How Refinancing Can Save You Money
By Lisa Scontras
If you’re like many Americans, you have a large percentage of your net worth tied up in your home equity. That’s a great situation to be in until someone in your family wants to go to college, or you’re faced with unexpected medical bills, or you suddenly need a major home repair that requires more cash than you have on hand.
First Hawaiian Bank vice president Jeff Bamer, whose job includes setting mortgage rates, says refinancing is a resourceful way to solve a number of common money matters. In fact, 50 to 60 percent of First Hawaiian Bank’s mortgage loan closings each month involve a homeowner who is refinancing. Circumstances leading to the decision to refinance generally fall into one of six categories:
1. Historic low rates
Anytime you find a way to save a significant amount of money, it is worth looking into. And lowering your interest rate is an easy way to do just that.
“On a typical loan of $300,000, reducing your rate by 1 percent via refinance can save borrowers over $180 per month,” says Bamer. “That is over $2,100-a-year savings.”
2. Converting an ARM to a fixed-rate loan
Adjustable-rate mortgages seemed like a good idea initially. But if your fixed interest period is about to expire or future step-ups in your adjustable mortgage have you worried, today’s 30-year lows make converting to a fixed-mortgage worth considering.
The question is not if rates will go up, but when. Locking in a fixedrate mortgage now at very near all-time lows to avoid step-ups later is a big motivator.
“Yes, there are still a lot of people who have adjustable-rate mortgages,” says Bamer. “When rates inevitably go up, their payments could increase dramatically.”
3. Consolidate debt
Trying to pay off credit cards but can’t seem to scrape together much more than the minimum payment?
If you’re paying high interest on your credit cards, it might make sense to consolidate all your debt into one low-interest loan and one single payment. By taking out a new larger loan, you can pay off your original loan, plus any credit cards. Using this option responsibly can breathe new life into the family budget.
“Mortgage rates are much lower than credit card rates or other loans, plus mortgage interest is tax deductible, saving borrowers ever more,” he says. “Ultimately, those savings can be used to pay down your overall debt faster.”
Bamer recommends paying the original higher monthly payment amount even after you refinance and lower your payment as a way to pay off the mortgage sooner and build equity faster.
4. Take cash out
Especially if you know you are going to need a new roof, new plumbing, or have college expenses to pay, using your equity for a onetime expense might make more sense than using a credit card. Having equity in your home is comforting but having all those dollars tied up in the value of your home may not be the best use for them.
“Cash-out refinancing can be a creative way to reduce the cost of financing home improvements, education costs, or even a new car,” says Bamer.
5. Consolidate equity line
Interest on equity lines of credit is low right now, but will likely rise in the future. Some homeowners are paying off their equity line by refinancing their first mortgage.
6. Mortgage-free homeowners
Congratulations if you’ve already paid off your mortgage. But if you’re looking for a way to harness the equity you’ve built over the long term, a new first mortgage may be the answer.
“If you’re considering tapping into your nest egg or taking out a loan for home improvements, education or the like, it may be wise to look at refinancing your home instead since rates are so low compared to other options,” Bamer adds.
Virtually all the economic experts are predicting rates rising in the coming months.
“It was expected that rates would already be on the rise,” Bamer says. “The sluggish economic recovery and global economic troubles in countries such as Greece and Ireland have kept rates low so far this year. Most experts believe that the government borrowing trillions more can only drive up borrowing costs for everyone.”