Knowing why you should refinance is as important to knowing how to do it properly-here are the top 9 reasons why homeowners often request to refinance their home mortgage loan (in no particular order):
1. I want to retire my existing lien and get a new/different mortgage.
Rate and Term Refinances are often done to avoid escalating payment adjustments and/or rate volatility are common driving factors behind a homeowner's desire get out of the “mortgage roulette game" (refinance out of an adjustable rate mortgage).
2. I plan on making repairs and/or home improvements to the property.
Making home improvements is an American obsession-The annual spending for home improvement in North America exceeded 418 billion dollars in 2006.
3. I want to lower my interest rate/lower my monthly payment.
This is by far the number one reason why homeowners refinance-saving money has the same “sex appeal" to the American homeowner as does spending it.
4. I need to pay off a mortgage subject to a balloon maturity.
Having a mortgage due in full at maturity is a pretty strong motivator for those that opted to use a balloon mortgage to originally purchase/refinance their home.
5. I need to consolidate credit card debts/lower my total monthly debt burden.
The benefits for consolidating credit card debt is twofold-it allows you to transform non-deductible consumer debt into tax deductible mortgage interest & in most cases it reduces both the average cost of borrowing (lower monthly payment) and applicable interest. Downside? You are using equity to secure what was once unsecured debt.
6. I want to obtain some money for personal reasons.
Ranging from funding junior's college ed to using equity to purchase a 2nd/vacation or investment property are reasons why people decide to separate their equity from their home.
7. I need to improve my cash flow.
For investors this means an increase in net operating income (NOI) for homeowners it means a reduction in monthly debt burden.
8. I want take advantage of some tax benefits.
Here are the two big tax reasons/benefits for refinancing:
- USE A HOME EQUITY LINE OF CREDIT (HELOC) TO CONVERT NONDEDUCTIBLE PERSONAL INTEREST INTO TAX DEDUCTIBLE INTEREST.
- REFINANCE YOUR CURRENT LOAN AND CLAIM ANY UN-DEDUCTED LOAN FEES AND INTEREST.
- MORTGAGE INTEREST PAID IS TAX DEDUCTIBLE IN THE YEAR IT'S PAID.
- PAID PREPAYMENT PENALTIES ARE TAX DEDUCTIBLE IN THE YEAR IT'S PAID.
- LATE PAYMENT FEES ARE TAX DEDUCTIBLE IN THE YEAR IT'S PAID.
- PREPAID MORTGAGE INTEREST IS TAX DEDUCTIBLE ON AN ITEMIZED BASIS.
- THE COST OF DISCOUNT POINTS ARE TAX DEDUCTIBLE ON AN ITEMIZED BASIS.
SPECIAL NOTE: Consult a qualified CPA or accountant to get information on the full tax benefits for homeownership.
9. I want to do away with PMI (private mortgage insurance) premiums.
Lenders are required to cancel PMI (upon request by you) when the loan balance is equal to 80% of the original purchase price/appraised value. If the loan balance is equal to or less then 78%, by law, PMI must be cancelled automatically.
H. Scott Miller is a nationwide commercial and residential investment lending professional specializing in the creation, management and growth of real estate wealth from a mortgage prospective. He is also the author of “The Not So Funny Games That Lenders Play With Your Money That Can Cost You A Fortune Every Time You Get A Mortgage" which is freely distributed at The Mortgage Inner Circle .