Refinancing: Home Equity Loan, Is Today a Good Day

So interest rates have been rising. It’s all over the news. Everybody knows it. The good days are over. You’ve missed your chance to refinance. That seems to be the message many borrowers are getting these days. The truth is it is always a good time to refinance, in the right situation.

Just as every fingerprint is different, so is every family, and their needs. This is also true of every real estate loan.

There are several ‘triggers’ for refinance. Sometimes, as in recent years the trigger is a lower interest rate. It is still often possible to improve on the rate you’ve got, especially if you bought using an 80/20 combo. If you got a good rate on the first loan, but did not do as well on the second, it is often possible to get a lower blended interest rate. The blended rate is your true interest rate for your home.

Let’s assume you have a first with an interest rate of 6.5{7fcbeda410c9f02a886f83a59a5af911565ec7141a170d397df667872a958d9e} on your first and 7.75{7fcbeda410c9f02a886f83a59a5af911565ec7141a170d397df667872a958d9e} on your second, your blended rate would be 6.75{7fcbeda410c9f02a886f83a59a5af911565ec7141a170d397df667872a958d9e}. This assumes that both mortgages have the same term.

The blended rate is the sum of interest paid on both mortgages over a specific period, divided by the sum of the balances of both mortgages over the same period.

In this example the borrower has pretty good credit scores. Often the second comes close to double digits on the interest rate, and as a result the blended rate is pretty high. In this instance, refinancing into one loan with a rate slightly higher than the first would make sense.

Another common trigger is the desire for a lower payment. This actually can be accomplished in different ways. There are a variety of loans that can lower your payments, sometimes by more than half. Products such as interest only loans, which allow the homeowner to pay only that amount which covers the interest on the loan, or ‘Pay-Option-ARMs” which allow the borrower up to four choices each month on how to pay the mortgage. Options that include the minimum payment, which is based on interest rates as low as 1{7fcbeda410c9f02a886f83a59a5af911565ec7141a170d397df667872a958d9e}. It is important to note that while loans like this allow for very low payments, they may also result in negative amortization.

A variation on the lower payment is debt consolidation, which results in less money spent on debt payments every moth. In this instance you lower your total payments each month, even if you are paying more for your mortgage. Let’s assume a new loan amount that allows enough cash out to pay off the car and several credit cards. These not only carry typically higher interest rates than the mortgage, they are also, in the case of the credit cards likely to take every bit as long to pay off as a 30-year mortgage. Even if your mortgage payments go up by as much as $300 each month, if you’ve eliminated $800 in payments there is a net gain of $500. It is important at this point to note that lowering your monthly payments by adding depreciating assets, such as your car payment to your mortgage and thereby financing them over 30 years does not usually make good financial sense. Often however, relief is needed today. It makes no sense to lose your car, or worse your home, rather than refinance over a longer term. Please before making the choice to refinance your home to pay off other debts talk to a competent advisor who has your best financial interests at heart. There are too many loan hackers out there who will say whatever it takes to get you to do the loan and take out as much cash as possible.

In this industry there are two kinds. Loan hackers and mortgage professionals. A hacker will help you get a loan. He will cut prices and fees all day long in order to ‘earn’ your business. He may or may not know his business well, but is always guided by the principle of making money for themselves. After you do your loan with him he looks for the next sucker.

A mortgage professional, on the other hand, is seldom shopped around. He does not feel the need to slash his fees, because what he charges is a fair fee, and for that he provides quality service. He seeks to build relationships for life and to educate his clients. His guiding principle is helping you to reach your financial goals. It is not enough to simply get you the loan.

Another trigger can be the need for capital. Often investment opportunities arise and there is a need for capital. Just be sure it is a sound investment. Taking the maximum equity available out of your house, driving to the first casino over the Nevada border and placing it all down on one roll of the dice at craps is not a wise investment. I may sound like a facetious example, but in our office we actually had a client do this. It was, as you might guess, against our advice. He lost by the way and now owes more than $100,000 more than before with no gain.

Quality investments on the other hand can be a fantastic use of capital. I particularly like real estate. Many of the countries richest men have made their fortune in real estate. Donald Trump recently said if he could have only one investment for the rest of his life it would be real estate. The returns are higher than virtually any other investment, and the risk is very minimal, if you buy smart.

Buying in a growing area, and leveraging your cash can lead to phenomenal gains in just a year or two.

Whatever the reason it is always a good time to refinance for someone in some situation. Seek advice from the best people you can find. Good advice is easy to come by. Great advice comes from those who have taken the time to educate themselves. Don’t settle for good when you can have great.

Steve & Stacie Scheunemann

Residential Loan Specialists

ViewPoint Financial Group

(866) 561-8081 Toll Free

(909) 238-3787 Cell

[email protected]