Despite increasing interest rates, mortgages still open doors; plus, reconsidering refinance “rule of thumb” and using home equity loans wisely
Media Contact: Barbara Fornasiero; EAFocus Communications; firstname.lastname@example.org; 248.260.8466
Wyandotte, Mich. — July 7, 2022 — The housing market has experienced record-breaking inventory shortages, rising interest rates – and an abundance of cash offers. But mortgages are still the ticket to homeownership for most people, according to Michigan Legacy Credit Union (MLCU) President and CEO Carma Peters.
“Cash offers have been wildly popular in the recent housing market frenzy, but it’s not unusual for cash offers to turn into a mortgage after the house has been sold. Sometimes the cash is a temporary gift of sorts from a parent or relative, with the understanding that the homeowner will ultimately take out a mortgage and repay the cash in full or in part,” Peters said.
And while mortgage rates continue to increase and have doubled from a year ago, there is still the opportunity to refinance.
“It’s amazing how many people we encounter who never refinanced their high interest rate mortgages of (7.00% – 8.125%), even with the record low rates we’ve seen in the past couple years,” Peters said. “While rates are higher now, they are still significantly lower than what some individuals are paying on their current mortgage. For those people, refinancing should be a priority.”
Peters notes that a general rule of thumb for refinancing is: if you can lower your rate by 1% and will be in your home for seven years, it’s worth pursuing. But re-fi considerations shouldn’t end there, she said.
“In some circumstances, lowering a mortgage rate by even half of a percent is advisable if the overall savings outweighs the closing costs in a period of seven years or less,” Peters said. “If you’re unsure if a refinance is right for your current mortgage, it never hurts to inquire to understand if you’re at a good refinancing point, or what the target rate is for you to refinance.”
Mortgages, which account for approximately 25% of MLCU’s business, not only allow for the purchase of a home, they can be helpful down the road for tapping into home equity. As both inflation and gas prices reach record highs, the equity in one’s home can also be used to pay off higher interest rate debts, such as credit cards or student loans, or otherwise gain access to affordable cash during a tenuous economy.
“With a home equity loan, people can borrow money based on how much equity they have in their home,” Peters explained. “So, if you’ve paid off $75,000 of your mortgage, you may be able to leverage that equity to get a loan for $25,000 or more, for example. It’s important, however, that the home equity loan be used to either make improvements that will add value to the home or to pay down debts that will put the borrower in a more favorable financial position. Never borrow money to pay off debt it there is not a net positive in doing so.”
Peters adds that the unpredictability of the past few years serves as a good reminder to individuals on the importance of making smart financial decisions, as they can have long-term impact on one’s ability to accomplish personal finance goals, such as investing in a home purchase. Despite current challenges, those who have saved the down payment for such a major life purchase can still lay claim to a home sweet home.
“Motivated home buyers may have to adjust their expectations when house shopping, but that doesn’t mean a home purchase is out of reach,” Peters said. “A smaller home may be the answer – or a home in a more affordable location. The frenzy of home buying from earlier this year is easing, which means more opportunities in a less crowded market. Be patient and be smart – don’t overpay for a house and don’t waive inspections. Make your home purchase a wise investment and you can reap the financial rewards in the years to come.”
About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.