Refinancing your home mortgage can be a very savvy move, especially in today’s housing market. Right now, home price appreciation in the United States is on a huge upswing, increasing at a rate of 5.4 percent—that’s twice the rate of inflation.
Metro Denver’s home price appreciation is experiencing an especially significant increase. It’s growing at about twice the national rate, rising 10.2 percent in January 2016. It’s also the 12th consecutive month of double-digit annual price increases for the Metro Denver area.
In this promising housing market that continues to thrive, there are several rock-solid reasons to consider refinancing.
A Cash-Out Refi Accesses Your Home’s Equity
A quick refresher: you build equity by making a down payment on your home, making monthly payments on your mortgage balance, and experiencing appreciation.
A cash-out refinance replaces your existing mortgage with a new larger mortgage, and you (the borrower) take home the difference in cash. The property you just refinanced is the collateral.
While it’s not a wise idea to refinance simply so you can travel the world or buy a flashy new car, here are four investments that can be worth borrowing from your home’s equity:
1. Home Remodeling and Improvements
If you need some major home repairs or need to make upgrades to your home, a cash-out refinance might be a great option. Your mortgage is also a tax write-off, so it’s wiser to refinance your home than to put this type of investment on a credit card.
And of course, some of the money you invest in upgrades and repairs can add value to your home down the road.
2. Paying For College Expenses
With today’s historically-low interest rates, your refinanced monthly mortgage payment may be less than your potential student loan debt. It may also be tax deductible.
When planning for college, there are certainly lots of long-term family goals to think about. It’s important to plan carefully and consider consulting a financial advisor.
3. A Second Home or Investment Property
If you can afford the costs of owning an investment property, it might be wise to buy now before both rates and prices increase.
On the other hand, despite strong rental demand, investment-home sales have been considerably less robust. Before you take on another mortgage, be sure you research the market carefully and do the math to ensure you can afford the costs while still living comfortably.
4. Superfund Your Retirement Account
Did you know that most Americans reaching retirement don’t have enough money saved to last them through their senior years?
Your retirement is hugely important and could be a very sound reason to consider refinancing your home. When it comes to investing for the future, many people aren’t even sure of the basics.
The “Rule of 72” offers a simple method for calculating how long an investment takes to double, (assuming a fixed annual rate of interest).
Simply divide 72 by the annual rate of return you receive on your investments. The number you get is a rough estimate of the number of years it will take to double your money. For example, if you have $10,000 in a savings account that yields 1% a year, it would take about 72 years to double in size.
Now think specifically about your own financial details: How is your retirement savings looking? Could you benefit from an extra infusion of cash from refinancing your mortgage?
Refinancing Can Reduce or Eliminate Your PMI/MIP
If your home equity is 3% or more and you used a down payment assistance program, you may be eligible to refinance into a conventional loan after 6 months. Not only does a conventional loan offer a lower rate, but the increase in equity can reduce or eliminate your private mortgage insurance (PMI) or mortgage insurance premiums (MIP), adding up to additional savings.
Federal Housing Administration (FHA)-backed loans are popular with home buyers and refinancing homeowners, but FHA mortgage insurance premiums (MIP) can be expensive.
The trick to getting rid of FHA mortgage insurance is to get rid of your FHA loan. With home values up and current mortgage rates down, there are millions of U.S. homeowners in a position to refinance their FHA MIP away.
If you have 20% equity in your home, you can also eliminate PMI payments through a refinance. You can either pay your mortgage down or arrange for a combination of payments and appreciation verified by an appraiser.
Refinancing Is A Better Option Than A Reverse Mortgage
If you’re 62 or older, you may convert your home’s equity into cash with a reverse mortgage. This allows you to borrow against the equity in your home and get a fixed monthly payment or line of credit. Repayment is delayed until you move out, sell your home, or you pass away. At that point, your home is sold and anything left over after repayment goes to you or your heirs.
But simply refinancing your existing mortgage decreases the size of your monthly payments and helps you build equity in your home faster than a reverse mortgage. Another reason it’s preferable: if you refinance instead of getting a reverse mortgage, your home remains an asset for you and your family when all is set and done.
While refinancing your home is a big step that no one should take lightly, it’s absolutely worth considering, especially in a housing market like the one we’re experiencing today.