by Stacy Francis, CFP®, CDFA
I was stunned to read in the newspaper this morning that it is now possible to secure a 30-year fixed mortgage at 4.5% (restrictions apply). This, of course, is wonderful news for anyone shopping for a home: we now have a real estate market with falling prices in many areas and interest rates at record lows. But those already in possession of a home, too, can benefit. How? Through refinancing.
When you refinance your home, you take out a new mortgage to pay for all or a portion of your old mortgage. If you have built a lot of equity in your home (the value of your home minus the size of your mortgage), you may even be able to increase the size of the mortgage and free up more cash. The latter could save you a lot of money if you are carrying high-interest debt, but always remember that you are putting your house on the line. Because of this, many people prefer to handle a short-term cash crunch with a HELOC (home equity line of credit). However, with the current credit environments the terms for getting a HELOC can be quite difficult. Some banks require credit scores over 750 even.
So apart from pulling cash out of your house, what are the reasons people refinance? The main one is that by refinancing, you may be able to secure a lower interest mortgage and shrink your monthly payments – sometimes significantly. This, of course, saves you money. Other people refinance to change the terms and conditions of their mortgage.
Whatever your reason is, beware that fees associated with refinancing can be quite substantial, so be sure to work with someone you trust or call me as I know several excellent real estate brokers. We can help you determine whether the savings versus cost of the loan are worth the refinancing. If you’ve been making your payments on time, chances are, the same provider that gave you the first loan may offer you a new, better deal.