Is the Time Right for You to Refinance?Paul Rycroft“Rates can’t go lower.” Or so advertisements from mortgage companies have been claiming for years. But it’s possible that now, it’s more true than ever. According to research done by Freddie Mac, the average rate on a 30-year mortgage in the U.S. dropped below 4 percent for the first time ever in 2011. Rates on shorter-term, 15-year mortgages are even lower. For some, this may create a great opportunity to refinance your mortgage, but doing so often isn’t the best decision financially for families in certain circumstances. Here are four things to consider before you make any decisions: 1. How much equity do you have? If you do have equity in your home, you have more flexibility. In cases where the amount you owe on the mortgage is significantly less than the value of the home, it’s possible to structure a payment that may be dramatically lower than your current monthly mortgage expense. If the amount of equity is not much different than the current value, the payment will be closer to what you already have, but would likely be an improvement due to the recent decline in interest rates. 2. Why do you want to refinance? Many who do have significant equity in their home refinance to “cash out” some of that equity for other purposes. But it can be risky; this strategy backfired on many homeowners when housing prices crashed in recent years. Those who took out too much cash were suddenly “underwater,” owing more on their house than it was worth when its value declined. If the rationale for refinancing is to access cash, be sure it is for a worthwhile purpose like paying down more expensive debts such as credit card balances or financing an improvement on your home that could boost its value.
Employment status could be another factor. A number of Americans, some involuntarily, have recently left the workforce and started their own business. If you don’t have an established record of income yet as a business owner, it might be a difficult time to obtain a new mortgage. Ask about this upfront when you contact your mortgage company to make sure it’s worthwhile for you to pursue the mortgage application process. 4. Determine the terms that suit your needs If your primary goal is the lowest possible payment, a 30-year loan makes sense. If you are trying to focus on reducing debt and accumulating wealth, a shorter-term loan may make more sense; the total interest paid on a 15-year loan will be significantly lower than with a 30-year mortgage. While monthly payments will be higher, a 15-year loan offers more long-term advantages for these homeowners since the financial obligation of a mortgage will no longer exist after 15 years, allowing you to concentrate on retirement or education savings. If you ultimately decide to refinance, be sure to compare costs of different lenders. The breakeven point on the cost of the loan (the number of years you need to keep the mortgage before the costs of obtaining a new loan are overcome) is a critical measure of whether refinancing is a worthwhile move for you.
Ameriprise Bank, FSB, Equal Housing Lender and Member FDIC, provides deposit, lending and personal trust products and services to Ameriprise Financial Services, Inc. Ameriprise Bank and Ameriprise Financial Services are subsidiaries of Ameriprise Financial, Inc. Ameriprise financial advisors may receive compensation for offering bank products. Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. © 2011 Ameriprise Financial, Inc. All rights reserved. | |
Alice TX Chamber News - December 2011 |