Refinancing your home can make sense for many different reasons, including, but not limited to:

• Lowering your interest rate
• Reducing your PMI
• Restructuring your debt obligations
• Building equity
• Changing the type of loan you are in

 Introduction

It’s funny- I’ve been in the real estate industry for about 15 years now, and I’ve heard it said, over and over, time and again by industry insiders from title, to mortgage, to realtors “well, this whole refinance thing is pretty temporary, one day it will all go away, so we aren’t going to worry too much about it.”  Ha!  15 years later and 20 percent of my loans were refinances last year.   That figure, makes me, at the moment among my peers… average?  Slightly below average? Once upon a time, not particularly all that long ago, there were more refinances than sales.  That’s no longer the case and hasn’t been for some time as we’ve had really low interest rates for some time, but still refinances persist.  Why?  This blog will dive into the top 5 times and reasons where it might make sense to refinance your home.

1. Lower Interest Rates

The most common reason most people decide to look into refinancing their home is when they become aware that the interest rate they have on their house is higher than the interest rate a friend, co-worker or family member told them they have.  Competitive nature kicks in- maybe I should get a lower interest rate.  Then, people will be totally and completely impressed with my financial acumen!  That will totally show my obnoxious brother in law who was bragging at Easter about his great credit and low interest rate on his new house. I never liked that guy- I just don’t get what my sister sees in him.  Where was I?  Oh yeah, if I can save a couple hundred dollars a month I guess that’s pretty cool- it would be like getting a raise at work.  Maybe I should go ahead and call about my mortgage and see if it makes sense to refinance, and away we go.

I’m never opposed to doing a loan that makes sense and saves someone money, and a lower rate will save you money.  Every 1/8th of a point in interest rate savings on the average loan size will save roughly $15.00 per month. So, if you can save a point in interest that could be a $1500 a year savings. If you are the average american and own your house for 7 years or so than that’s a $10,000 savings. That’s real money and might be worth a phone call to kick around that idea.  But, although this might be the most common reason most think about refinancing that’s by no means the only reason to do so, which leads me into reason #2…

2.  Reducing PMI or getting rid of PMI altogether

This is where the savings can really start to roll in, lowering PMI payments and the factor that you pay on it.   PMI, or private mortgage insurance, is a monthly payment that the borrower pays every single month until their loan to value reaches 80% on a conventional mortgage, where the borrower can then elect to cancel the PMI (and you should always cancel).  But, the LTV of the house and the credit score factor into how much of a payment the borrower makes.  So, if your home has increased in value since you’ve owned it, and your credit has held steady or maybe gotten better it’s quite possible that a year or two into a loan where you put minimal amount of money down at the time of closing you can save some pretty good money with a refinance, because it will re-set your factor (lowering your monthly payment) and shorten your window for paying PMI.  I spoke with someone yesterday who wanted to know if it would make sense to refinance their loan.  The interest rate savings was going to be roughly 1/8th of a point, but, the PMI savings was going to work out to roughly $197.00 a month alone.  Would that make sense?  If you plan on staying in the home for the term of the PMI that’s an absolute and unqualified yes!

3.  Restructuring your debt load

In Texas, you can borrow 80% of the value of your house through a home equity loan.  If you have equity in your house and are literally drowning in debt, it’s quite possible that a restructuring of your finances is in order.  High interest credit cards and car loans come with a short term to pay them back, a high interest rate, and sometimes crippling monthly payments.  If you have equity in your home and a credit score above 500 I can get a loan for you.  The lower your score, the higher the interest rate, but even for people really struggling they can find a refinance where they pay off their credit cards and the like to be a life saver.  I refinanced someone recently that saved themselves approximately $1,400 a month by converting consumer debt to home equity debt.  This also could potentially come with a tax savings, and a large increase in credit score can come about by paying off this consumer debt.

A cash out refinance lowers the equity position a homeowner has in their house, and makes sense for many people struggling with debt, however another decision can be made which ignites equity building in your homeownership in a really exciting way, by…

4.  Shortening the term of your loan

Have you ever looked at an amortization chart and compared the difference in building equity between a 30 year mortgage and a 15 year mortgage?  Yikes, it can be pretty striking.

An example of a scenario I worked on last year with one of the people I helped refinance:  They had $200,000 owed on their house and a remaining term of 26 years.  Their payment was $1082.27 a month and 5 years in only $373.00 of that was going to principal.  They refinanced at a pretty similar interest rate and their payment jumped to $1,466.88, but their principal accelerated to $850.00 every month.  This year on their one year anniversary their loan balance is now $11,000 lower, as opposed to the $5,000 lower it would have been if they stayed on the same track.  At 15 years they will now owe $0.00 on their home, instead of the $90,000 they would otherwise owe.

As you get more established in your career and start making more money it’s incredibly likely that the house you had to stretch to afford on a 30 year mortgage will be much easier to afford on a 15 year mortgage, and the difference in wealth building and the mandatory savings aspect of changing the term of your house payment can be staggering.

5. Change loan types:

Many people choose an FHA loan for the low down payment, or because their credit is less than completely optimal. An FHA loan is a godsend in helping people buy a home that might not otherwise be able to do so.  But, it comes with one really really really rough downside, which is that the Mortgage Insurance (government loan version of PMI) never goes away.  By never, I mean, you know, never as long as you have your loan.  Over the course of a 30 year loan that could mean that you are paying roughly $50,000 more to the lender than you would otherwise have to pay if you change loan types to get out of PMI.

Bonus for refinancing your home

NO, I’m not going to send you to a vacation getaway but… if we time the refinance right you can skip 2 monthly payments, and if you have an escrow account set up you even get an escrow refund. I’m not saying that you should take the $5,000-$10,000 you might get back in skipping 2 mortgage payments and head to the beach or mountains or buy a boat, but I’m not saying you should ignore this opportunity to change your cash flow either.

Conclusion:

Honestly, most of the time any one reason we talked about in this blog post isn’t a good enough reason to refinance.  But, when you have 2 or 3 of these reasons start to converge, and you can save in interest rate, PMI and cash flow by not making payments, OR you can restructure debt to get breathing space, OR change programs or terms to otherwise better your financial life then it might be time to take the plunge.
I tell people all the time not to refinance. I don’t try to sell anyone on doing something that doesn’t make sense for them. But, what I do suggest is that periodically you take a look at your financial health, and any look at financial health should lead you to ask if the mortgage you have right now is the same mortgage that makes sense for you.  If I can help you take a look at any of this please email me at gabekmg@gmail.com or call me at 832-557-1095