Sometimes, the best refinance options aren’t refinancing at all.
Refinancing is the process of exchanging your current mortgage with a new one that has new terms. A lot of people refinance their mortgage for reasons like saving money, tapping into home equity, shortening their term, or lowering their interest rate. Whatever your reason may be, did you know that a traditional rate/term refinance isn’t the only way to go? And depending on your situation, it may not even be your best option. We’ve got some refinance options and alternatives you might want to consider. Let’s take a closer look.
1. Cash-out refinance
First things first, we’ve got a few refinance options that allow you to tap into your home equity. Have you ever heard of a cash-out refinance? It’s when a borrower refinances their mortgage for more than the amount they currently owe and receives the difference in cash. This option is great if your goal is saving money or paying off some debt. You could use that cash to pay down or pay off other high-interest debts, like credit cards, auto loans, or student loans.
Cash-out refinances are great because the homeowner gets to borrower against their home equity and get a fixed amount they can spend like cash. They allow you to lock in a new fixed rate for the life of the loan and get predictable payments that make budgeting simple. Plus, all fees associated with the cost to borrow are paid up front—no surprise fees down the road.
Cash-out refinances are great because the homeowner gets to borrower against their home equity and get a fixed amount they can spend like cash.
2. Home equity line of credit
A home equity line of credit (HELOC) is a refinance option that allows you to borrow against your home equity and use that to pay for miscellaneous expenses. It’s unique in the sense that the cash may be advanced to the borrower via a line of credit—much like a credit card—rather than in a lump sum.
In many cases, closing costs on HELOCs may be lower than other mortgages and the interest rates are generally variable. The interest paid on a HELOC may be tax-deductible, and during the “draw” period, borrowers may be able to opt to pay for the interest alone each month (and not include principal in their monthly payment until after the draw period expires). We don’t offer HELOCs because there are significant drawbacks to this type of refinance, but some homeowners find the benefits worthwhile so it’s good to know you have the option.
3. Home equity loan
Like a HELOC, a home equity loan allows you to access some of the home equity you’ve built up. But in this case, you receive the funds in a lump sum, and it may either come with a fixed or adjustable interest rate. Then, the homeowner repays their home equity loan in fixed monthly payments over a contracted period of time.
Although we don’t offer this type of loan, most people choose home equity loans for a few reasons. They get to keep their home while they’re repaying the loan, the interest they pay may be tax-deductible, and fees may be lower than those of certain other refinance options.
7 Refinance Questions to Ask Yourself
4. Sell your home and downsize
If your goal in refinancing is to get cash from your home equity, selling your home might be a viable option. In fact, you may even get more money back from selling your home than you would by any kind of refinancing. If the time is right and you’re ready to sell, consider downsizing. A smaller home may come with a smaller monthly mortgage payment, leaving you with more money in your pocket to pay for other expenses.
5. Sell your house to someone you know
Do you have a friend or family member who is willing to buy your house? If you trust them and have a good relationship with them, you may be able to set up an agreement to continue living there while they own and pay for the house. This arrangement can be especially attractive to older couples with grown children who are looking to purchase a home for their young families and would like to have the multi-generational family live together. However, it’s very important for a homeowner considering this option to seek professional advice since it involves transferring the title, a binding legal contract, and doing business with family.
6. Turn your home into an investment property
If you’re cash-strapped, flipping your home into an investment property could benefit you greatly. You could rent out a room, a floor, or the whole place from time to time and make a little extra money from tourists and vacationers. This option means you can keep living in your home, make some cash on the side, and enjoy the company of visitors. But, this option may not be the best for all homeowners and you should discuss it with family, friends, and your legal or financial advisor first. And, in some cases, using your home as an investment property may not be permitted. Your existing mortgage, local government, or homeowners association may prohibit it.
Spring Break: Should I Rent Out My Home?
7. Find a roommate
Similar to renting out your home, finding a roommate can help offset some of the costs of living. With rent costs rising, a little extra income from a roommate may cover or greatly offset your monthly costs. If you choose this alternative, carefully screen your candidates and perhaps get some help from a legal or financial advisor. Like turning your home into an investment property, renting a portion of your home may be prohibited by your mortgage, local government, or HOA. It’s best to do your research.
Sometimes, the best refinance options aren’t refinancing at all.
8. Look into property tax discounts
Trying to save some money on your home? Look into the property tax benefits in your area. You may be able to get a little property tax relief! In some areas, if the homeowner meets low-income requirements, they may be eligible for a partial tax credit. Or a tax program that allows them to postpone or forego property tax payments. This isn’t a loan or line of credit, but it may keep more cash in your pocket.
9. Research other benefits
There are so many programs and benefits out there that can help homeowners reach a better financial place. You might even save some money. A good place to start is benefits.gov where you can fill out a questionnaire and they will match you with the benefits you’re eligible for. You don’t know what’s out there until you do a little research.
Did any of these refinance options and alternatives stand out to you? Give us a shout-out on social media.
