Posts Tagged ‘home equity loans’

Home Loan Modifications: Should You Refinance Your House?

Monday, March 2nd, 2009

Home loan modifications are not for most with debt

Someone who has non-mortgage debt should in general avoid home loan modifications like refinancing. This is because several months of payments after home loan modifications are complete, even if at favorable terms, are required in order to clear the initial refinancing costs to make it financially worth the while. However, if one has strong income security in spite of outstanding non-mortgage debt and excellent personal discipline, then cashing out a sliver of their home equity to pay down high interest debt may be acceptable. This is qualified advice since a strong correlation between cashing out home equity and getting deeper into non-housing debt has been identified.

If you have an ARM (adjustable rate mortgage)

Refinancing into a fixed-rate mortgage might be a smart move, although you need to make that decision based on your own assessment of financial security, including income security. This is because you need additional tenure in your home, which can be on the order of several years, before home loan modifications become worth the initial cost. The upside to switching into a fixed-rate mortgage is monthly payment certainty compared to variable rate plans, and more certainty means less risk – a major benefit for someone with debt, even if the fixed rate option is at a slightly higher interest rate than the ARM. Also, consider doing a point-roll into the mortgage. In short, look at costs relative to savings to calculate the payback associated with home loan modifications.

If you have 20% or more equity in your home

Home loan modifications are opportunities to contact your lender and make sure that they have eliminated private mortgage insurance (PMI) from your housing debt contract once you reach a level of 20% equity. This should help lower your monthly payments. Any freed up funds should be applied directly to your debt elimination payments, while providing for certainty of your monthly mortgage payments at a fixed rate.

Paying one-time costs that are either large or unexpected

If you have a choice between paying on your credit card or using funds from home loan modifications like a refinancing scheme, the interest rate and other terms attached to the bank mortgage loan from a mortgage contract are likely to be much more favorable than those of a credit card, despite the convenience of just swiping the plastic. Though there are better strategies for obtaining a college education than paying expensive tuition bills that one cannot afford, if one is committed to covering a tuition bill, then consider using a refinancing scheme to obtain the funds at a cost lower than a credit card or other private loan. Likewise for large, emergency medical expenses: it is better to cover these with funding through lower interest mortgage debt than that obtained through a credit card.
  
To sum up, in general, one should not refinance when in debt because of the risks associated with getting deeper into the red. The most important thing to keep in mind is that while home loan modifications like refinancing look (and are) favorable from a mathematical standpoint, homes should not be viewed as piggy banks. Avoid putting the house at risk, and cashing out equity to pay down high interest debt is not the same as saving income. Most with debt should view cashing out home equity as a last resort option. The DebtGoal product helps one gain a strong handle by automating the debt elimination process in a way that is easy to understand. 
  

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

 

 

 

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What a Near-Zero Interest Rate Means for Someone in Debt

Wednesday, December 17th, 2008

The Federal Reserve has dropped the federal funds rate to a record low – almost zero percent. But what does this mean for someone in debt?

Federal Rate to Prime Rate

The prime rate is affected by the change in the federal funds rate, and the prime rate is used by banks to set their rates for home equity loans, small business loans, and other consumer loans. But in the current environment, banks see risk in the economy that prevents them from lowering their rates to consumers accordingly. Unfortunately the result for many is not attractive bank loans for homes, small businesses, and consumer needs.

“Variable Rate” Credit Cards

But those with “variable rate” credit cards will see their interest rates drop significantly. The interest rates on these cards are tied to the prime rate, and so rates should respond accordingly. In a plan to get out of debt, paying off other outstanding credit card balances should take priority in most cases.

Housing

HELOCs and home equity loans will both benefit from today’s rate cut. This makes paying off outstanding credit card debt more pressing than clearing what is owed on the house. But for the large number of households with 30-year fixed-rate mortgages, the federal rate cuts will not change repayment terms.

Educational Debt

For those with private educational loans, these typically have variable rates, so they are impacted by the change in the prime rate. Although most variable rate educational debt at this point in time has comparable or better interest rates to student debt held at fixed rates, one should carefully evaluate both and set priorities since variable rates can change in the future.

Savings and deposits

Any savings or deposits at banks or investment brokerages that pay out periodic interest to you based on the prime rate will be adversely affected by the new rate cut. Depending on how heavily staked you are in these types of accounts, you should evaluate the situation and take into account any anticipated decreases in income from these sources when setting up a plan to eliminate debt.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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