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7 Good Reasons For a Mortgage Refinance

Bankrate recently posted an article stating that there were 7 good reasons to refinance your current mortgage. Of course I agree with some of the reasons, but there are a few that I certainly disagree with and would advise against doing.

Get a Lower Mortgage Rate

This one is kind of a no-brainer I suppose. If you can get a lower rate, go for it! However, the general rule of thumb is to refinance only if the current rate is 2 points lower than the rate you are locked into. This is when you can be certain that the additional costs of the refinance will be offset in your favor with the lower rate, and therefore, lower payment.

Ditch Adjustable-Rate Mortgage For the Fixed-Rate Loan

I like this plan as well. Since the rates are currently at a historic low, adjustable rates just don’t make any sense anymore. Why would you want your rates to go up in the future? Get that fixed rate mortgage!

Pull Cash From Your Equity to Buy a Second Home

I don’t quite understand this one. During a time of economic turmoil, why would someone want to risk their current house in order to buy a vacation home? Steer clear of this tactic. It has bad news written all over it.

Pull Cash Out to Start a Business

Because my background is in Business Finance, I understand the reasoning behind this move, but it still is very risky. You need to be pretty sure about your business idea in order to do this. If you are going this route because the bank wouldn’t give you a loan, chances are, it’s a bad idea and you’re going to lose your money. Do your homework and put together a business plan that is rock solid. Only then will this option make sense.

Pull Cash Out to Pay Off Credit Cards

This also doesn’t sound like a terrible idea. Since credit cards can carry an interest rate of over 20% and the average mortgage rate is 4%, it’s an obvious savings in interest. However, this makes those credit cards very tempting to use again. My advice is that if you use this option, cut up those credit cards and live below your means by using a debit card instead. Otherwise, don’t do it. It’s too much of a temptation.

Combine the First Mortgage with the Home Equity Line of Credit

I don’t mind this idea. It creates a little more clarity in your mortgage rather than referring to two different lines of credit.

Pull Cash Out to Address Family Matters

The money is often used to help a family member out who is in a bind. The common scenario now is with younger individuals facing foreclosure, and their parents are bailing them out by refinancing their own house.

Also, this option is used by those who may have recently gone through a divorce and need to divide the assets. Since it is difficult to divide a house in two, it is often easier to cash out in order to pay half of the value to the other party.

Unfortunately, this becomes the only option for some, given their scenario. You’ve just got to do what you’ve got to do.

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9 comments to 7 Good Reasons For a Mortgage Refinance

  • Fred

    These are some great reasons, but do you always suggest a refi?

  • I am currently working on a refi to get a lower interest rate on some rental houses. I meet with the mortgage guy today.
    JT recently posted..Hoping the Rental House Refinancing Works Out

  • My mortgage principal is only around 60k so the cost of a refinance takes a long time to pay off. I got a decent rate but I could refinance lower. At this point I don’t plan on refinancing though.

    • I’m kind of in the same boat Lance. I have less than 60k to go, and I’m already paying down the principle rather aggressively. The rate would have to be extremely low to even consider it (because of the initial costs to refinance).

  • Gary

    Good tips as always. Sounds like something my wife and I should try, trying to save wherever we can these days! Makes it hard when I am the saver and she is the spender though. I have been following your blog for a while and don’t normally comment, but we are struggling and I have to ask how you and your wife make it work? You have written in the past that she is the spender and you are the saver, and it’s becoming a challenge in our marriage. We try to follow advice from Dave Ramsey and remain frugal, but we still like to have fun. She hates the ‘B’ word (budget) and it just seems like our finances are driving us apart. How do you make it work with Mrs. LAMF?

  • I like the idea of pulling cash out to pay off high interest credit cards… We will probably next refinance when our fixed term is finished and we default to the SVR
    Savvy Scot recently posted..2012 – What a Freaking Year!

    • Just be sure to keep those credit cards empty of purchases after you do it! So many people get caught into the trap of taking out equity in their home to pay for their cards, and then they go ahead and buy a bunch of stuff on credit. It’s a vicious cycle that ends up getting you nowhere in the long run.

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