Recently, some borrowers have taken an interesting strategy to invest in their home. These folks have paid down a higher rate jumbo loan in order to refinance into a Fannie Mae or Freddie Mac conforming mortgage. This strategy usually applies to folks who have already taken a portion of their investments out of the stock market and currently have that money in cash. Perhaps, they are just not as comfortable with the risk/reward profile being offered by the stock market right now. They potentially want to take a more defensive position with their investments, create equity in their home as a financial security blanket or pay down some of their debt.
They usually have a jumbo loan (balance greater than $417,000) with 6%-7% rate that has a balance of $425,000 to $500,000. They desire to take advantage of the 5% rate market for Fannie Mae and Freddie Mac 30-year mortgages, called a conforming loan. Because the balance of a conforming loan must be less than or equal to $417,000, these folks are taking their cash investments and are refinancing the high rate jumbo loan into a conforming mortgage that has a rate near 5%.
By paying down their mortgage and refinancing into a low rate loan, they are investing their cash into their home. They are also creating equity in their house that they may be able to tap into if there is a job loss in the family. They are also lowering their monthly payment so as to reduce their debt burden and save money compared to their current financing. Over a five to ten year span, this savings can be equal to anywhere from $50,000 to $150,000. In most cases, any upfront fees are paid back through the savings in six months. For those who want to further invest in their home, they can refinance into a fifteen year mortgage for a rate just below 4%.
Now this idea is not for everyone. You need a certain amount of cash on hand and this is a luxury that many people do not have. You also need to believe that your home is where you want to concentrate your investments. The benefit can be extremely significant, but you have to be willing to re-allocate a significant amount of your assets.
It is an individual decision. This is not financial advice. It is just an example of how some folks are looking at financing their homes. You have to make up your own mind.
Reprinted with permission from Jim Pomposelli, Mortgage Banker at Mortgage Direct, Inc.