I’m probably going to do the one thing you’re not supposed to do when you publish a book. I’m going to share the top takeaway right here, right now.
Your home is one of the most powerful assets you can own.
Ok, so now that the secret is out, it’s time to figure out what you can do with this asset and how you can make it work for you.
One of the ways you can make your home work for you is with a REFI. Known as Refinance, this is the process of restructuring your current mortgage to take advantage of better interest rates, terms, cash flow or to get access to the equity you already have in your home.
Why Would You Want to Refinance?
Before we get into the how of refinancing your mortgage, let’s talk about the why.
Refinancing can accomplish two things; reduce your costs of borrowing and/or gain access to built-up equity (cash).
Why you want to refinance will depend on your situation. Perhaps you want to pay down some high-interest debt like credit cards, or you want to pay for home renovations, or you want to free up some cash flow to start investing—whatever is the case, your home can be a tool to get you where you want to be.
The Two Things You Need to Know About Refinancing
Like it was when you were buying your first home, there are some rules in place for refinancing. This is still a legal agreement between you and your lender.
There are two things I see most of my clients struggle with when they want to refinance.
Not Having Enough Equity
While you’re slowly building equity every time you make a mortgage payment, lenders will want a certain amount of equity built in your home before they consider refinancing.
They are looking for a maximum of 80% LTV (Loan to Value). This means that of the full value of your home, you must maintain 20% of the equity while the lender will loan a maximum of 80%.
You can quickly do the math on the estimated equity in your home using your latest property value assessment. Divide your current mortgage balance by the property value assessment, multiply by 100%, and you’ll get your LTV. If this is over 80%, it’s not the right time to refinance.
There are a few different strategies for building up the equity in your home faster, such as taking advantage of lump-sum pre-payment and accelerated payments privileges.
Having to Pay a High Penalty
If you do have enough equity in your home, it still might not be a great idea to refinance yet. Depending on the type of mortgage contract you have with your lender, you could be facing high payout penalties to break your current mortgage.
There are two ways lenders can charge you to break your mortgage; three months’ interest or Interest Rate Differential (IRD). If you have a variable rate mortgage, you’ll likely be charged three months’ interest.
However, if you’re in a fixed-rate mortgage, you’ll likely be charged using the IRD formula, which varies from lender to lender. In almost all cases as well, it’s higher than three months’ interest.
This is where your mortgage professional will help you figure out exactly what that cost is to break your mortgage term. You may end up paying more to break your mortgage than you could save!
If there’s one thing I’ve learned about refinancing is that it really does come down to timing and the numbers. Working with your mortgage professional is going to help you figure out if and when it’s the right time for you.