re going to be upset because you would have gone $5,000 more, but you lost the property, just bid the higher price in the first place to ensure your chances.

Find tradespeople ASAP

Because repairs are almost inevitable with foreclosed houses, it is recommended that you get to know tradespeople who can assess and repair damage from pests, mold and leaks. Assume that the air conditioning needs to be fixed, and possibly the heating system, too.

It all sounds daunting. But at least you don’t have to wait for the owner to move out of the house.

5 Reasons for a Mortgage Refinance

Naturally, if you’re paying 6% for your mortgage and you can refinance at 5%, you’re gonna do it. Although cutting your monthly payment remains an important motive, there are at least five other reasons to consider a mortgage refinance, for long-term savings and convenience.

mortgage refinance

1. Change your mortgage term

If you decrease the term of your mortgage in a refinance by going from a 30-year to a 15-year, you’ll pay a lower interest rate and shorten your total interest costs. You’ll build home equity more quickly, and pay off your loan sooner, even though your monthly payments go up.

2. Move from an adjustable rate to a fixed rate

ARMs offer low introductory rates, but they also offer long periods of uncertainty that make it hard to budget. It makes sense in a mortgage refinance to go from an ARM to a fixed-rate loan during a low-interest rate environment. You’ll get emotional security and your rate won’t fluctuate with changing economic conditions.

3. Take out cash

With a cash-out mortgage refinance, you can turn an intangible asset—accumulated home equity—into a tangible one—cash. It makes sense for a project that will generate long-term benefits, like a home improvement or funding a child’s college education. However, don’t do it for frivolous reasons. Unless you’re extremely disciplined, you could find yourself in even deeper debt.

4. Consolidate two mortgages

When interest rates are low, a mortgage refinance lets you consolidate your main mortgage and an outstanding home equity loan to realize a lower overall monthly payment. Plus, you’ll have only one mortgage payment to make each month.

5. Recover from divorce

If your home is jointly owned with your soon-to-be ex-spouse, a mortgage refinance will turn a joint obligation into the responsibility of the person keeping the home. Nothing is more frustrating than tracking down a former spouse who doesn’t keep up with his or her end of the mortgage payment.

Lay the groundwork

If one of these reasons resonates with you, contact your current lender to see if it’ll offer you preferred rates or reduced closing costs on a mortgage refinance. But don’t assume the current lender is best: Leave no stone unturned by searching for lenders online and calling community banks and local credit unions.

No matter which lender you choose, a mortgage refinance for the right reasons can save you lots of money—and that’s the best reason of all.