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.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.