The long and short of it is yes, no, or maybe. As many are aware the rates are higher than they were last year and will continue to go up as we head into 2019. Does refinancing make sense for anyone right now? It likely could. See below for my top two reasons to consider refinancing before rates go up again.
You have private mortgage insurance (PMI) with your current loan. Even if you purchased as little as one year ago, the combination of equity gained, the few principal payments made to date, and your original down payment amount you may be at a 20% equity position. If you are unsure, a mortgage lender can run some quick numbers and determine if your home will appraise high enough to remove the PMI payment. Your interest rate will likely be higher due to today’s rates, but even with that your payment could go down and more will go towards the principal once the PMI is removed.
You want to take cash out or open a line of credit. Taking cash out means your loan is structured to cover what you still owe, and more, giving you the cash back. For example, if your mortgage balance is $300,000 and you borrow $320,000 your new loan amount is $320,000 and the $20,000 is considered the “cash out”. That seems counter productive, but if you have high interest debt or want to tackle a remodel it’s not a bad way to go. Plus, the new loan amount is likely lower than what you originally borrowed depending on how long you have owned the home.
A line of credit is like a credit card on the home. The bank determines how much your home is worth and how much you owe (loan to value). Based on a set ratio number they open a line of credit otherwise known as a HELOC (Home Equity Line of Credit). The equity line is there if and when you need it. If the money isn’t used there is nothing to repay. When you do use the money the rate will be higher than your first mortgage amount yet not nearly as high as a credit card would be. This pot of money may be far larger than a cash out refinance and can be used as a safety net emergency fund or pulled from for a major home improvement project.
Who is not a good candidate for a refinance? If you plan to sell soon (in the next year) the cost to refinance, which isn’t high, still outweighs the savings. Those who have an amazing rate in the 3%’s should stay put and not consider refinancing unless they need the cash. A home equity line can be added to any property regardless of whether or not you refinance the first mortgage if you have equity.
Want to learn if refinancing or adding a line of credit is right for you? Let me connect you to a lender that can walk you through your options.