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[note color=”#FF9900″]What would you like to do?
[spoiler style=”2″ title=”Improve Cash Flow”]Improving monthly cash flow is probably the most typical reason for refinancing your existing mortgage. Click on the tabs below to learn more about your situation.
[tabs style=”1″] [tab title=”Lower My Rate/Payment”] Most people think about rate and payment together, however, there are many situations where you could actually get a lower payment with a higher interest rate. If I’ve learned anything over sixteen (16) years of consulting with clients about their mortgage, it’s that everyone has a unique situation. Depending upon your unique situation, there’s a remedy that is best for you. Here are some of the ways that we might ease the monthly mortgage burden.- Refinance into lower interest rate mortgage (most common)
- Refinance into longer term mortgage
- Payments spread out over a longer term will have a lower payment
- For an older, seasoned mortgage, the payment is based on the initial, higher loan balance. If the loan is significantly smaller now, the same rate or even higher rate can lower your payment and improve your cash flow.
- Refinance into a variable rate mortgage
- While interest rates are low, this might not make the most sense, however, if you know that you will be selling your home (for sure) in the next 5-7 years, a short term fixed rate loan might be the perfect solution.
- Getting rid of mortgage insurance
- If you had a loan that initially required mortgage insurance, you might be able to save hundreds of dollars per month even with a higher interest rate. If your home’s value has increased enough, you may not need mortgage insurance anymore. Depending on the type of mortgage that you have, your mortgage insurance is scheduled to go away when your loan is paid down to 78% loan to value, however, this could take over 10 years, depending upon the initial Loan-to-value. In the case of an FHA loan, mortgage insurance is now permanent, it will remain for the life of your loan.
[/tab] [tab title=”Need to Start Saving”] Saving is a very difficult thing to do. The media has been so successful at selling us on the idea that “more or better or best” is what we need to be happy. In comparison, saving money is viewed as so un-glamorous and un-fun. Of course, as we all know, saving money is what we all must do if we want our money to support our life and lifestyles in our golden years.
If you are able to refinance your mortgage and improve your cash flow, you have newfound money. Instead of going out and buying more stuff, develop a discipline of saving now – it doesn’t take much to have a comfortable nest egg if you start now.
I’ve reviewed hundreds of loan applications over the years so that I have a pretty good idea about what makes wealth. I’ve witnessed a handful of “get rich quick” stories, but the most common formula for a comfortable retirement is slow and steady. If your financial health can be told with the “tortoise and the hare” story, in my experience, the hare might win a few races, but the tortoise consistently takes home the National Championship. The tortoise always wins. Slow and steady is the winning formula.
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[spoiler style=”2″ title=” Payoff My Loan Sooner”]
Two options
[tabs style=”1″] [tab title=”1. Shorter term refinance”] If your goal is to pay off your loan sooner, a simple option is to refinance your existing mortgage into a shorter term loan. The typical shorter term loan is 15 years, however, 20 year terms are also available. Many of my clients want the payoff of their mortgage to coincide with their retirement. This option is attractive because the interest rate for a 15 year loan is substantially lower than the rate for a 30 year loan; however, since the payments are compressed into half the time frame, the monthly payments are usually too steep for most people to handle. Furthermore, if you run into financial hardship, it’s harder to make the bigger payment. This strategy to Payoff Your Loan Sooner works great, but you have to make sure that your income is sufficient to handle it.[/tab] [tab title=”2. Accelerated Principal Paydown”] Another more common way to accelerate the payoff of your mortgage is to overpay the amount due on your mortgage every month. Any monies in excess of the billing amount will be applied directly towards the principal – this results in Accelerated Principal Paydown. Using this practice, depending upon the extra amount that you send, you can payoff your mortgage years earlier. In fact, you can “dial in” the exact date that your loan will payoff by paying the same amount of extra monies every month. We often counsel our clients on the monthly amounts that will help them to meet their goals.
In my opinion, accelerating your principal paydown using this approach is safer because it puts you in control of how much or how little extra money that you apply towards your principal. This allows you some flexibility during times of financial hardship, you decide whether or not you will pay more or not.
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[spoiler style=”2″ title=”Change Loan Type”]
Here are some options to improve your financial position by changing the type of loan that you have.
