Refinancing could still make sense even if you plan to sell the home down the road. Here are several reasons to consider refinancing anyway.
Financial Circumstances Can Change
Let’s say you plan to sell your house in five to seven years. No matter how well you plan for the future financially, things happen. Job loss, illness, death, life inevitably gets in the way of your financial plans, focus on the here and now as long as you can justify pulling the trigger. The longer the horizon of selling the home, the more chances life has of getting in the way.
Consider Interest Rates
Thirty year mortgage rates have etched up and are hovering just over four percent. The new outlook for mortgage rates points to continual increases bringing the cost of debt up. Picture this, if you don’t sell the property nor if there is a market correction, and you do not refinance for whatever reason, is your current loan rate and payment, something that you can afford to carry for the long haul? If you could save money or better your financial position it is probably worth investigating. Rates are even better on Jumbo mortgage loans, as more and more investors are pouring into this particular market niche. If you have big mortgage on your home, take a look a refinancing.
Arm or Home Equity Line of Credit Recasting
With the increased likelihood of the Federal Reserve tightening interest rates in fall 2015, adjustable rate loans and home equity lines of credit recasting will affect millions of homeowners. Most adjustable mortgage loans were tied to the London Interbank Offered rate which closely trails the Fed Funds Rate, the rate at which the Federal Reserve uses to control the US economy. Put another way, if the Federal Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners within their adjustment period will experience a higher payment or a future higher payment when their adjustable-rate loans recast.
The other more common form of adjustable-rate mortgage is a home equity line of credit. It works in a similar fashion with fixed period followed by a recast. The payments are interest-only for the first ten years. After ten years, the loan recasts, and the remaining twenty years of the thirty year term, the loan payment is principal and interest, so at the end of 30 years, the loan is paid off in full. The payment shock will happen after the first 10 years is up.
If you have a first mortgage on your home with a home equity line of credit, it very well might make sense even if you plan to sell the home down the road, to roll the first mortgage and second mortgage into one, saving money continuing to make a manageable mortgage payment in relationship to the time in which you plan to sell.
Mortgage Tip: if you have not taken any draws on the home equity line of credit in the last 12 months, you are automatically more eligible for more mortgage loan programs as the loan may be considered to be what’s called rate and term which allows you to refinance up to 80% of the value of the home.
Throwing Good Money after Bad-PMI
The number one dreaded mortgage cost every consumer despises is private mortgage insurance. PMI is an extra portion of the mortgage payment that not only drives the housing expense higher, but doesn’t do anything beneficial for the consumer. PMI benefits the bank to protect against payment default. If you can rid yourself of private mortgage insurance, because you have at least 20% equity in your home or more, or might be able to qualify for a special mortgage loan program such as lender paid mortgage insurance, even if this home is not the end-all be end-all home, you’ll save money. PMI can average up to several hundred dollars per month in most instances. If you have the 20% equity needed to refinance a new non PMI loan, have the credit worthiness, but simply choose to not refinance, because the paperwork is too daunting, you’re throwing money away.
Recapture Time Frame
No one should refinance unless the time frame it takes to recapture the monies is sooner than the time in which they plan to sell the home. The most common form of determining how quickly you can recoup your monies when refinancing is performing a cash on cash calculation. For example if your closing costs are $2800, and you’re saving a proposed $300 per month on a refinance, that’s a nine month recapture. Fees divided by benefit equals recapture.
If you can benefit by refinancing by payment reduction, by cashing in on equity, or by interest savings, or any combination of these benefits, remortgaging your home very well could pencil. Consider the following scenario… if you can recapture refi in under two years, and you don’t plan to sell for five years, your three years ahead, and the reward are yours indefinitely, no matter what the future holds. Ultimately, weighing out the pros and cons of a possible refinance in conjunction with selling the home is a decision for you to make. A good mortgage professional should be able to suggest mortgage options in alignment with your financial goals and objectives allowing you to make the most prudent decision.
Considering refinancing? Need some guidance on your options? Begin with a free quote from Scott today!