It is no surprise inflation is upon us, and interest rates are feeling the rising cost of goods and services. Everything seems like it is going up in price. Mortgage rates are no exception. One thing you might want to consider as it relates to refinancing your house is there is a net tangible benefit. Here is how to decide whether refinancing into a higher rate loan but for a lower monthly total payment might make sense for you and your family.
Let us use an example to illustrate what we are talking about. You have a 30-year fixed rate mortgage at 2.875% you have credit card debt in the $15,000 range average interest rate on the credit cards is 10%-15%, plus a car loan for another $15,000, a student loan for another $15,000+ at a 4% interest rate. If you can refinance and combine all these debts into one new loan then your mortgage payment would go down by $700 a month. In other words, you are combining all your multiple forms of debt into one new loan, your home loan. So, the mortgage balance on your house is going to be bigger now.
If your loan amount stays the same and you are paying off all your debt. Your payments are going down $500-$700 a month but your interest rate is going up from 2.875% to say 3.75% on a 30-year fixed. You will want to take an average of your mortgage rate and all the debt on your consumer debt. If that rate blended is bigger than 2.875% or bigger than 3.75%, which is the prevailing new rate in this illustration, it would make sense to refinance. If you are going to save money, do something prudent with that money. It might make sense to go from a 30-year mortgage with all the debt consolidate into a 10-year loan or a 15-year fixed rate mortgage with consumer debt.
Most experts will tell you not to refinance unless your interest rate is going down 0.5%-1.0%. These experts teach people to look at interest rates in a linear format. They do not instruct people about the bigger, broader budget of their total monthly expenses and their total savings as it relates to their income and cash flow. At the end of the day, a mortgage should be integrated into your long-term and short-term payment and cash flow goals. Simply put the interest rate is important. However, the total interest rate that you are paying on all your debt is also important to your ability to save.
You could save money by refinancing which will allow you to better adhere to a monthly budget. You can save more money which leads to more wealth creation over time. Even if that means a higher interest rate. Lenders do not look at the interest that you are paying on your other debt, lenders look at the minimum payments. They know that a hard element is your payment-to-income ratio. This is how much of your monthly payment is going towards a house payment plus your other monthly expenses. They get this number by adding up your house payment and your other expenses and then dividing it into your monthly gross income. If this number is 40% of your monthly income, they are looking at why with a very fine-tooth comb.
You should do the same for your financial budget the way the mortgage underwriter will on your mortgage application. Cash in, cash out. You want more cash coming in than out. Regardless of what other economic factors are happening in your life, this creates the financial platform enabling you and your family. It helps to save money while supporting a mortgage payment and getting the enjoyment of that tax break.
If you have been thinking about doing a cash-out refinance, work with a local lender who understands the market. Who can best advise you about what this scenario might look like or at least a lender that has hundreds of online recent reviews? This way you know that you are working with someone who is a complete expert in their field and a student of their craft. Doing so will only help you in the long and short term. A person like this is interested in helping you with multiple loans over time. Continually advising you as market fluctuations occur to help lower the cost of funds for you and your family.
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