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!
Related Posts:
- Using Your Home Equity Loan to Pay Off Credit Card Debt
- Rule to Grow Rich By #2: Refinancing Your Home
- How to Escape Your Mounting Credit Card Debt Financial Situation
- Reasons Why You Should Own Your Home
- Consumer Debt Worst Offenders: Banks, Advertisers, and Advisors
- 8 Ways To Improve Your Credit To Get a Mortgage
- Getting Prequalified For Your Home Loan
- The Debt Destruction Technique: Destroying Debt One at a Time
- The Major Role Credit Plays in Real Estate Financing
- Myths and Truths About Buying Your First Home
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2 responses so far ↓
1 rudy // Sep 9, 2008 at 11:55 pm
if you’re going foreclosure do you have to file for bancruptcy also.
[Reply]
2 Michael Emilio // Sep 10, 2008 at 7:00 pm
@ rudy,
Foreclosure doesn’t necessarily mean bankruptcy.
However, some people choose to file for bankruptcy to avoid losing their homes. For example, if you’re a homeowner that’s been foreclosed upon recently, you can file bankruptcy to avoid losing your home even as your bank is going through the foreclosure process in your local court system. Just because a bank has begun foreclosure proceedings against you doesn’t necessarily mean you can’t file for bankruptcy and keep your home - in fact, bankruptcy laws were put in place to help you in this situation. In most cases you can wait all the way up to the auction sale of your home by the sheriff at the court steps to file your bankruptcy petition and this can stop foreclosure. This is of course an exaggeration - but you get the point.
Of course, a bankruptcy is a last-ditch effort when nothing else fails to prevent foreclosure and when you have no way to pay your outstanding debts.
Remember that if you simply let the house go to foreclosure you may have the lender coming after you for the net difference between the loan balance and what the lender received after the house is auctioned. Some lenders allow short sales, where the lender will accept a significantly lower amount for the home and forgive the remaining loan balance.
Read these posts to find out more on this subject:
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