mortgage-refinance-form (Copyright: Bill Oxford)
Since the Federal Reserve recently voted for the first benchmark interest rate hike in years, many homeowners may be wondering: Should they refinance now to lock in a record-low rate before it starts creeping up? Well, that depends on your motivations for doing so. Some reasons are just plain bad -- i.e., you're just itching to get your hands on easy cash -- but others should really inspire you to submit your application sooner rather than later.
On the fence over whether it's worth the trouble? Check out these perfectly fine reasons to refinance your home loan.
Reason No. 1: To get rid of credit card debt
While mortgage rates have peeped above 4% only once this year (in July), credit card interest rates often ride well into the double digits. All things being equal, it's better to owe under 5% interest on a loan than 18% on a credit card. And as an added benefit, the interest you pay on your mortgage is tax-deductible; the interest you pay on plastic is not, says Kristen Euretig, a certified financial planner and co-founder of Brooklyn Plans.
Of course, this is assuming you won't just run up more credit card debt once you've refinanced, so be sure to curb (or better yet eliminate) your card use and/or get in a debt management program to keep your spending in check.
Reason No. 2: To save more for retirement
Similarly, if you are falling behind on retirement savings, you may want to use the savings from a refi to make contributions to your 401(k) -- after all, these contributions are not taxed, and if your employer matches your contribution, your savings work double time, points out David Schneider, a certified financial planner and founder of Schneider Wealth Strategies in Manhattan. Also, as a third benefit, since your 401(k) is withdrawn from your paycheck before it is taxed, your overall income is lower and your tax bill is smaller at the end of the year.
Reason No. 3: You're underwater on your mortgage
For homeowners whose property values have slipped below the cost of their mortgage, there are places they can turn to refinance that could help -- namely the Home Affordable Refinance Program.
Rolled out by the federal government in the wake of the financial crisis of the mid-2000s, HARP provides relief to underwater homeowners. The program is set to expire at the end of 2016. To be eligible, you'll have to meet some requirements: For instance, your mortgage must have originated on or before May 31, 2009; you must be current on your mortgage payments; and your loan-to-value ratio must be higher than 80%. Click here to see if you're eligible.
Reason No. 4: Your current mortgage interest rate isn't great
Just because you have a decent 30-year fixed mortgage rate and you are happy in your home doesn't mean you should become complacent. It's in homeowners' interest to keep a watchful eye for a better deal, as the savings could be significant. For instance, if you borrow $100,000 with a 6% rate, you would pay just shy of $600 per month and you would pay nearly $116,000 in interest. But if you borrowed that same sum with a 4% rate, your monthly payments would come to just a little over $475 per month, and you'd pay roughly $72,000 in interest.
To see if you would benefit from a refi, try crunching the numbers in a refi calculator.
Reason No. 5: You have an ARM
There's a reason why most financial advisers recommend clients steer clear of adjustable-rate mortgages: It's a high-risk loan in which borrowers could easily lose their homes if they can't make monthly payments after the mortgages "adjust" (or balloon, as the case may be). But for many first-time buyers, ARMs are the only way they can afford to get into the market. In the face of rising interest rates, though, now may be an optimal time for ARM holders to secure a less risky, low-rate mortgage.
"If you have an adjustable-rate mortgage, in this environment, you should try to lock in a fixed-rate mortgage," says Schneider. "Particularly if something is changing in your life, like if you're about to retire or you're on a fixed income."
Then again, there are also some very bad reasons to refinance, which we will reveal tomorrow. Stay tuned!