Tuesday, April 19, 2016

5 Tips to Determine if Paying More Principal to Refinance is Worth It

You already have a mortgage and you’re making good headway, but refinancing is something your considering to lock in a lower rate.  However, at your currently higher-priced monthly payment, your debt to income ratio isn’t as great as it could be.  Ironically, the refinance payment would get you to a better ratio in order to qualify.  Sometimes paying down the principal can help, other times it’s not such a good idea.  Here are five tips for the Financial Samurai himself.




Things to Consider Before Paying Down Extra Principal

Mortgage Refinance Boom
A refinance boom is absolutely here again. Are you taking advantage of declining rates?
Things To Consider Before Paying Down Extra Principal

If you’re considering paying down extra principal to qualify for a mortgage, here are eight things to think about before making a decision.

Liquidity situation.
Ask yourself how much money in the bank makes you feel financially secure. The answer is different for everybody. I like having six months of living expenses in the bank at a minimum. The rockier the times, the more I want.

Upcoming purchases or expenses.
Do you want to buy another property? Will your car need replacing soon? Will you be having to pay outrageous private school tuition? How about upcoming medical expenses? If your monthly cash flow can’t take care of your expenses on its own, then paying down extra principal might not be a good idea.

Interest rate outlook.
There are two things involved with a successful mortgage refinance: 1) locking in an interest rate that makes sense, 2) passing the underwriting process. I was able to lock in a rate 0.125% off the all-time low I’ve seen for 5/1 jumbo ARMs. I do believe interest rates will stay low for a long time, but I just don’t know whether I’ll be able to time the bottom again. 

Real estate outlook.
If you plan to own your property for the long term, it doesn’t matter whether the real estate market is increasing or declining. But if the length of ownership is less than forever, then you need to make an educated guess on the probability of a real estate meltdown occurring during the window when you plan to sell. If there’s greater than a 50% probability, you shouldn’t pay down extra principal because you may never get your money back.

Income stability.
Do you have a recession-proof job? Or are you in a highly unstable and cyclical business? Everybody should refinance before losing their W2 income because you become dead to banks once you are unemployed. At the same time, nobody should be tying up excess capital into their illiquid homes if their job is at risk. The more streams of income you have, the more income stability you have as a result.


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