Blog with MAE Capital

Refinancing a house is done for several reasons, and people have different motivations to do so.  The most common reason for refinancing a house is to lower your monthly payments.  Another reason for refinancing your home is to take some cash out of your accumulated equity, and people do this for many reasons we will explore in this blog post.  Other reasons people refinance include having a balloon payment due, or they may want to shorten or lengthen the term of their loan.  The reasons for refinancing are very personal, and we take it very seriously when we talk to our clients about refinancing their homes.  If you do it wrong, you could end up paying far more in interest over the years or you add too much to your loan amount and could lose your home in the long run.

Refinancing to lower your monthly payments is the most common reason people refinance their homes.   You may choose to refinance to a lower interest rate to lower your monthly outgo. This can only occur if the interest rates now are lower than when you took out your original mortgage.  An example of this would be if you got a 7% interest rate and interest rates have dropped to say 5.5%, and you do a refinance, and the lower interest rate lowers your monthly payment.  This is the most common scenario of people refinancing to lower their monthly mortgage payment.  There are other reasons to refinance to lower your payment, such as if you bought your house with a low down payment and took out mortgage insurance.  Now your home has risen in value to the point where, with appraisal, the value of the home has risen to the point where the loan-to-value on a new loan would be less than 80%, and now you can drop your mortgage insurance.   By dropping your mortgage insurance, even with the same interest rate, you could be saving $200-$600 a month, depending on your loan amount.  

Refinancing to take cash out of your equity is the second most popular reason to refinance your home.   People will refinance their home when the value has risen, and they can now refinance their home and take money out of their equity to pay for things they may need or want.  An example would be if a person has owned their home for a while and they bought it for $350,000 in 2005, and now the house is worth $750,000, and they have a child who is heading off to college and needs money for this.   They could refinance and take cash out of the equity to pay for the education.  They could borrow up to 80% of the value of their home to pay for this or whatever they may need the money for.  People will often take cash out of their equity to pay off bills to lower their monthly outgo.  An example of this would be if someone was paying $2,000 a month in credit card bills and they owed, say $50,000 in revolving credit, they could take the cash out the equity and stretch that obligation out over 15 or 30 years and have a lower interest rate, thus lowering their monthly outgo.  These are the most common reasons for taking cash out of your equity.  There are people who will tap the equity in their home like an ATM, but I would highly discourage doing that,t as you will be paying far more overtime through the costs of refinancing and the loss of equity.     

Other reasons for refinancing may be caused by a divorce situation where one spouse is forced to refinance a house to pay the other spouse off.  Another reason may be that the original loan that was taken out to purchase the house may have had a balloon payment associated with it.  This is where the original loan may have been amortized over 30 years, but has a due and payable date sooner than 30 years.  An example of this would be a 30-year loan due and payable in 5 years that is coming due; a refinance is the only option or you lose your home.  Another reason to refinance may be that you have an interest-only loan and you wish to change to a fully amortized loan.  Yet another reason would be to change the term of the existing loan, either shorter or longer than the current term.

There are many reasons to refinance your home, but you should always keep in mind your future.   What I mean by that is that you should be aware of when you want to retire,e as you wouldn’t want to take a 30-year loan out if you are 50 years old and plan on retiring at 65 years old.  As most people’s income dramatically decreases when they retire, you don’t want a mortgage payment that is choking in retirement.  You should also watch how much you pay for your refinance.  If you pay points to lower your interest rate, you should weigh how long it will take to recover those fees and whether it will be worth it in the long run.  An example of this would be if you want to pay 4 points to buy your interest rate down on a $500,000 loan amount.  This would be a $20,000 upfront cost and would lower the monthly payment by $328. However, it is going to take 5 years to recover that initial $20,000, and the question is whether you would rather have the $20,000 to spend today or 5 years from now?  We have formulas to help you make the decision and to make sure you are making the right loan decision based on your expected retirement age and many other factors.   MAE Capital Mortgage is here to walk you through the process with humans, not automated stuff like the giant mortgage companies is moving to.  If this helped you, please consider us when you are looking to refinance.