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Know the Why

For the last few years, mortgage interest rates have been at an all-time low while home values have totally skyrocketed. If you bought a house a few or more years ago, this news is awesome for you! You probably have lots more equity in your home than you realize. (If it’s not you, NEWS FLASH–THIS IS NOT THE TIME TO BUY A HOUSE.) Having a lot of equity is fabulous if you take advantage of it correctly. What do I mean by that? Hear me out.

The conditions I described above make it a prime time to refinance your home. Refinance is basically getting a new loan on your home to “buy it again”. You will pay off your original loan with a new loan. 

Many people do this and “take out the equity” on their home when they do. When they create a new loan, they borrow more than the balance of their original loan. They can do this because their home is now worth more than it was when they bought it. Why do this? Sometimes to consolidate debt (not necessarily the best plan unless you’ve really made changes to the way you handle your finances), sometimes to make a large purchase (which I never advise…you should budget and pay cash for everything). In my humble opinion, neither of these options is a valid reason to refinance. So, what is?

If you plan on staying in your home for a while and are taking advantage of a significant mortgage rate reduction, refinancing can be a good idea. It might also make sense if you’ve built enough equity in your home that you can eliminate PMI (prepaid mortgage insurance, which is insurance you are paying to your lender when you owe them more than 80% of the value of your home), which can be quite expensive. I approve of either option, but make sure that you do a break-even analysis before you sign on the dotted line. You need to make sure that the cost of the refinance (yes, there are costs associated with refinancing) is not more than the amount of money you will be saving.

Consider getting a new loan with a shorter term (15 years or less, if possible) which can save you even more on the interest rate. Go ahead and check your options, just be smart about it.

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