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Tracy King's Blog

Is Putting Money into a Refinance a Good Investment?

Today’s interest rates are the lowest in just about forever. Yet a number of people are not refinancing to take advantage of these rates because the value of their homes is not quite enough to show that the equity is the 20 to 25% that the lender requires to do the loan. What am I talking about? Lenders today like for borrowers to have a healthy amount of equity in their homes before they lend them money at the incredibly more affordable interest rate than any of us have seen in any of our memories. That’s so in case we don’t make our payments and the lender has to foreclose, they will actually be able to sell our property for enough to pay them back for their investment, even if we don’t make our payments for many months and even if the value of our property goes down after they give us the money.

Interest rates are so low right now that even if you are a bit “upside down” with your loan, meaning that you owe, say, 90% of what it is worth today, you might want to consider investing in paying down your mortgage balance to complete the refinance. Jack Guttentag, The Mortgage Professor, wrote an article for Inman News that illustrates the scenario (http://www.inman.com/buyers-sellers/columnists/jackguttentag/reap-benefits-cash-in-refinance). Check out his calculator to see what return paying a lower interest rate yields on your money: http://www.mtgprofessor.com/Calculators/Calculator3f.html.

One important element to this idea depends on whether you can get an appraisal that reflects an acceptable value for your home. I blogged recently about my personal trials and tribulations regarding this, but in the end, I was offered a lower interest rate than I could have gotten earlier this year, and although I had to put money in to get the loan, I think it was totally worth it in the long run.
Another element is, of course, do you have the money to put into the payoff? This is obviously not a solution for those who are upside down and unable to pay down the mortgage or having trouble affording their payments.
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