Reason No. 1: To get rid of credit card debt
Mortgage rates have jumped above 4% only once this year (in July), credit card interest rates often end up in the double digits. It’s better to owe under 5% interest on a loan than 19% on a credit card. Another benefit, the interest you pay on your mortgage is tax-deductible. Take out some cash out of your home and get out of debt.
But make sure you stop using the credit cards or spend responsibly.
Reason No. 2: Retirement Help
Similarly, if you are falling behind on retirement savings, you may want to use the savings from a refi to make contributions to your 401(k)—after all, these contributions are not taxed, and if your employer matches your contribution, your savings work double time. Also, as a third benefit, since your 401(k) is withdrawn from your paycheck before it is taxed, your overall income is lower and your tax bill is smaller at the end of the year.
Reason No. 3: Are you underwater?
For homeowners whose property values have slipped below the cost of their mortgage, there are places they can turn to refinance that could help—namely the Home Affordable Refinance Program.
Rolled out by the federal government in the wake of the financial crisis of the mid-2000s, HARP provides relief to underwater homeowners. The program is set to expire at the end of 2016. To be eligible, you’ll have to meet some requirements: For instance, your mortgage must have originated on or before May 31, 2009; you must be current on your mortgage payments; and your loan-to-value ratio must be higher than 80%.
Reason No. 4: High Interest Rate
Just because you have a decent 30-year fixed mortgage rate and you are happy in your home doesn’t mean you should become complacent. It’s in homeowners’ interest to keep a watchful eye for a better deal, as the savings could be significant. For instance, if you borrow $100,000 with a 6% rate, you would pay just shy of $600 per month and you would pay nearly $116,000 in interest. But if you borrowed that same sum with a 4% rate, your monthly payments would come to just a little over $475 per month, and you’d pay roughly $72,000 in interest.
Reason No. 5: Trading the ARM
There’s a reason why most financial advisers recommend clients steer clear of adjustable-rate mortgages: It’s a high-risk loan in which borrowers could easily lose their homes if they can’t make monthly payments after the mortgages “adjust” (or balloon, as the case may be). But for many self-employed home buyers, ARMs are the only way they can get into the market. Interest rates will continue to rise now may be the best time for ARM loan to make the switch to a Conventional loan.