Home refinances are very common and most homeowners will refinance within the first two years of purchasing their home.
A home refinance can be done as soon as 6 months after a purchase in some cases.
Refinancing your home should be done to lower your rate, term, and payment. Homeowners can also refinance to access the equity in their home which is used like cash to help pay off consumer debt or upgrade the home’s features.
Waiting at least 24 months to access your home’s equity would be highly recommended. Each refinance will change the loan structure and it is important to understand the new terms of your loan. On average it can take four to seven years to see significant equity build up in your home depending on the housing market.
How do I know if I can use my equity
Equity is the difference between the market value of your home and the outstanding loan balance on the home. Your equity increases with each payment made with a percentage split between interest and principle. As home prices go up in your surrounding area this increase is calculated against the property.
Some Colorado zip codes are seeing an average of 20-30% increase in equity with the housing market over the last 18 months.
Using a cash out refinance to pay off debt will use your equity like cash and will increase the amount you owe on your home loan. The reason homeowners choose this method is to pay off bills such as credit cards, auto loans, and other lines of credit is to get rid of high interest rate payments. A peace of mind is also gained when knowing you have removed monthly credit debt freeing up cash flow for other living expenses.
Some math needs to be calculated prior to completing a cash out refinance for debt consolidation. For example you will want to try to stay below 80% loan to value of your homes worth. Otherwise mortgage insurance will be added to the loan and will increase your mortgage payment by the mortgage insurance premium amount.
Know how much equity you have in your home and what your market value is for your home. (Current mortgage amount) / (approximate home value) = loan to value ratio.
Which bills do I pay off?
Choosing the right bills to payoff with the equity of your home is one of the most important steps. Choose the bills that report to the credit bureaus and will have a significant effect on your score and monthly cash flow.
Once the debtors have been chosen and paid off, do not open new accounts or start spending large amounts on the paid off accounts. Otherwise, you will undo all the debt consolidation you just mortgaged, causing yourself to pay for the same type of debt twice. Establishing good spending habits and financial responsibility , this habit will be rewarding in the short term. Yes, short term, after your high interest debt has been paid off or down past 60% of the line of credit, your credit score will start to go up after 6 months.
A good saving practice is to take what your monthly payments equaled on your high interest debt and put that money into a savings account or investment account. For example, if you consolidate 3 credit cards equalling a total monthly payment of $700 and refinancing your mortgage to pay off debt went up by $75, minus the $75 from the old credit monthly total of $700 to equal $675. Take $675 a month or at least 45% ($304) of that amount and put into an interest earning savings account.
Now you have your spending habit earning money for you. $304 over a course of 12 months will equal $3,648.00 (if you choose to do the full amount of $675 for 12 months you just paid yourself $8,100) plus any interest earned.
Closing cost for Consolidation cost
Closing costs are fees to pay for completing a home loan.
This out of pocket expense will also need to make sense to your budget when consolidating debt. For example if you are consolidating lines of credit to save from paying $15,000 in credit card interest and your closing cost on your refinance cash out mortgage will cost you $3000 then you are saving money, however if the interest payments on the consolidated credit lines is only $3000 then you are not saving money after your closing cost is paid.
When equity is available in your home it can help the homeowner in many ways. As your Home Loan Originator, I will do the research and evaluate how much equity you have available in your home. I will compare it to your current mortgage and consumer debt to provide you with an educated recommendation if a cash-out refinance makes financial sense for you.
Author:
An Equal Housing Lender