As mortgage rates have consistently held themselves around 5% for fixed loan products, the idea of refinancing to a lower rate has appealed to many home owners. Traditionally, obtaining a lower rate should lower the monthly mortgage payment. In many real estate markets, home prices have been falling making it more difficult to obtain a new mortgage as proposed loan amounts to the home value ratio has changed significantly. Additionally, credit policies with lenders have also changed making it even more difficult to obtain a mortgage.
While most borrowers will stay in their current mortgages, refinancing in a "difficult" market can improve your financial health in different ways.
1) Use home equity to pay down consumer debts.
Credit card companies are taking advantage of consumers who have outstanding balances. With interest rates around 20% in many cases, using home equity to eliminate consumer debt is a smart move in a calm real estate market.
2) Fund a retirement plan using home equity.
There are many investment opportunities available that will put your home equity to work in a tax free retirement account. Many mutual funds are available that are paying significant dividends and are attractively priced. Take advantage of quarterly and annual dividends for your retirement account as keeping the majority of your money in real estate can be risky. If your 401k has dipped, being proactive about increasing the value of retirement accounts is a smart move.
3) Avoid refinancing on condos or co-ops.
Guidelines for refinancing on these types of properties are stricter than ever. Making a drastic move into a new mortgage could diminish the possibilities of a future refinance. Lenders are tightening up on how much insurance buildings must now carry, its occupancy rate, and how much space the building can use for commercial purposes. As changes are being made in this market, its safer to keep your existing mortgage before locking in on a new loan where changing guidelines can negatively affect your financial strength.
Remember, mortgage financing strategies are contingent on how long you plan on staying in your home. Leveraging your mortgage to increase cash flow and your overall financial health is wise, but there may be long term consequences if you greatly reduce the equity in your home. Many lenders prefer keeping 20% of your own equity within the property before considering a mortgage refinance. Programs and policies will vary, but using home equity to your advantage has never gone out of style.
