I don’t know about you, but I’m always getting inundated by advertisements from lenders and banks practically begging me to refinance my home by using a refinance loan.
It seems so easy and pain free!
So I can cut my interest rate? And I can lower my mortgage payments? All with no closing costs on a no cost refinance? And you even offer a bad credit refinance? Wow!
The thing with the financing industry is that it’s very tied to the credit card industry. Did you know that more than six billion credit card offers get sent to people every year? I have a feeling you were one of the six billion too. I think I might have received at least half of those six billion offers judging by the stack of junk mail I have. Anyway, with the rise of these offers has come a huge rise in consumer debt. We have a total of $2.5 trillion in consumer debt, and guess what, it’s growing…. fast.
Why do banks want you to refinance so badly?
They know you have debt. They know you can’t stand it. So, in the kindness of their hearts, they want you to consolidate your debts using your most cherished possession (and for most people, their most expensive possession), your home.
Most people would much rather not pay their credit card balances than have the risk of facing foreclosure looming overhead by missing their mortgage payment.
Why is a home so valuable?
One word. Equity.
What is equity?
The equity in your home is the difference between the market value of your home right now and the amount of money that you owe on your mortgage. This means that the down payment you made on your home gave you your first injection of equity. When you start making payments on the principal of your mortgage, your equity goes up. Another way it goes up is when you make improvements to your home, like adding a kitchen, bathroom, or you remodel. You can even gain equity when the economy is in inflation, thus making your home more “valuable”.
So should I ever refinance my home?
Of course there’s good reasons to do it! Just don’t do it just to pay off consumer debt. You have to focus on changing those spending habits that got you in trouble in the first place.
A reason to do a home refinance may be to use as fuel to push along investments that you are doing. Maybe you’re starting a business and you need that extra seed capital. Maybe you want to get your start in real estate investing, starting small by buying foreclosures and preforeclosures as investments, and you need some starter money.
Just don’t use your home equity to fuel a lifestyle that goes beyond what you can really afford. Your home equity is a powerful real estate tool, use it wisely!
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I will hopefully be able to refinance to a 15 year mortgage, and I am not taking any equity out. I don't like having debt and the stock market crash has really made me want to pay off my house. I have read about the horror stories of people losing their home when they had 2 incomes and now they are homeless. I never want to be in that situation so I am going to try and pay off my house as soon as possible. I setup a blog if anyone wants to follow my status. I will still fully contribute to my 401k and roth ira, but my tax return, gift money, and any other extra income will go directly towards my principal. I can't wait until I am able to send off my last check to the mortgage company knowing they won't be charging me interest any more.
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