Refinancing your home is a big decision. The process of signing a mortgage is a sizable contract and a large promise to your lender. In addition, building equity is hard work! You want to make sure that you’re making all of the best decisions based on your situation.
1) Lower Your Payments
If possible, try to set a goal of lowering your monthly payment. This may mean trying to get a lower interest rate, or looking at extended terms. Depending on what you’re doing with the money once you receive it, you may be able to pay down other debts and actually add an additional principal payment with each monthly mortgage payment. Make sure your new mortgage doesn’t have a pre-payment penalty if tackling the principal is one of your goals. Make sure that your decision to refinance to lower your payment doesn’t get derailed by a quick sale, however. Depending on your closing costs, it may take months to make up in reduced payments what you spent in closing costs.
2) Shorten Your Loan Terms
If you can’t lower your monthly payments, try to shorten the term of your loan. If you’re ten years in on a thirty year loan and can refinance to a 15, you’ve just signed up for a 25 year loan instead of the 30. Also be aware that if you go 30 years or longer, the first several years of payments will go mostly to the interest. If at all possible, aim to make an additional mortgage principal payment during the early years of your mortgage. Strive to wipe out your mortgage debt in time for other large financial events, such as a child starting college or your own retirement.
3) Lower Your Debts
It’s critically important to review the interest rate of all of your debts if you’re considering pulling money out of your home equity. For example, as of spring 2020, a 30 year FHA mortgage had an interest rate of 3.693 APR. Credit card interest rate can run upwards of 25%. If you have high interest debt and can qualify for an FHA cash out refinance, you can greatly reduce your monthly payments while maintaining the same level of debt. The less unsecured debt you have, the easier a time you’ll have weathering any upcoming financial storms. By this process, you can also improve your credit rating and have an easier time if you need a loan for a vehicle or another tangible debt.
4) Expand With Care
If you want to put your home equity to use expanding the footprint of your home, take care to review property valuations in your area before you start. If you own one of the smallest houses in the area, expanding can be a great way to increase the value of your home and you won’t price yourself out of your market. However, if your house is at the top end of your neighborhood valuation, it may be very hard to sell. For homeowners who want to add a pool to beat the summer heat, update with an eye toward selling the house and add alarms for small children even if your kids are all older. The decision to expand is specific to each household. Consider asking a realtor for neighborhood comparables before you make big changes.
5) Look to the Future
Are you considering aging in place in your current home? If you’re planning to refinance the house to make improvements, strive to make changes to improve your ease and safety. Consider creating a space for laundry beside the bedrooms. Set up a master bedroom on the main floor with a roll-in shower instead of a tub. Invest in wider doorways and U-shaped door handles that will be easy to manipulate as your grip strength falters. Consider expanding your front porch to make it possible to add a ramp if necessary. Make life easier for your future if you choose to renovate as your children get older.
It’s critical that the decision to refinance lessens your financial burden in some way. What you do with your refinancing dollars can also improve your home and thus your quality of life. Lowering your payment, wiping out high interest debt, or enjoying a house that’s more suited to your needs are all great reasons to refinance.
