Mortgage Refinance: A Financial Debt Strategy
Homeowner equity is at record highs and mortgage rates have trended low for the first 8 months of 2019. These two primary factors paired with other market conditions were enough to trigger a refinance boom.
While homeowners are certainly aware they can always explore the option of refinancing their mortgage, many are not aware of the potential financial strategy a refinance could represent.
If you have substantial debt and own a home, you may want to speak to a licensed mortgage professional about the possibility of refinancing your mortgage as a debt strategy.
Make an informed decision
There’s a lot of factors to consider and you’ll want to make a wise decision. Discuss your options with a licensed mortgage loan officer. For this type of transaction, finding a professional that is going to advise you and lay out all your options with the pros and cons is imperative to making a smart decision. Avoid those that seem rushed or just pushing for your business - they will not have your best interest in mind.
Get debt under control
With a debt consolidation mortgage, right now may be a great time to refinance your home and pay off interest bearing accounts or other types of debt. Depending on your equity, you could get rid of credit card balances, car loans, and even student debt. If handled properly, your monthly expenses could fall dramatically.
Home equity is up nationally
2019 has seen record-breaking home values. In fact, American homeowners are in one of the best positions in U.S. housing history — and home values in most areas continue to rise.
Homeowner Equity Q1 2019
CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63 percent of all properties*) have seen their equity increase by a total of nearly $485.7 billion since the first quarter 2018, an increase of 5.6%, year over year.
*Homeownership mortgage source: 2016 American Community Survey.
Advantages of a debt consolidation mortgage
With equity up nationwide, homeowners with positive equity could access that money. Today’s mortgage rates are generally below the cost to finance cars, some student debt, and especially credit cards.
For comparison sake, If you’re repaying a mortgage at 5 percent and a credit card at 16 percent, the rate difference is obvious.
Be cautious though…
A lower rate should not be the only consideration. Timing is a factor. Over time you may pay more in interest for a small loan over a 30-year mortgage than paying it off at a higher rate in a short time frame.
It is imperative that you sit with a licensed professional that can review structuring with you and plainly lay out financial scenarios.
You have options
Homeowners with positive equity have three options to pay off more expensive deb with a refinance:
• Cash-out refinance
• Fixed second mortgage
• Home equity line of credit (HELOC)
This should only be considered if you can significantly improve on the terms of your current mortgage. You will typically be charged more for cash out transaction — a fee that applies to the entire home loan, not just the cash out. By borrowing enough to pay off your existing home loan plus more, this is the most expensive financing option.
The interest rate, however, could be the lowest of the three choices. It might be the best option if you need to take out a lot of cash, but probably makes little sense to get just a few thousand.
Fixed second mortgage
The interest rate on a fixed second is usually higher than that of a first mortgage, however, you only pay fees on the cash you need, not to replace your current mortgage as well.
You also have options with a fixed interest rate and a shorter term (anything from 5 to 30 years), helping you to avoid long-term financing to repay smaller amounts. The fees are generally lower than those of cash-out refinancing, but higher than those of a HELOC.
A home equity line of credit (HELOC) is a loan secured by your house, but is a “use as you need” approved amount of credit. It functions like a huge credit card… with lower interest.
For smaller amounts, HELOCs offer the advantage of typically the lowest transaction cost of the 3 options.
HELOCs can come with disadvantages, however. Primarily, if you’re in over your head with debt and you’re in that position due to credit card abuse, a line of credit mortgage not a good idea idea and can land you in hotter water than you started in.
Also, the interest rate is not fixed, so your payments can fluctuate sporadically.
Additionally, the HELOC allows you to draw funds for part of its term and then amortizes the balance over the remaining term which can cause your payment to shoot up.
In summation, refinance as a debt strategy should be reserved for disciplined consumers that can financially benefit from restructuring their debt. Working with a professional is vital in determining if this strategy is financially beneficial for your specific situation. If the person you are working with does not lay out several options with calculated scenarios, you are going into the transaction blind.
For those in the right position, this strategy can prove financially beneficial.