How and When a Home Mortgage Refinance Could Be a Sound Investment Strategy
When you were first deciding whether or not to buy your own home, you probably heard over and over again how buying a house is a good investment in your future. It is true that real estate will always have value because, the reality is that there is only so much to go around. While this is a big planet on which we live, there will come a point in time where the number of people outgrows the amount of land and then the worth of each parcel will be invaluable.
No, that won’t happen in our lifetime or in the lifetime of our children, but the point is, the amount of inhabitable land on Earth is finite. Real estate will always have value and so, yes, that decision to buy a home was a wise one, a good investment in your future. However, you may be at a point when you need to get your hands on some cash and you are wondering if refinancing your home is a sound investment strategy. It may be, and then again it may not be. Here are some factors to consider.
The Rate of Your Current Loan vs. the Rate of a Refinance Mortgage Loan
One thing you may be aware of by this point in time, having paid for a number of years on your home, is that interest rates fluctuate from year to year based on what is happening in the economy. If you are paying, for example, 9% and are still paying mostly interest and very little towards the principal, a 6% home mortgage loan might sound enticing. It very well could be a sound investment strategy but that also depends on the term of both loans as well as the type of loan you are looking at.
Fixed vs. Adjustable Rate Loans
While fixed rate loans offer a number of benefits, one being that you will always have the same rate of interest now as you will in the future. An adjustable rate mortgage sees interest adjust based on the economy. In theory, this could mean a lower interest rate but that very rarely happens. Typically, your interest rate will adjust upwards over time, and this is what kills (not literally of course) most homeowners. Before deciding whether or not refinancing your home is a sound investment, weigh in on what kind of rates you have now based on the rates open to you. Are they adjustable or fixed and for what term?
Seeking a Shorter Term to Pay Your Home Loan in Less Time
When you stop to think about it, as you are paying your mortgage, the home doesn’t really belong to you until it’s paid in full. Until that time, your home belongs to the holder of your mortgage. Sometimes refinancing your home for a shorter term means you can pay it off in as little as half the time, meaning that the entire value of your home would then be yours. For example, investopedia.com explains that a 30 year mortgage that is a fixed rate could be paid in 15 years if the interest rate were cut in half and the term were cut in half. They explain that a $100k mortgage at 9 percent would carry monthly payments of just under $805 a month. For just a few extra dollars a month, a 15 year fixed rate mortgage would carry payments of about $817 per month if the interest rate was at 5.5 percent. That is, indeed, a very good investment.
Looking at the Bottom Line
Finally, it really depends on the purpose of refinancing your home. If you are looking to refinance for a sum greater than what you now owe because you need to get your hands on some cash, it may depend on why you need that cash. Are you reinvesting in your home to make improvements that will add to the value? Are you looking to pay off other loans, such as credit card debt, that carries much higher rates of interest? If the money you realize above and beyond what is still outstanding on your current mortgage can grow in any way, it could be a very sound investment.
This is just some of what goes into determining how and when a home mortgage refinance could work to your advantage. First, you really need to understand the anatomy of a loan and whether or not it is best to sit on what you currently pay or refinance for a better deal. Don’t make the mistake of so many homeowners in the past. If you can lower your payments and earn a profit on the excess you’ve borrowed, go for it. If not or if you are uncertain, don’t act rashly until you’ve spoken with your banker or financial advisor. Refinancing is only a sound investment if it yields a profit and that’s what you need to determine.