Homeownership is one way to grow your wealth. Most of the time property values tend to rise while you pay off the mortgage. When you pay off the principal on your home and the value rises, you gain equity in your home. This is the monetary value between the amount you owe and the possible sale price of your house.
When you have a lot of equity in your home and interest rates are low, you might consider refinancing your mortgage. Refinancing a mortgage allows you to take equity out of your home or lower your monthly payments*.
*By refinancing your existing loan, your total finance charges may be higher over the life of a loan.
How Property Value Affects Refinancing a Mortgage
If you’re considering renovating your home or paying off debts, you might consider a refinance mortgage for these expenses. You can only do this if your property value is considerably higher than the amount you owe on your home.
For example, if you bought your home 10 years ago with a $150,000 mortgage, and it’s now worth $250,000, you’d have at least $100,000 in equity. Paying your monthly mortgage may have reduced the amount of principal you owe and freed up more equity.
In this example, the increase in property value gives you access to an additional $100,000. However, if you choose to refinance the mortgage and take some of that equity, your monthly payment amount will usually increase. Depending on the type of refinance mortgage, you may find yourself beginning a 30-year mortgage again. Before opting to refinance, make sure that you can afford the future repayment schedule.
Reasons Property Values Increase
Your home might be worth more than when you bought it. There are a variety of reasons that property values increase, such as:
- Improvements to the property: From adding a new roof to remodeling the kitchen, your home has probably seen a variety of improvements. Each of these upgrades can increase the value.
- Tight housing market: There are times when there aren’t many homes available to buy. When this happens, people trying to sell their homes can ask more for them. This drives the property value up.
- Popularity of your neighborhood grows: As the population increases, people move further away from the city center. You may find that your neighborhood that once sat on the outskirts of town has grown in popularity. The increase in demand helps home prices increase.
- Time: Traditionally, the value of a home rises over time. Sometimes, it’s a slow steady increase, while at other times prices seem to skyrocket.
When the economy booms, you tend to see an increase in property values. Before you decide to refinance a mortgage, weigh your options and understand the repayment schedule.
Reasons to Refinance a Mortgage
Refinancing a mortgage requires most of the same paperwork and costs of closing on the home in the first place. This takes time and money. So why do people opt to refinance a mortgage? Reasons include:
If you bought your home a decade or more ago, then your home probably isn’t in line with the latest housing trends. Many homeowners refinance their mortgages for home renovations. This might include a bonus room, new kitchen, or mother-in-law suite.
Pay Off Debts
The interest on a mortgage is typically lower than that on credit cards. If you have a large amount of debt, you might consider refinancing and using the equity in your home to pay down your debts.
Lower Your Monthly Mortgage Payments
If you bought your home when interest rates were high, refinancing your mortgage might save money, especially over the term of the loan. When interest rates fall to historic lows, many people choose to refinance and lower their payments.
Make a Large Purchase
In some cases, you might opt to refinance a mortgage to make a large purchase. It might be a new car, boat, or something else. When you can receive a lower interest rate by refinancing a mortgage instead of another type of loan, it’s beneficial to refinance a mortgage.
College Tuition for Your Kids
Sending your children to college has been your dream since they were small children. It’s also one of the most expensive experiences you’ll pay for your kids. With enough equity in your home, you can pay for your child’s college by refinancing your mortgage.
Deciding whether to refinance your mortgage is a serious decision. When interest rates are low, and your property value has risen, it’s tempting to use the equity in your home. However, you need to decide if you can afford the increase in payments over the long-term. You don’t want to end up in a tight money situation. It’s always a good idea to talk to a lender when you’re considering refinancing your mortgage.
If you are looking for help navigating the refinance process, contact our experienced team.