What You Should Know Before Refinancing
Is this in line with my financial goals?
In taking control of your financial future, setting goals is paramount. The precursors to harnessing the full power of your money include paying off student loans, auto loans, consumer loans, and ultimately, your home.Your Finicity Home Loans expert can help you decide whether refinancing your home will help or hinder you in obtaining your goals of financial freedom and building personal wealth. Refinancing can be the one of the best ways to take control of your financial future. But before you decide on any particular mortgage program, take some time to ask yourself a few questions:
There are many reasons to refinance your home. Some of them may include the following:
- Paying off consumer debt
- Getting cashout for any reason
- Lowering your monthly payments
- Converting to a Fixed-rate mortgage
- Home improvements
Am I working towards my America Dream, or the American Nightmare?
If you’ve found yourself in an all too common cycle of overspending and using credit cards without paying them off every month, you could be right in the middle of your own financial nightmare. Many consumers spend more than they make. Many turn to their homes to bail them out of the interest pit they have dug for themselves. They will often refinance their homes to absorb the overspending, and pay off high-interest consumer debt, i.e. credit cards. Although this is a sound solution, if the behavior doesn’t change, the problem only worsens. If the overspending isn’t controlled, those credit cards that were just paid off will be maxed out again in no time, perpetuating the nightmare.
We can help. Speak to an expert today, and find out more.
Will I be penalized for paying off my existing loan?
Does your current loan have a pre-payment penalty? Your loan’s “Note” will have a provision for a prepayment penalty. They typically are applicable in the first 0-3 years, and have a heavy penalty of 6 months’ interest. Some penalties are “hard,” meaning they apply if the home is refinanced, or sold. Some penalties are “soft,” meaning they only apply if the home is refinanced, and not if the home is sold. At Finicity Home Loans, none of our loans have a prepayment penalty. We want you to enjoy your money!
Interest Only Mortgages:
Your payment consists of all of the interest that has accrued for the month, but no principal. You may have taxes, home owner’s insurance, as well as any other payments associated with the home, i.e. HOA dues, school taxes, etc. These are a good fit if you are in a rapidly appreciating area and do not plan on being there for long, as most interest-only options expire after 0-10 years. However, qualifications for interest-only loans are greater than they are for a standard 30-year fixed mortgage. Speak to an expert today to customize your best options.
Adjustable rate mortgages:
Historically, adjustable rate mortgages, or ARMs, were developed to give borrowers the ability to qualify for more money than they would on a fixed term because the initial rates were lower than fixed-interest rates. Most lenders in the sub-prime arena that offered adjustable rates also had a rate floor cap, which, simply put, was a cap on how low the adjustable rate could go. That floor cap was often the initial rate at which the borrower closed. This ensured that the rate would never vary downward, only upward. Currently, 30-year fixed rates are lower than adjustable rates and are easier to qualify for. ARMs are also a good fit for borrowers who plan on being in their home for less than 5 years. Our ARMs have no floor cap, so if the rate varies downward, so does your payment. Find out more: speak to an expert today.
Home Equity Lines of Credit:
HELOCs are similar to a credit card, but the credit line is secured by your home. The amount of the credit line will vary based on Loan-to-Value, income, credit worthiness, etc. The advantage to a line of credit is that you only pay interest on what you use, as opposed to a standard second mortgage where you pay interest on the entire amount, even if it is sitting in your checking account. Also, any interest paid on any Home Equity Line of Credit should be a tax-deductible item.
Fixed rate Mortgages:
Fixed-rate mortgages have an interest rate that is fixed for the life of the loan. The interest rate will not change, period. This is the most conservative, cost-effective way of financing a home. Your principal and interest payments will be the same each month. The only variances in your payments will come from adjustments in your real estate taxes, as well as your home owner’s policy, if any. Fixed-rate mortgages come in several options, from 15-year, 20-year, 30-year, and even 40-year options. Speak to an expert today to find out more.
Will I have Private Mortgage Insurance? Can I avoid it?
Mortgage insurance is only for a loan in the first lien position that exceeds 80% Loan-to-Value, or LTV. The terms of the Mortgage Insurance vary depending on the loan program and LTV. Also, FHA loans have a different parameter than standard, or conforming guidelines. As of 2007, Mortgage Insurance is a tax deductible item. Previously it was not. Mortgage insurance does not reduce your principal balance, or help you pay off your loan prior to its date of maturity. Sometimes it makes sense to have mortgage insurance vs. a higher interest rate on a second mortgage, but sometimes it doesn’t. Let us help you decide the right loan for you. Speak to an expert to find out more.
How do I know what my home is worth?
Often when looking into financing a home, the question of the home’s value is brought up. A real estate appraisal is the best and most reliable method of home valuation. A good indicator of your home’s value is the current county tax assessment. Typically the county tax assessment is conservative. However, in today’s changing market, it may not be. A real estate agent can pull comparative market analyses (“comps”) from the MLS (multiple listing service) to compare your property to similar homes that have recently sold or been listed to get an approximate value for your home.
Important items to consider are:
- Quality of construction and materials used
- Total livable space in square feet
- The floor plan of your home and its appeal
- The relative neighborhood where your home is located
- Proximity to shopping centers, grocery stores, schools and transportation
- Land size, desirability, and landscaping
Speak to a financing expert today…
Should I pay off consumer debt?
If you are spending more than $500 per month on consumer debt, you may be spending too much. In addition to spending too much money, you are not getting any tax benefits for the interest you are paying to your creditors. If you are only making your minimum payments on consumer debt, i.e. credit cards, you will likely never pay off the debt and spend 20-30 times the amount that you borrowed originally in interest. Are you spending too much? Find out by speaking to a financing expert today.
