Refinancing strategies for younger homeowners

Posted by  on Dec 01, 2014

Buying a house in your 20s can give you an important jump on building equity in your home. It can also lead to some particular challenges, as the ups and downs of establishing a career collide with the monthly imperative of making a mortgage payment.

Typically, the early years of a career are the lowest earning years. On top of that, young people are more likely to be changing jobs, while they also may still be working off student load debt and trying to start a family. All of this can cause financial stress, but refinancing can help relieve some of that stress.

Here are six examples of how to use refinancing to relieve the financial stress on younger homeowners:

  1. Easing the monthly budget. It may be due to an unexpected job change, or it may simply be that your career has not yet reached its peak earning years. In any case, it is not unusual for younger homeowners to struggle meeting their monthly financial obligations. Refinancing can help in a couple ways. Ideally, lower refinance rates can do the job by lowering your interest expense. Even if refinance rates are similar to your original rate, if you are a few years into a mortgage and refinance to a new 30-year mortgage, you can spread your remaining balance over a longer time and thus lower your monthly principal payments.
  2. Jump-starting your retirement savings. Early retirement savings can do the most work for you by compounding returns over a longer period of time, but younger employees often neglect retirement savings because they feel there are more urgent priorities. Refinancing in a manner similar to the one described above can ease your monthly payments enough to create room to jump-start your retirement contributions.
  3. Stabilizing your payments. The low initial rate on an adjustable-rate mortgage may have been a tempting way to get into your home, but at some point you should think long-term and stabilize your monthly payments by refinancing to a fixed-rate mortgage -- especially while refinance rates are still low.
  4. Financing long-term projects. No sooner do homeowners get into a house than they start seeing ways it could be better. Cash-out refinancing can be a cost-effective way to finance home improvements.
  5. Retiring your student loan debt. The amount of student loan debt outstanding increased by more than 50 percent in less than five years following the Great Recession; so if you still have this burden hanging around your neck, you are not alone. Compare current refinance rates to your student loan interest rate and see if you can lower your interest expense by paying off your student loans with a cash-out refinance.
  6. Eliminating credit card debt. Average credit card rates are nearly nine percentage points higher than mortgage rates; so if you have some credit card debt to pay off, cash-out refinancing could really cut your interest expense.

In the long run, the goal for your mortgage should be to pay it down so you can build equity. In the short run though, especially for someone in the early years of a career, the most pressing goal is to manage that mortgage so you can be sure to meet your monthly payments and your other financial obligations. The right refinancing can help you meet that immediate goal.


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