Does a new home loan make sense?
There are at least seven reasons to refinance a mortgage. You probably can think of the first one – to get a lower mortgage rate.
The average interest rate on an outstanding mortgage at the beginning of 2012 was 5.098 percent, according to the Bureau of Economic Analysis. But lenders today are offering rates well below that benchmark, making a refinance a no-brainer for many.
But low rates are not the only motive for refinancing a home loan nowadays. The following are good reasons to consider a new home loan.
1 REFI FOR A LOWER RATE: The No. 1 reason to refi is to get a lower mortgage rate. Despite sinking rates, a lot of people haven’t refinanced.
Many homeowners would like to refinance but can’t because they have little or no equity due to falling home values. Jim Sahnger, mortgage consultant for FBC Mortgage in Jupiter, Fla., said too many of his clients can’t refi for this reason.
“But there are people who can, and some people who get so into whatever they’re doing that they don’t pay attention to the news and don’t pay attention to where rates are at,” Sahnger said.
So Sahnger will call to tell them that rates are near record lows.
2 CONVERT AN ARM: Stability-hungry borrowers are ditching adjustable-rate mortgages and refinancing into fixed-rate loans.
“Everybody’s frightened about inflation, so if they have an adjustable loan, that’s the No. 1 reason they’re getting out of them,” said Jeff Lazerson, president of Mortgage Grader, a lender based in Laguna Niguel, Calif. “It’s not because you can get them at a better rate, but because you can get them at a stable rate.”
Other borrowers swing from one hybrid ARM to another, said Matt Hackett, underwriting manager for Equity Now, a direct mortgage lender based in New York City.
“We’ve done a few of those for people who were in a five-year ARM that they originated four years ago, that was getting ready to adjust,” Hackett said.
Even though the rates were about to adjust downward, they got new 5/1 ARMs to extend low rates another five years.
3 GET A MORTGAGE ON A PAID-OFF HOUSE: This isn’t technically a refi, but it’s close. Mortgage-free homeowners sometimes get mortgages to put cash in their pockets.
“There’s a lot of people who don’t have a mortgage,” Hackett said. “Maybe they want to go to Florida, buy a second home with cash. So they cash out their first home and take the cash and go down there and don’t need a financing contingency, and they’re in a better position to bargain.”
They could also take out a mortgage on a paid-off property to start a business or for other reasons.
4 CASH OUT TO CONSOLIDATE DEBT: When house prices were rising by 10 percent or more a year, millions of borrowers got cash-out refinances. They refinanced for more than they owed, got cash, and spent or invested it.
The cash-out refi craze ended when the housing bust began. But there are still a few cash-out refis.
“We’re still in the business of cashing out people – paying off credit cards, for example,” said Michael Moskowitz, president of Equity Now.
Michael Becker, mortgage banker at Happy Mortgage in Lutherville, Md., said, “It’s not like it was years ago, when people took cash out to buy things, like a pool, a car or an RV. It seems more to be paying down debt, lowering their debt service, trying to save money.”
5 CASH OUT TO BUY OTHER PROPERTY: Lately, Lazerson has noticed an interesting refinancing trend.
“One thing that’s a trend now is that people are taking money out to purchase other properties,” he said.
Often, it’s to buy investment properties.
Refinancing to buy property can bring up unexpected tax and mortgage underwriting issues. A lot depends upon how the refinanced house and the new property will be used.
For example, which property will be the primary residence? Will the other property be rented out? Those are issues for a financial adviser or tax professional to untangle.
6 CONSOLIDATE TWO MORTGAGES: Some homeowners want to combine their first mortgage with the home equity line of credit.
“I’m seeing a lot of people, even if their rate on their home equity line of credit is 3 percent, refinancing to get rid of them,” Becker said.
Why get rid of a loan with such a low rate?
“Because they’re worried if five years from now, what if that rate jumps up to 12 (percent), 11 (percent), 13 percent?” Becker said.
7 ADDRESS FAMILY MATTERS: Divorces often lead to refis as a means of removing the absent former spouse from the note.
“That has less to do with rates and is more about timing,” Lazerson said.
Moskowitz said he recently did a $110,000 cash-out refi from a woman who used the money to bail out a son facing foreclosure on his own house.
That’s not how Moskowitz would spend his money from a cash-out refi. But to anyone who agrees with him, he said, “You’re clearly not a mother.”