[tabs style=”1″] [tab title=”Variable to Fixed”] Fixed rates loans are great. You always know what your payment will be every month, every year. However, there are “risks” associated with having a fixed rate too. Most people, don’t see things this way, however, if you understand that there is “no such thing as something for nothing”, you understand that there is a consequence of having that that security. You may be missing out on an opportunity to benefit.For example, if the interest rates are trending downward, and you have a variable rate loan, you get to participate in the lower rates automatically. Of course, you can always refinance, but refinancing costs money, requires time and energy and there’s no guarantee of loan approval if your financial situation has changed. In any case, it’s a very individual thing based on your personal financial disposition and your long and short term goals.
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[tab title=”Fixed to Variable”]
In a low or declining interest rate market its great to have a variable rate loan. The scary part of a variable rate loan needs no mention, financial uncertainty is never fun for most people. However, if you’ve had a variable rate loan for more than 5 years, chances are that you’ve experienced an up and down cycle in interest rates and you understand the money markets a lot better.
The following is a grossly oversimplified view, however, a basic truth about interest rates is that they go down in bad economic times and rates go up in good economic times. Since there is so much data and media coverage on the economy, you can have a pretty good feel or what’s going on. Certainly, not even the brightest brains in the business can predict what will happen on a day-to-day basis, however – except while we’re in “economic limbo” – the direction of the economic trend is usually known pretty well. In any case, it’s a very individual thing based on your personal financial disposition and your long and short term goals. There are however, definite situations where a variable rate loan might be the best option for you.
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[tab title=”Getting Rid of MI”]
Check out this blog post for more info.
If you were required to have Mortgage insurance (MI) as part of your current loan because your down payment or equity was too low, it might be a good idea to revisit your loan status again. If it has been a while, your loan balance may be lower than you think. – or – if the real estate market has done well and prices have increased even slightly, there might be an opportunity for you to get rid of your mortgage insurance. In some cases, you might not even have to refinance your loan.
In any case, its a good idea to consider your options in this arena. Even if the current interest rates are higher than your current rate, its likely that you will still benefit. You may add $50 or more to your loan payment, but it will be offset significantly by the hundreds of dollars that you’ll save by eliminating MI.
Additionally, mortgage lenders are always creating new products to meet the demands of the consumer. When you got your loan, you may have been required to have 20% equity in order to avoid mortgage insurance, but today there are dozens of variations on lower equity situations where mortgage insurance is not required.
Check out this blog post for more info.
[/tab] [/tabs] [/spoiler] [spoiler style=”2″ title=” Get Cash Out”]Taking cash out of your personal residence is a controversial topic these days. Before the Great Recession, accessing the equity in your home used to be as simple as applying for a credit card – just sign and collect. Collectively, as a society, we had a low awareness of the excesses in which we were indulging. In fact, many homeowners used their equity as an “ATM”; they purchased consumables, cars and boats and RV’s or took lavish vacations that were normally outside of their budgets. Now, I’m not here to say that that all fun spending is bad or that you should never reward yourself, but it’s important to consider the long term effects of your decisions. Especially decisions that effect the integrity of your homestead.
A good friend of mine taught me a lesson that I share with others – “it’s OK to take risks on discretionary funds, but you don’t ever want to put your own home at risk”.
In my opinion, these are the ONLY cases where you might take equity out of your personal residence.
[tabs style=”1″] [tab title=”Home Improvement”] Permanent home improvements that add to the value of your home are great. Other improvements that simply make you feel better about your space are great too. The best return on investment for any home improvement, things that increase the value of your home are:- Adding square footage – making your home larger
- Adding a room – bathroom or bedroom
- Remodeling kitchen
- Remodeling bathroom(s)
Other home improvements that add curb appeal, like hardscape and landscaping are also great, but they typically have a lower return on investment.
[/tab] [tab title=”Investing”] If you are taking cash out of your home to make an investment, you’ll want to be careful about where you are reinvesting. It’s important that you don’t compromise the integrity of your homestead. That means that you’ll want to be very conservative about the amount of cash that take out and the payment on the new higher encumbrance (loan). You will want to be very comfortable that you can handle the new payment, otherwise, you might expose yourself to unnecessary risk.That said, it can be argued that the equity in your home is dormant and its not really working for you. If you have dormant equity that can be used to invest in something that can earn money for you, it’s worth investigating.
You might also have access to great investments that yield a higher than market return. In simple terms, if you put money into play (invest it) and it makes a higher rate of return than it costs (the interest rate), it’s worth investigating.
A good rule of thumb to “keep it real” is to understand you should never use “short term” and “investment” in the same sentence.
- By definition, an investment is long term
- Short term is usually better described as “speculation”
Understanding this distinction will help you to make more prudent investment decisions.
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[tab title=”Debt Consolidation”]
See “Improve Cash Flow” above.
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