It is important for the homeowner to have a clear understanding of their financial situation and objectives - keeping them in mind in order to acquire the loan most appropriate for them. This article highlights a few of the major reasons as to why people decide to refinance their mortgages.
If mortgage rates happen to be lower than when they were when the home was originally financed, or if the homeowner decided upon an adjustable rate mortgage accompanied with a lower interest rate than the current rate, monthly payment will decrease. That is assuming the homeowner doesn’t significantly shorten the loan term or cash out equity. When the home owner refinances, that means that monthly payments will be lowered and there will be extra money for those desired extras such as dinners, new clothes, or investing into a retirement or education fund. However, that is not the only reason to refinance, but it is possible for the homeowner to not have the funds to bring to the closing table at the end of the initial mortgage loan. Most of the time, all of the closing costs of the initial loan can be placed into a new loan, which means less money will come out of the homeowner’s pocket.
Even an interest rate reduction of one-half of a percent can make a difference in the payments that is quite noticeable. Due to the fact that fees associated with refinancing can extend into the thousands of dollars, it is important to go over the numbers and make sure that the home will be occupied by the residents long enough to recover the costs of this type of transaction. For example: If the total closing costs for the refinancing of the loan comes to $2,000 and the monthly payment is reduced by $80, it will require a period of almost twenty-five months to break even. It is important for the homeowner to know if the costs that come with the refinancing are worth it in the long run.
There is a general rule in the industry that states that if the present interest rate is lower than the mortgage by two percentage points, refinancing is something to consider. Mortgage lending competition is starting to turn the industry toward a looser rule of thumb. Those homeowners with good credit can get special deals on their closing costs from various lenders. In these cases, refinancing in order to achieve lower interest may make sense. Here is a rate table highlighting current rates in your area.
If the homeowner is in the position to make a monthly payment that is higher than usual because of good fortune or an increase in salary, the homeowner may want to think about switching from a 30-year mortgage to a 15 or 20 year mortgage. This allows the homeowner to build equity quicker and save more money on the financing fees. In other words, the homeowner builds equity at a faster rate without putting out substantial amounts of money every month. If refinancing costs are hard to justify, one doesn't need to refinance to lower the payment term. One can simply pay extra each month or consider bi-weekly payment options.
Some mortgages come with a pre-payment penalty, so even if it make sense to pay extra early on the loan, those with a pre-payment penalty may need to leave a small balance for a period of time near the end of the loan to avoid paying that extra fee.
Many homeowners decide to go for an adjustable rate mortgage because of the low rates in the beginning, especially before interest rates begin to fall. However, these mortgages are quite unpredictable and may increase without warning. This means the mortgage is able to fluctuate and can do so monthly by hundreds or even thousands of dollars. Many homeowners have the desire to move to a fixed rate mortgage after starting with an adjustable rate mortgage because of its added stability. Since interest rates are always fluctuating, the original deal suddenly becomes less attractive. People decide to change their loan programs so that they can capitalize on those available rates that are best for them at that time. If the homeowner’s adjustable rate mortgage is adjusting, that can be a great reason for the homeowner to refinance to acquire a loan containing a fixed rate. 30-year and 15-year loans are common, but some people also take out 5, 10, 20 or 40 year loans.
Achieving better credit scores is another great reason to refinance. If the homeowner’s credit score has gotten better because mortgage payments have been made on time, the homeowner may be able to take advantage of that improved credit by refinancing into a loan with lower interest rates decreased payments.
Debt consolidation that will help the credit score is another great reason for cash-out refinancing. The homeowner can use the money from a cash-out refinance to pay off other bills such as credit cards. This is the same as transferring the debt into the home loan. Due to the fact that mortgage rates are most likely lower than that of credit cards, not only will the total amount of monthly payments go down, but the interest paid will also be tax deductible. It is good to check with an accountant to make sure your home loan is structured in a way where you are allowed to deduct the interest payments from your income taxes.
The homeowner can use a cash-out refinance loan to tap into the equity that has been build up in the home. The homeowner may want to consolidate debts and pay off credit card accounts, send a child to college, or make improvements to the home.
Cash-out refinance is an easy way to pay off credit card debt, but you should only do it if you won't quickly run up the credit cards again. If you run up the credit cards again you end up with the same credit card payments & yet more debt against your home.
Through cash-out refinance, at closing the homeowner receives a lump sum. Those who are responsible put the money to good use. This may mean they are planning for retirement, making home improvements, or paying off other creditors charging higher interest rates.
Maybe the homeowner has paid off a car, inherited a sum of money, or received a bonus at work, if the homeowner is planning to own their home into retirement, refinancing down from a 30-year loan to a 20 or a 15 year loan may be a good move financially. The payments will rise, but the extra money can be used to cover the difference. By paying off the home earlier, the interest that is saved over the life of the loan is quite significant. The homeowner will also own the home free-and-clear sooner.
US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners with a steady payment history may benefit from recent rate volatility.