August 5th, 2015 8:03 AM by Jackie A. Graves, President
Are you interested in refinancing your mortgage, but hesitant to
do so because you’re thinking of selling your home at some point? Believe it or
not, refinancing could still make sense. Here are several reasons why you might
want to consider refinancing anyway.
Let’s say you plan to sell your house in five to seven years. No
matter how well you plan for the future financially, things happen. Job loss,
illness, death—life inevitably gets in the way of your financial plans. Focus
on the here and now, as long as you can financially justify refinancing your
mortgage. The longer the horizon of selling the home, the more chances life has
of getting in the way. If refinancing can save you money in the meantime, it
may just make sense.
Because financial circumstances can change over time, for better
or worse, it can be a good idea to calculate how affordable your house really
is for you. This free calculator can tell you how much
house you can afford.
At publishing time, 30-year mortgage rates have edged their way
up and are hovering just over 4%. The new outlook for mortgage rates points to
continual increases, bringing the cost of debt up. Picture this, if you don’t
sell the property or if there is a market correction—and you do not refinance
for whatever reason—is your current loan rate and payment something that you
can afford to carry for the long haul? If you could save money or better your
financial position, it is probably worth investigating. Rates are even better on
jumbo mortgage loans, as more investors are pouring into this particular market
niche. So if you have a big mortgage on your home, you may want to consider
With the increased likelihood of interest rates going up in fall
2015, the subsequent recasting of adjustable-rate mortgages and home
equity lines of credit will
affect millions of homeowners. Most adjustable mortgage loans were tied to the
London Interbank Offered Rate, which closely trails the Fed Funds Rate, the
rate at which the Federal Reserve uses to control the U.S. economy. If the Federal
Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners
within their adjustment period will experience a higher payment or a future
higher payment when their adjustable-rate loans reset.
A HELOC works in a similar fashion to an ARM with a fixed period
for the interest rate, followed by a rate reset. For a HELOC, payments are
interest-only for the first 10 years of the 30-year term. After 10 years, the
loan resets, and for the remaining 20 years the loan payment is principal and interest,
so at the end of 30 years, the loan is paid off in full. The payment shock will
happen after the first 10 years.
If you have a first mortgage on your home with a HELOC, it very
well might make sense even if you plan to sell the home down the road, to roll
the first mortgage and HELOC into one, saving money and continuing to make a
manageable mortgage payment until you sell.
Mortgage tip: If you have not taken any draws on the HELOC in
the past 12 months, you may be eligible for more mortgage programs as the HELOC
may be considered a “rate and term,” which allows you to refinance up to
80% of the value of the home.
The one mortgage cost consumers love to hate is private mortgage insurance. PMI is an extra
portion of the mortgage payment that not only drives the housing expense
higher, but it also doesn’t do anything beneficial for the consumer. PMI
benefits the bank to protect against payment default. If you can rid yourself
of PMI because you have 20% or more equity in your home, or can qualify for a special
mortgage loan program such as lender-paid mortgage insurance, you’ll save
money. PMI can average up to several hundred dollars per month in most
instances. If you have the 20% equity needed to refinance a new non-PMI loan
and are creditworthy, but simply choose to not refinance because the paperwork
is too daunting, you’re throwing money away.
If you’re not sure where your credit stands, but you want to
refinance, it’s a good idea to check your credit sooner than later. You can get two of your credit scores for free on Credit.com, and
they’re updated monthly so you can watch for changes.
No one should refinance unless the time frame it takes to
recoup the closing costs on a refinance is sooner than the time in which
they plan to sell the home. The most common form of determining how quickly you
can recoup your money when refinancing is performing a “cash-on-cash” calculation. For example, if your
closing costs are $2,800, and you’re saving a proposed $300 per month on a refinance,
that’s a nine-month recapture. Fees divided by benefit equals recapture.
If you can benefit by refinancing by payment reduction, by
cashing in on equity, or by interest savings or any combination of these
benefits, remortgaging your home very well could make sense. Consider the
following scenario: If you can recoup the refinance costs in under two
years, and you don’t plan to sell for five years, you’re three years ahead, and
the rewards are yours, no matter the future. Ultimately, weighing the pros and
cons of a possible refinance in conjunction with selling the home is your
decision. A good mortgage professional should be able to suggest mortgage
options in alignment with your financial goals and objectives.
This article was written by Scott
Sheldon and originally published on Credit.com.
To view the original article click here