Lower Debt with a Long Term Refinance
When housing values are low, refinancing isn’t as easy. Your loan-to-value ratio (LTV) becomes very important and even if you qualify for a refinance, you may not get as good a deal as you wanted. If you are looking to lower your monthly payments as much as possible and don’t have loads of cash (who does?) to put into your mortgage when you close, you might want to think about using a refinance to increase your term.
Conventional wisdom says that if you want to pay as little interest as possible, you should opt for the shortest term. This makes sense if you have no other debt, but for those with credit card or other loan debt a longer term might just be the answer. Since credit cards typically carry a much higher interest rate than your mortgage, you may find freeing up capital through a longer term refinance to be the best decision.
Unemployment is another factor that may lead to a longer term refinance becoming a good idea. If your income changes significantly, so must your finances. If your income stops or decreases enough, refinancing into a mortgage with a longer term and a lower monthly payment may be the difference between missing a payment and foreclosure.
The truth is that refinancing for a longer term will not save you money. Your interest rate will go up in most cases, but with today’s low rates, it is possible to get a great deal. Understanding all your mortgage options is important if you are thinking about refinancing into a longer term.
If you have questions about these mortgage options or how to fund your home improvements, send a question to Bill, the Bills.com resident expert.