So you are thinking about refinancing. It could be a wise decision. It could also be a situation where you may be better off waiting to refinance.
Here are three questions to ask yourself about refinancing.
- Are you trying to lower your rate?
If you are, then you need to determine what your long-term plans are. Refinancing costs money and if you don’t plan to stay in your current home a long time, then refinancing may not make sense for you. That is because you will have a break-even point when you save enough on your new monthly payment that it makes up for the cost you paid to refinance. If you plan to stay in your home a while, then refinancing may be right for you.
- Are you trying to go from an adjustable rate mortgage to a fixed rate mortgage or a fixed rate mortgage to an adjustable rate mortgage?
Depending on your situation, choosing an adjustable or fixed-rate mortgage is a crucial decision. An adjustable rate mortgage allows a homebuyer to specify their fixed rate term (5, 7, 10 years, etc.) After that time period is over, the interest rate can go up or down. If you want a fixed-rate mortgage you can choose to select a 30-year, 25, 20, 15 or 10 year. If you go with a 30-year loan you can count on a set amount to pay monthly for quite some time. This will make your monthly payment lower, but your interest rate may be higher. If you choose a 15-year rate, then you will be able to pay off your loan much faster than the traditional 30-year, but your monthly payment will be much higher. This allows you to pay less interest over time because you are making higher monthly payments.
- Are you focused on bad debt pay off and consolidation, home improvement or cash out for a down payment on an investment property?
What are you looking to do? If consolidating debt is an objective, then you may consider what is good and bad debt. Generally speaking, car debt is bad debt. Credit card is typically considered bad debt. If you have student loan debt and your career is helping you manage that debt reasonably then that may be considered good debt.
You could cash out to make a down payment on an investment property. You could sell your home or refinance to pull money out to buy five single-family or multi-family residences priced at $100,000 each, for example. You pull $100,000 of equity out via a cash-out refinance and you then put that money to work buying assets like $20,000 down on each of these investment properties, and then get financed for $80,000. A multifamily property has four doors with four dwellings, meaning there are four families that may pay you rent. If you purchase a multi-family property with four dwellings and put your 20 percent down, then you have four monthly payments, which may provide positive cash flow, also known as “passive income.”
A remodel on your home isn’t going to positively increase your immediate cash flow. It will make you feel better about your home though and that is worth something. If you plan on living in the house for a long time and are not pleased with how it currently looks then you may consider a remodel. A remodel may increase the value of your home if you plan to sell it soon.
If you have any questions about refinancing, don’t hesitate to give us a call!