Refinancing to Protect Home Equity
As rates change, there are opportunities for people to evaluate their current mortgage to see if there are other mortgage products, or conditions, that would allow them to put more of their payment into the equity of their home, as opposed to the interest they pay. And doing a review of different mortgage products every few years is a good way to make sure you are paying the least amount or using your equity to save you money on other higher interest rate loans.
As an example, you may have a 30-year fixed rate conventional loan that charges 7% and you closed in 2002. Even though you see that interest rates have generally been lower than 7% since 2002, adjustable rates still make you nervous. Perhaps you research a 15-Year Fixed Rate Conventional Loan that charges 3%. You may be able to refinance your 30-year loan to a 15-year loan with a lower rate to pay off your mortgage faster, while not impacting your payment too much.
Or, perhaps you are a bit more risk-tolerant and decided that a 5/1 Adjustable Rate Mortgage had a great rate in 2009. The first five years were great because rates were around 5% and you paid this fixed rate. Then in 2013, rates were even lower and your rate adjusted downward, but you’ve recently heard that interest rates could climb and you want to lock in a low rate now. You can try a 15 or 20-year fixed rate mortgage to protect the lower rates you’ve become accustomed to, and continue to build equity in your home.
Or, you may be one of many who are in the unfortunate position of owing more for your home than it is currently valued at market. There is a way to refinance through the Home Affordable Refinance Program (HARP) that can help you make your mortgage more stable and affordable. You may qualify for a HARP refinance loan even if you’ve had difficulty obtaining traditional refinancing due to lack of home equity or a decline in your home’s value.
Advantages and Disadvantages
Here are some of the advantages and disadvantages of refinancing to protect the equity in your home.
- If you can refinance to a lower rate, and you continue to pay the same amount each month, the equity in your home will build faster and the loan will be paid sooner.
- If you know that you will relocate in the next few years, refinancing may make sense to lower your monthly payment to save for this event.
- Refinancing at a lower rate could free up money that you can put toward paying off higher debt obligations.
- The closing costs associated with refinancing could possibly outweigh the benefits of a particular refinance scenario.
- Refinancing at a lower rate is good, but if you lengthen the terms of the loan, the impact on your home equity may be minimal or negligible.