Before the financial crash, there was such a Gold Rush mentality among different banks and home mortgage companies that refinancing was very easy and, in many cases, actually encouraged. As a result, homeowners got deeper and deeper into debt and instead of liquidating or terminating their debt in ten to fifteen years, many signed on to another thirty year term.
When the housing bubble burst, many of these same homeowners found themselves with huge mortgage payments because the refinance terms used adjustable rates. No wonder, many homeowners had no other option but put up their homes for short sale. Others, laid off due to the financial crisis, had no choice but move out since the bank foreclosed on their homes. Ouch.
I bring up this sad recent experience to bring home the point that refinancing is a financial move you should not take very lightly. It is intended only for certain situations. You have to actually be in these situations for refinancing to truly work for you. Sadly, during the pre-Financial Crisis days, many homeowners looked at refinancing as a quick and easy way to treat their home’s equity into a credit card credit limit. Disastrous results. Read the guide below to quickly get a good idea of when it is a good time to refinance.
Interest rates matter as much as equity
As I mentioned earlier, many people refinanced their homes once their houses showed some market appreciation. As you probably already know, prior to 2008, the US went through a long housing boom where real estate prices spiked up. This created a lot of paper wealth and many homeowners decided to cash in on some of their homes’ appreciation by refinancing.
The problem is they based their decision on the amount of equity (appreciation) in their homes instead of pairing this information with another key piece of information-interest rate. Interest rates are extremely important because they dictate how much you’ll be paying on your loan.
Remember, that loan is not free money. It is borrowed money and it comes at a price. Many of these individuals took out refinancing loans that were pegged at initially low rates which spiked up after a few years. Eventually, many got foreclosed on since they could not handle the spike in their mortgage payments when the interests rates changed.
If you are going to refinance, pay attention first to the fixed mortgage rate the bank or finance company is offering you. Make sure it is very low. You need it to be very low so you can have some cushion in the future should your income change for the worse. Next, you should look at your equity and make sure there is enough appreciated equity to make refinancing worth the bother.