Things change in life and we, hopefully, reposition ourselves in order to adapt and grow personally as well as financially. We have to in order to survive, but that’s a good thing because that means we have an opportunity to improve on our current situation. Busy, busy, busy, we are all very busy people in a very busy world. Sometimes, we just don’t have the time to be mindful of the possible financial alternatives before us, unless we get an in-the-face reminder, so here it comes… You may now have the opportunity to refinance (reposition) before the impending increase in rates. In all honesty, I would say lifestyle considerations far outweigh the possibility of rising rates, when it comes to deciding to refinance, so I wouldn’t drop everything. Will rates rise? Who knows—they have been saying rates will rise for the last three years, and rates will eventually rise…and they will fall as well, but who cares? We aren’t trading bonds. Your decision to refinance has to be made in the present and take into consideration the ultimate goal of what you want to achieve. Ask yourself: Do you want cash flow? Do you want to build equity? Are you selling your home in the next two years? Are you upscaling? Are you downscaling? Do you want to keep your home and buy a second home? Are you starting a business? Do you have investment possibilities on the horizon? Are you close to retirement?
So, what should you pay attention to in order to consider repositioning your finances through refinancing your mortgage?
ANSWER
Can you refinance to a lower rate and payment? Your existing rate and payment might be higher than the current market rate due to: (a) Rates dropping after your current loan closed.
(b) Having a derogatory credit profile which may have had rate bumps and adjustments, and currently your credit may have improved allowing the possibility of a better rate. (c) Not having initially shopped for the most competitive rate. (d) Having a first and second mortgage whose average rates are high. (e) Having a loan with mortgage insurance which can be eliminated through higher appraised value and or increased equity.
A balloon mortgage coming due. Long-term loans having minimal or no amortization of the outstanding principal, and a due date (payoff date) earlier than the term are called balloon loans (or interest-only loans). The loan principal is not self-amortizing; therefore, a lump sum principal payment is due at a point in time specified in the mortgage note agreement, or the outstanding principal balance will amortize over 20 years at a substantially larger payment.
A need for predictability. Converting an adjustable rate to a fixed rate. Many people have taken adjustable rate mortgages because: (a) They are easier to qualify for. (b) The initial cash flow is better. (c) They had planned on a short-term use of the property. (d) The bet that rates would stay low forever and they would just churn into another adjustable. Generally if current fixed rates are the same or lower than an existing arm, and if you plan to hold the property on a long-term basis, refinancing to a fixed-rate product for stability may serve you well. Conversely, you may have decided that you plan to stay in your current property for the short-term, only 2-3 years, so you may be able to refinance from a fixed rate to a lower adjustable rate (rates are typically lower) and payment in order to lower your payments.
Cashing out of your property for the greater good. You may refinance your mortgages to pull cash from the equity in your home for the following reasons: Things that may add value: (a) home improvements (b) investment opportunities (c) purchase of a vacation home or other properties (d) to buy, expand or start a business. Thing that are living needs such as: (a) tuition (b) year-end tax payments (c) celebrations (weddings, etc.).
Your construction loan coming due. If you have been doing construction on a new home, your loan will typically modify into a fixed-rate loan. You may want to compare that rate to current market rates with other lenders right before your final rate is set.
Eliminating monthly mortgage payments. For all those over 62 years of age: Reverse mortgages can eliminate your current monthly mortgage payment, consolidate your debt and create more positive cash flow. A reverse mortgage can also be used to purchase a new primary home or second home while eliminating the monthly mortgage payment.
Clear your head and take a moment to be mindful of what you have and where you are. Allow for a space of calm, clarity and creativity to think of all the possibilities you may have to reposition your current situation into a happier financial place by selecting the right mortgage financing option available.
By Carl Guzman, CPA, President, Greenback Capital Mortgage Corporation
