Have you taken advantage of low interest rates to refinance your mortgage? Rates are rising, but you still have time to act. So which type of refi might be best for you?
Bloomberg reported in December that homeowners in the United States gained an average of $57,000 in home equity in the previous year because of rising home prices. That combined with interest rates that are still under 4% for many loans makes now a great time to think about a refinance.
Refinancing your mortgage means taking out a new loan (you can stick with your previous lender or use a new one) to pay off your existing loan. If your current rate is too high, or you want to cash out some of your home equity, or perhaps borrow more to renovate or expand your home, then it’s time to think about a refi before interest rates rise even more.
Rate and Term Refi. This is the most straightforward type of refinance to consider. Replace your existing loan with a new one – with a new rate and perhaps a new term length. You can lower your monthly payments or pay off your mortgage faster or save money over the lifetime of the loan or get rid of mortgage insurance – maybe all of the above!
Cash-Out Refi. If you have built up enough equity in your home, (and rising home prices have helped you out with that in the past two years!), then you may be able to do a cash-out refi. Your new loan amount will be higher than what you currently owe on your mortgage, and you keep the extra cash. Lots of people use the money to renovate or make repairs on their homes, but there can be lots of reasons that a cash-out refi makes sense – to pay down other debt like student loans or credit cards, to pay for college expenses, to pay for unexpected medical bills or other emergencies, or maybe to invest in a second home or investment property.
Construction Loan Refi. A construction loan refi is when you refinance your existing mortgage with a construction loan in order to expand or renovate your property. Most lenders will let you borrow up to 80% of the after-renovation value (ARV) of your single-family home. For example, say your home is worth $520,000 now, but the appraiser estimates the value of your home to be $800,000 after a proposed $250,000 renovation. If you owe $350,000 on your existing mortgage, you take out a new mortgage of $600,000 to pay off the first mortgage and fund the renovation. This can be a great option if you have a large renovation or addition planned and you don’t have enough equity in your home, as-is, to pay for the renovation with a cash-out refi. The combination of high market values and low interest rates present some interesting opportunities here.
Give us a shout if you’d like to discuss numbers, and we’d be happy to discuss what options make the most sense for you, recommend a good lender, or estimate the current market value of your home so you know how much equity you have today.
