Deciding whether or not to refinance your mortgage is a big decision that should be considered carefully. If you are currently paying off a large home loan, refinancing your mortgage for even a small percentage difference in your interest rate can result in major savings in your monthly payment. As mortgage rates inch lower, it’s important to think about the following questions before deciding whether or not now is the right time to refinance your mortgage.
If you are currently in a significant amount of debt, refinancing to pay off your highest interest loans first can be a smart financial decision. If you have credit card debt, for instance, you may be paying as much as 20 percent interest, forcing you to spend much more each month to cover the interest fees. With current mortgage rates still near historic lows, now is the perfect opportunity to consolidate debt and put yourself on the track to a debt-free future.
You will need to pay closing costs if you refinance. While refinancing your mortgage will result in a lower monthly payment, be sure that you will own your home long enough to cover the closing costs. To better understand this, calculate the point at which your decreased monthly payment will cover the cost of refinancing — also known as the breakeven point. If you plan on selling your home prior to the breakeven point, refinancing your mortgage now is most likely an unwise financial decision.
Don’t focus too much on how much interest rates have dropped. Instead, look at how much money you can save based on the change in rate. A 1% interest rate reduction provides a lot more savings on a $500,000 mortgage as opposed to a $200,000 mortgage.
The more equity you have, the better the rates you can access. You can even avoid mortgage insurance. Home equity comes into play even more if the reason for refinancing is to access cash. As an example, owing $100,000 on your mortgage with $50,000 available equity may allow for a new loan of $125,000. With a lower interest rate, your monthly payments may stay the same while you cash out the extra $25,000.
Once you’re feeling good about your responses to the above questions, let’s consider the benefits of refinancing.
Many homeowners refinance to lower their monthly mortgage payments. It is a great option if interest rates are lower than when you originally financed your home or if you have an adjustable-rate mortgage (ARM) that will soon have a higher interest rate than the current rate. Refinancing can make a big difference on monthly payments, but it’s also important for the homeowner to consider the associated fees.
Homeowners can build equity faster if the homeowner is in a position financially to make a monthly payment that is higher than usual. This could allow the homeowner to switch from say a 30-year mortgage to a 15-year mortgage so he/she can build equity in the home quicker and save more money on financing fees. The money you save on interest payments is significant when moving from a 30-year to a 15-year mortgage.
The loan you started with may not suit you later on in life. The good news is: you have options! And the best way to understand those options is to work with a salary-based loan officer. This way your needs are put first. Maybe you want to get out of a high-interest rate loan to take advantage of lower rates. Or, maybe your ARM’s fixed-rate period is about to expire. No matter what your current loan is, you can trust there are a variety of loan programs available that can be customized to fit your latest stage of life.
Since mortgages require monthly payments, if the homeowner is paying those on time, it can help boost his/her credit score, which is a good reason to refinance. The homeowner can take advantage of good credit by having a refinanced mortgage loan with lower payments. The homeowner may want to invest in one type of loan program to start to build their monthly payment portfolio, improve their credit, and then consider refinancing at a lower monthly payment. Put in a little up front and get a lot in return. This benefit is worth the bang for your buck.
Every homeowner’s dream: paying off the mortgage and finally owning a home. Transitioning from a 30-year to a 15-year loan may boost your monthly payments. But paying it off sooner saves interest over the life of the loan, which is significant.
You now have an understanding of what’s involved and potential benefits you have access to. So, when is the time to refinance? There’s no right or wrong answer, of course, as it depends on each individual’s financial situation. Get additional questions answered, or even start the refinance process, by calling the salary-based mortgage consultants at American Financing. Many customers are saving up to $1,000 a month. Why not see what can be done for you?