Reasons to Refinance Your Mortgage (continued)

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In my last blog post we started discussing the various reasons that a homeowner would look into refinancing a mortgage. We touched on the conversions between adjustable rate and fixed rate mortgages, and the shortening of the mortgage’s term. In this post, we’ll touch on the remaining (common) reasons for refinancing.

Getting A Lower Interest Rate

As with the switch between adjustable rate and fixed rate mortgages, the goal is to save money via interest rates on the loan. When seeking a lower interest rate, it’s always necessary to switch between rate-types. In an environment where interest rates are low, mortgage holders (with fixed rates) may seek out refinancing to obtain another, fixed-rate mortgage with a lower rate. The general rule is to only seek out refinancing if there is an opportunity to reduce the interest rate by 1-2%, anything less will not be worth the upfront costs of the refinance.

 

Debt Consolidation or Accessing Equity

These are some of the most common reasons that mortgage holders will consider refinancing, but they are also the reasons that carry the most risk, from a personal finance perspective.

Some mortgage holders will look to refinancing in order to access their home equity.  The justifications for this move will vary. Some will use the equity to pay off remodeling, which can increase the value of the house, or to purchase more property, which can be a great investment. Others will use the equity to to cover large personal expenses, or pay off other debts.

Other mortgage holders will refinance to try to consolidate their debts; the idea of reducing high interest debt with lower interest debt makes sense on paper. However, many people who are refinancing for this purpose alone will not necessarily be saved from their high-interest (ie: credit card) debt forever. It’s likely that they will accrue more high interest debt with the available credit the refinancing has allowed them.

 

For a great breakdown of how mortgage rates are quoted, view this video by Khan Academy:

Is the Millennial Generation Buying Homes?

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A quick glance at any search results regarding millennials and their home-buying decisions will undoubtedly show a hodge podge of articles with conflicting points of view. So the question remains, are millennials buying or not? Surprisingly, the answer is: yes. But they’re buying differently than the generations before them.

As the millennial generation begins to come of age, it is becomingly increasingly obvious that they are approaching property ownership differently. This is understandable as the recession of 2008 left many under employed, and the subprime mortgage crisis had dire consequences on the market as a whole. Millennials are entering the real estate much more slowly than generations before them, for both economic and social reasons. From an economic standpoint, they are carrying far more student loan debt than ever before. About 71% of bachelor’s degree recipients graduate with loans today, which is up from 64% just 10 years ago. Additionally, the millennial generation has been heavily focused on moving into urban areas (where, from their financial standpoint, homeownership is virtually impossible).  

But, the oldest members of the generation are turning 30 now, and the housing market is simultaneously beginning to find health. This means that millennials are actually looking to purchase homes.

Studies show that 35% of home buyers in 2015 were millennials, which was up 3% from 2014.  These buyers had a median age of 30 years old, and were purchasing primarily single family homes within suburban areas. Based on the millennial exodus to urban centers (where they were primarily renting space in apartments), it’s very likely that millennials would like purchase homes in those urban spaces if the economy allowed for it. According Lawrence Yun, a NAR Chief Economist,

“The need for more space at an affordable price is for the most part pushing their search further out.”

According to Fortune Magazine, a survey was done to determine where millennials (ages 20-30) were looking to purchase homes. It was found that individuals were actively seeking out places where average wages and home prices worked hand in hand to make for a healthy living situation. Not surprisingly, the areas where millennials were purchasing homes were far away from the coasts, where housing cost are steadily increasing.

Currently, the most popular place amongst millennials looking to purchase homes is Utah. Not only does Utah tout some of the most affordable home prices, Utah County also has the fastest employment growth of the 342 largest counties in the United States.

 National Mortgage News has pegged the following cities as the top 10 cities where millennials are buying homes:

  1. Ogden, Utah
  2. Minneapolis, Minnesota
  3. Raleigh, North Carolina
  4. Salt Lake City, Utah
  5. Charleston, South Carolina
  6. Denver, Colorado
  7. Washington, D.C.
  8. Seattle, Washington
  9. Austin, Texas
  10. Portland, Oregon

As, the millennial generation continues to age, it will be interesting to see how their buying habits develop over time.