The 6 Secret Uses of a Refinance Loan
Updated: Feb 5
Refinancing your mortgage when rates are low and home values are robust can be a pretty straightforward decision. Reducing the interest rate can mean a lower monthly payment. Converting your FHA loan to conventional should eliminate your private mortgage insurance (PMI). Or a well-timed cash-out refinance can provide some extra funds to improve your home with updates.
But what about some of the more unconventional reasons to refinance? Whether it’s proactive, responsible financing or handling unexpected circumstances that arise, join us as we’ll look at a few secret, or lesser-known uses of the mortgage refinance.
1 | ARM: The Clock is Ticking
While the 30-year fixed mortgage is the most popular with homeowners, strategic borrowers can find great value with an adjustable-rate mortgage – or ARM. This is especially true of those who may not qualify for the lowest fixed rate possible. Perhaps your plan was to enjoy the lower initial rate and sell before it resets, but as it often does, life happens (pandemic anyone?), and plans change.
If you know the time is running out on your current ARM loan, and you’re keeping an eye on current low rates, it just makes sense to refinance to a fixed rate before your monthly payment goes up – sometimes substantially.
2 | Changing the Mortgage Term
Has your credit score or income increased? If you’ve diligently made your mortgage and other payments on time, your FICO score has probably risen as a result. Or perhaps your income has substantially increased due to a new job or promotion since purchasing your home. With low interest rates, it might be time to capitalize on either situation by refinancing to a lower rate – and better yet, a shorter term.
By replacing your mortgage with a 20-year balance with a 10- or 15-year loan, you could garner a lower rate and save thousands in interest over the remainder of the term. A refinance calculator or mortgage lender can help you do the math and see if it’s the right move for you.
3 | Improve Your Credit Standing
A common reason for refinancing is to consolidate debt by paying down high interest credit cards or other loans. Current rates mean a new mortgage may be in the low single digits, while some forms of revolving credit can charge more than 20% APR. But there’s an additional angle to saving with a cash-out refinance.
If you’re able to take the amount you’re no longer paying on your credit cards, and apply it to your monthly principal, you could pay off early and save big. While there will be a hard inquiry on your credit for the refi process, your score will rebound in no time with diligence on your part – just keep those balances low to maintain your progress and protect your home.
4 | Vacation Getaway
It’s generally not recommended to use cash from a refinance on big expenses like a vacation because there will be additional expense in fees and interest, and zero return outside of great memories and a tan. However, some borrowers may find value – and quality time! – by using money from the equity in their current home as a down payment on a second home or vacation getaway.
Real estate is always a strong investment so you may also consider adding a rental property to your financial portfolio. With careful planning and time, it could pay for itself.
5 | Pay Down Big Debt
Sometimes your financial obligations don’t arise from credit cards, but unexpected debt such as medical expenses or hospital bills. Unfortunately, the ongoing pandemic has made this a potentially harsh reality for millions of Americans. Tapping the equity in your home for a cash-out refinance can provide relief from bills, not to mention the added emotional stress of collections.
Student loans typically have competitive rates, but sometimes that isn’t an option and the cash from your home can resolve an immediate need. Investing in education lends itself to long-term, valuable returns.
6 | Change of Mortgage Holders
For better or for worse, sometimes a life change can result in the need to refinance your current mortgage – and whose name is on it. This might be the case in a divorce when one partner is keeping the home and needs it solely in their name. Or conversely, a new union is made official by adding another borrower. Perhaps the homeowner had parents cosign the original loan and they’re now on solid fiscal footing to qualify on their own.
Whatever the reason, refinancing to rectify mortgage holders might be even more fortuitous when working with lower rates or a better loan product.
Different homeowners may have their own, less common motivations to consider refinancing right now. With the ongoing economic crisis as a result of Covid-19 and change in administration, the impact on interest rates in the near future is unclear. Now might be the right time to take advantage of current refinance deals available, so give us a call at EnTrust Funding (ETF) to discuss your own personal goals and potential mortgage solutions!