Refinance Debt ReductionThere are many good
reasons to refinance your home, and doing so may help
you reduce your overall debt as well. A lot of people
bought there homes several years ago, when interest
rates were higher, and they may not have refinanced to
take advantage of lower interest rates. Some people have
a competitive interest rate, but are paying $50 or more
per month for PMI, Personal Mortgage Insurance. This is
when the bank allowed you to get approved for a mortgage
when you had less than 20% down for the cost of your
home. Other people have a great interest rate, but it is
a variable rate and in the next two years may not be so
great anymore.
If you are paying more than 6.75% interest, you
should seriously consider refinancing,. On a 30 year
fixed rate mortgage, each quarter of a percentage point
makes up $17 per month on a $100,000 loan. That is
$6,120 over the full 360 months of the
mortgage.
The savings increases if you consider
how that $17 per month could help you reduce your credit
card debt, or even if you use it to pay off the mortgage
early. This become even more of a saver if you can
eliminate PMI payments in addition to getting a lower
rate.
Banks insure your mortgage if you make a
down payment of less than 20% of the value of the home.
This is key to note that it is based on the home's
worth, not the amount of the loan. They in turn add the
PMI premiums to your mortgage, meaning you are paying
for them to insure your loan.
With the increase
of property value over the last few years, many homes
are worth substantially more than when they were
purchased. If you bought a house for $100,000 three
years ago, and in some areas where it may be valued at
$110,000 or more now, you can see how this can get you
over the threshold of the PMI index. If you loan balance
is less than 80% of the current appraised value of your
home, you can request that the bank cancel the
PMI.
Using our example, when the $100,000 home
was purchased you could figure paying that extra monthly
premium until your loan balance was under $80,000. If
you had the home reappraised for $110,000 you could get
out of the PMI payments if your loan balance was under
$88,000. That is a significant difference, and you may
be able to get out of the PMI payments two or three
years early if not more. That will lower your monthly
mortgage payment by around $50 or so, but your PMI cost
could be much higher depending on the amount of your
mortgage.
You may be able to get out of your PMI
charges without refinancing if you have your home
appraised and contact the bank with the new value,
provided you are more than 20% vested (This is the same
as saying that you owe less than 80% of the value)
depending on the contract for your mortgage. A lot of
banks offer refinance mortgages with low closing fees,
and can drop the PMI charges as well if
applicable.
If you have a variable rate mortgage,
it may make sense to pay slightly more each month now to
lock in a rate that will be markedly lower then the rate
that your current loan will be in two or three years. It
may be in your best interest to contact your current
loan holder as they may be able to assist you in rolling
your mortgage over to a lower rate, or a fixed rate in
order to keep your business. If you can get your monthly
payments down through lower interest and/or saving on
PMI costs, you can turn the savings around for immediate
use on paying off your credit card or other debt and not
have it affect your budget whatsoever.
One final
word of advice, it is almost never a good idea to roll
any other form of debt into your mortgage. Even if you
have a credit card with an absurd interest rate like
20%, rolling the amount of this loan into your 6.5%
mortgage may sound like a good idea, but 6.5% interest
for 30 years is a lot more interest than that 20% for 5
years, provided that you are working hard to pay off
that debt. That is an example of the magic of
compounding.
THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS
IS IN NO WAY GIVING ANY LEGAL ADVICE OR REPRESENTATION.
THE INFORMATION CONTAINED HEREIN WAS COMPILED FROM
VARIOUS ARTICLES. FOR ANY LEGAL ADVICE OR REPRESENTATION
SEEK YOUR OWN LEGAL
COUNSEL.
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