Think you may have missed the opportunity to refinance your home mortgage? Think again! You may still benefit from refinancing even though rates have recently gone up.
While conventional loans make up the large majority of home mortgages, there are millions of borrowers who have other types of loans. Those loans are usually taken out with the intent of refinancing at a later date.
Here are some loans that can be refinanced today and still save you money:
Hard Money Loans
People who find themselves with life circumstances and need a mortgage to satisfy an immediate need often resort to hard money lenders. Typically these loans carry a higher rate than conventional loans. They may also be short-term loans with terms that are not as favorable as conventional loans.
One common example is Interest Only loans. When borrowers must take cash out of their homes to either avoid foreclosure or take care of other pressing needs, they opt for loans with higher interest rates. One way to keep the payment down on these loans is to opt for the Interest Only option usually offered.
In cases such as this, it makes perfect sense to refinance. Usually, the borrower will re-establish credit and employment history within a couple of years after taking out a hard money loan. This enables the borrower to be in a position to then apply for a standard conventional loan. If conventional financing is not available, FHA loans may be an option.
Getting out of a hard money loan can put you in a better position by eliminating unfavorable loan terms such as interest only. Thus getting you one step closer to getting the best loan you can qualify for.
Even as recent as early 2019, FHA rates were in the high fours. Many FHA borrowers have not refinanced for a variety of reasons. The most common reason is a lack of financial literacy. Most FHA loans are done in lower-income areas. They are also typically issued to borrowers with credit that is not up to conventional loan standards.
Unfortunately, these borrowers keep those loans way past the time when they need to. Over the last 4 years, their equity has increased substantially. This allows them to refinance with a conventional loan. The benefit of conventional financing is that they can get rid of the Mortgage Insurance, which is typically .88% or just under 1%.
Borrowers who currently have a 4.75% or higher FHA rate are essentially paying over 5.5% net rate, including mortgage insurance.
Why would it make sense to refinance if rates right now are about 5.5% to 5.75% for conventional loans? The benefit here would be paying down the principal. Even if you have the same rate, your mortgage insurance is a straight loss of money every month. That money could instead go towards paying off your mortgage.
2nd Mortgages / Home Equity Lines of Credit
If you have a 2nd mortgage or HELOC, it may still make sense to consolidate. Most HELOCs have adjustable rates, and due to the Fed’s rates increases, those HELOC rates may be more than what you need to be paying.
Keep in mind that the Feds have promised to keep raising rates in the foreseeable future. It may be time to secure a fixed rate and eliminate uncertainty in your monthly mortgage payment.
Other Reasons to Refinance
Debt Consolidation Refinancing
Consumer rates are on the rise, and many homeowners are carrying a considerable amount of credit card debt. Penciling out the benefits of refinancing may work out in your favor.
One thing that most people don’t take into account is the difference between simple interest and compounding interest. Let’s break that down and see how it impacts your finances.
Simple interest is the type of interest you pay on home loans. The lenders calculate the interest portion of the payment based on the outstanding principal balance only. You only pay interest on the actual money owed.
Compounded interest, on the other hand, is interest on top of interest. This is how credit cards work and the reason why it’s nearly impossible to pay them off. The interest on credit cards is compounded daily using the principal balance plus an average daily balance. If it sounds confusing, it is. That is by design as well.
If you carry a large amount of credit card debt, you may very well be better off refinancing it into your mortgage. By doing so, you pay simple interest, no compounding at all, instead of getting fleeced by the credit card companies.
Home Expansions or Improvements That Can Create Income
There are many ways that improving your home may be able to generate income that will more than offset the higher payments.
One very practical example is adding a 2nd unit to your lot, which you can rent out. In states such as California, homeowners can add Accessory Dwelling Units (ADUs) even in residential lots that are zoned for single-family homes.
With the shortage of homes for sale turning into a pandemic practically, rents keep going up and up. This offers opportunities to create additional income by adding to your home at a still modest interest rate.
Other opportunities are in areas where your home is on a mixed zoning lot. You may be able to add commercial space to your property in addition to your existing home. This could be for a business you may be thinking of opening or adding space you can lease out.
Explore Your Options
While it is true that mortgage rates have increased, that does not mean you have lost all chance of benefiting from today’s rates. Even in the mid-fives, that is still a very good rate that can serve many purposes.
Make sure to do your due diligence with the help of a trusted professional. Crunching numbers at these levels takes the right tools. Mortgage lenders who are equipped with the right modeling software can compare multiple types of loans and give you detailed payment and amortization schedules. Having this information at your fingertips will empower you to make informed decisions based on facts.