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6 Other Reasons To Refinance Other Than The Obvious
When someone mentions refinancing, we immediately think about it as an activity adjust interest rates or the length of loan.
That is a pretty straight forward reason.
But there is a significant portion of mortgagors who do that for reasons other than the obvious.
Does that raise your curiosity? Maybe these less obvious reason apply to you as well but you are unaware of them?
Here are 6 of them.
1) Debt consolidation
When you refinance your home loan, you have the option to “Cash Out” with an additional term loan, provided the property value is much higher than the outstanding loan amount.
Cashing out basically means that you replace your existing loan to a new bigger one.
So if your property value is $500,000 and the outstanding amount is $100,000. You can choose to take up a $250,000 new mortgage. $100,000 will be used to redeem the existing on, and the remaining $150,000 can be used for your own personal investment purposes.
Generally speaking, home loans are some of the cheapest loan we can obtain as a consumer. They are secured with the best collateral which is real estate.
This is why banks and lenders are willing to offer low interest rates as they are of a lower risk profile.
Compare that with credit cards at 24% interest, mortgage rates look like a steal from a flea market.
So it might make financial sense to draw out your home equity via cashing out and use the funds generated to payoff all your other existing financial liabilities like education loans, personal loans, hire-purchases, etc.
And instead of going through the trouble of making 8 different payments each month-end on these bills, you will not have consolidated these loans into 1 account which is your new mortgage.
2) Amendment of borrowers and guarantors
You might think that amending details of borrowers sound ridiculous. This is because you have yet to run into a situation where these actions are necessary or advantageous.
Under various predictable and unforeseen circumstances, many people undertake to add or remove borrowers from an existing mortgage.
It could be because a business partner has left, a family member wants out, divorce, or someone wants to take up a new loan under his own individual name.
These are just some reasons. There are many more reasons where we would not be able to see from the outside.
When you collectively invest in real estate with others or family members, each person has a legal claim in the property. And if someone exits the investment without properly removing himself from the mortgage, he is still legally liable for it.
This means that any default in payments will continue to be credit to him as well.
Imagine living a quiet blissful life and one day realize that you are public enemy number 1 to lenders due to a war going on in your credit report that you are totally unaware of.
You will then have trouble with apply for any financing facility with any lender.
3) Remove private mortgage insurance (PMI)
A typical PMI is roughly 0.50% of the loan quantum over 12.
There are a number of variables that determines the premium which is payable.
Home owners refinance to remove PMI primarily when they are not tax deductable.
There is however, certain criteria to meet before you can go ahead with this.
As rules vary from state to state and city to city, you should check with your loan officer on your eligibility and qualification.
4) Pay off multiple liens
A lien on a house does not necessarily have to be a mortgage.
On top of that you could have 2 mortgages for one property. A contractor or builder for example, could also have a lien on your house. The point to illustrate is that there can be multiple liens on a property.
Again, this is something that will sound foreign to you until the moment when you realize that it is something standing in your way of what you want to do.
Existing liens take priority over a new refinance.
To proceed with refinancing, existing liens need to agree to subordinate to the new mortgage or they need to be repaid in it’s entirety.
Subordinating would mean that those liens would take up a lesser priority behind the first mortgage.
At least you read about this here. It would be a huge headache to only learn about this when things are already in motion.
Other circumstances that can result in liens include unpaid taxes, bad loans, personal guarantees, etc.
Those with multiple liens placed on their properties may refinance to pay off the vested parties so as to remove them absolutely.
5) Avoid foreclosure
Foreclosure is not something to be embarrassed about. Sometimes, shit happens.
People lose their stables jobs, are suddenly in bad health, or meet with unfortunate accidents. Economies can crash and businesses can become obsolete overnight.
Sometimes, we are just at the wrong place at the wrong time. Causing us to be unable to afford the huge mortgage sucking from a hole in our savings accounts.
Depending on the original terms you signed up for, a lender can start the process of foreclosure if you breach the agreement. Usually, 3 consecutive defaults can be a justifiable reason for financial institutions to kickstart the foreclosure process.
Once this happens, the home owner is not entirely powerless to do anything about it.
If he is able to repay everything outstanding, the sun will shine again while the butterflies start appearing again.
The total costs of the reinstatement amount to pay include the due payments, next payment, legal fees, administrative fees and collections fees.
The owner could of course, sell the property. But why do that when you can refinance you way out of it?
There is a certain type of mortgage named foreclosure bailouts.
They allow owners to refinance the note together with the reinstatement amount. Due to the riskiness to the lender offering such a product, you can expect strict criteria and high interest charges should you choose this route.
Lenders are often open to owners cashing out for renovation.
This is because renovation or even a total overhaul can substantially increase the value of a home.
The difference between this arrangement and a cash out is that lenders will only grant the facility for the purpose of renovation or remodeling.
This means that you have to get quotes from contractors that verifies the amount you are asking for.
You might even have to provide building approval documents from the relevant authorities for the lenders to feel safe enough to grant you the loan.