Think about this for a minute....Why do people get mortgages? As far as I can tell, every answer can fit into one of three categories:
1) Refinance; 2) Consolidate/Cash out ; 3) Purchase of a new home.
For a purchase, a mortgage is pretty much a necessity, so we won't even talk about that one. But the other two are more of the issue here.
Actually, #2 is just an offspring of #1, so you can make an argument to lump them together, right? So, let's break down the Refinance category. The reasons for refinancing are to lower the rates, right? Now, if you just agree with the last sentence, we have a LOT of work to do for you, but there is hope. Just break it down, why do people want lower rates? All together now, TO GET A LOWER PAYMENT! If you don't believe me, ask yourself this, if the rate was so good the last time your borrower refinanced, why are they refinancing again now? To get the lower rate? Umm, I'll let you stew on that one on your own. I'm not trying to convince you about anything. I'm in a sense, trying to challenge you.
Now, when people need to consolidate, what are they doing? (this is an easy one). They are trying to lower their overall monthly financial outgo. What about the cash out refi's you ask? That's a good question also. The reasons for cash out are: 1) consolidate (see above) and 2) life improvement (home improvement, investment portfolio improvement)
OK, so the people that get cash out for home improvement usually ask two questions. The first is "What rate can I get?" and the 2nd is "What's my payment gonna be?" The first question is just a reflex question to make themselves seem like they know what they're talking about, but the real question is the 2nd one.
Don't believe me still? No problem. Ask yourself this, ever have someone ask for $50K cash out and change their mind to get $60K because "the rate is so good"? I'm sure it may have happened to someone in the past, but it's so unusual, you can call it a White Elephant, true?
I can hear it now, "I have a wealthy client that can pay off his house at anytime but chooses to get a mortgage because of the lower rates, it's cheap money for them." Of course it's cheap money, the payments are lower as well and they are maximizing their cash flow. Once again, lower payments come into play.
Just something to think about.
Saving Money - this is the primary goal of people when it comes to refinance mortgage. It's like replacing your old car with a new economical one to save on expensive maintenance costs and gas bills your older model entailed. Once you undergo refinance mortgage, you loan money to pay off your old one and get to pay lower interest rates, or perhaps more flexible or reasonable payment terms. Here are the most common reasons why people refinance mortgage:
Lowering Payments Made Monthly
Regardless of an adjustable mortgage rate or a high fixed interest rate, when you refinance, it will dramatically lower the payments you make every month. It's a known fact that the slightest drop in interests rate can result in substantial savings overtime.
Switching to Fixed Mortgage Rates
Adjustable mortgage rates can be convenient at the start. However, once the rates increase, so will your payments and interest rates. Even if you were initially offered a low but adjustable interest rate of 5% for your home, keep in mind interest rates go up overtime, and inevitably, your payments will steadily increase as well. Undertaking refinance mortgage so you can change to fixed mortgage rates would be a wise decision, especially if you plan to keep your mortgage much longer. This will allow you easier management of your living expenses without the stress of wondering when your payments will start increasing.
Getting Lower Interest Rates
A 1% drop in interest rates can mean considerable savings for you. So if you got your house with 6% as the best rate offered and after some time, it fell to 5%, then refinance mortgage would be the best move to make. Even the slightest drop of your current interest rates can go a long way for you, financially. More money will go to your loan's principal balance rather than the interest, plus your monthly payments will undergo a substantial decrease.
Paying-off Credit Card Debts
High interest credit card debt is nothing new to us, but there are a lot of people who are in financial woes because of this. Fortunately, though, your home's equity can be used to pay everything off, and you can save a lot on the monthly interest rates. What's more, your mortgage interests are tax deductible as opposed to credit card debt.
Shortening Mortgage Terms
When you refinance to shorten the life of your loan, this amounts to really lower interest rates. It would mean an increase on your monthly payments, but if you do the math, your total savings will be huge.
Getting some Much-needed Funds
The equity of your home can be utilized to fund important expenses, such as home repairs, purchasing a new car, or college tuition for your kid. Using your equity could also mean the much welcomed added tax deduction.
No matter what your reasons for refinancing your mortgage are, it's always best to consult a financial counselor first. Expert advice and wise decision-making will almost always ensure financial well-being for you and your family.
