With mortgage rates at historic lows, it can be difficult for homeowners to get straight answers on refinancing – is it right for you?
When, exactly, is the best time to refinance your mortgage? It all depends on your situation and reasons for refinancing. Getting a lower rate to save money is probably the main reason people refinance their home loans, but there are others. Here are six of them, starting with the most obvious:
Lower interest rate and lower monthly payments
Refinancing to a lower interest rate will save you money — both on your monthly mortgage payment and also in interest paid over the life of the loan.
Most people focus only on the rates and/or closing cost fees without realizing they can often save far more by structuring their loan correctly. Working with an experienced mortgage broker can give you insight and options you might not have known were available to you.
Do it before rates rise
This is not the time to wait. Rates are at historic lows right now. If your current rate is higher than 3.5 percent, you may be able to find a better deal to justify refinancing.
According to a survey of significant housing authorities such as Fannie Mae, Freddie Mac, and the Mortgage Bankers Association, a 30-year fixed-rate mortgage will average around 3.18% through 2020. Rates are currently hovering near this level as of May 2020. Action is key right now, there is no way to know when mortgage rates will start to rise again.
Rising home equity
If you currently have an FHA loan or put down less than 20 percent when you purchased your home, refinancing could get you out of your FHA loan and get rid of monthly mortgage insurance premiums. Depending on how long you have owned, you could have gained enough equity by now to put you in a better financial position and save yourself some money in the process.
Cash-out
A cash-out refinance can help you make home improvements or ease your debt. One thing to be aware of is that this usually involves refinancing your mortgage for a more significant sum than what you owe now. This still leaves your home as collateral for the bank, but if you can reduce the interest rate on your mortgage, you can use that lower rate to give you some cash-in-hand to pay off debt with much higher interest. For example, smart ways to use the money from cash-out refinancing include paying off higher-interest credit cards or putting money aside for emergencies or uncertain times.
Reduce loan term
A loan with a shorter term typically has a more attractive interest rate. Shortening the term of your mortgage can significantly decrease the amount paid over the life of the loan. For example, switching from a 30-year mortgage to a 15-year will increase your monthly payments, but drastically reduce the total interest through the life of the loan. This could potentially save you thousands of dollars in interest – and you’ll pay off your mortgage quicker.
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