You have heard this once before, another neighbor, friend, or family member has refinanced their home mortgage and have saved a bundle on their mortgage payment. You’ve seen the news, you’ve read the morning newspaper, and have received fliers in your mail about how mortgage interest rates have reached their all time lows. So, is now the best time for you to refinance your mortgage?
To refinance your mortgage means that you are essentially having your new mortgage lender payoff the loan you currently have and taking out a new loan to either cash-out some equity in your home, or lower your monthly payments. We are going to talk about the basics of refinancing your current home loan, such as the reasons for refinancing your home loan and the steps that you would need to take to getting your mortgage refinanced. We are also going to discuss the many different options that you have available.
Why Should You Refinance Your Home Mortgage?
Many homeowners decide to refinance their mortgage for several different reasons. Homeowners choose to refinance for a wide variety of reasons:
- A homeowner would like to lower the interest rates available,
- Some would like to go from a 30 to a 15 year to build equity more quickly,
- Maybe you would like to go from a fixed mortgage rate to a 5 year arm (many choose this option if they are planning on moving within a couple years to received a lower mortgage interest rate,)
- Your credit rating has improved since you first took out the loan and you would like to take advantage of the new lower interest rates available to you, or
- Take out a line of credit to invest in home improvements (not as easy as it once was.)
Refinancing Your Home to Obtain a Lower Interest Rate
If you want to lower your interest rate and reduce your monthly payment, you will able to do so as long as the interest rate advertised to you is lower, the closing costs do not affect the principle amount borrowed significantly, and you choose not to cash out equity.
An important decision you’re going to have to make is how long you’re planning to remain in your residence. If you’re only planning on remaining in your home for a year or less, it will probably not benefit you to refinance. You’re going to have to evaluate if the cost to refinance your home is worth paying and thus outweigh the fees you’re going to have to pay to refinance the mortgage note. Discuss this with your mortgage professional and make an informed decision on whether the lower interest rate is worth it, or not.
Refinance Your Home to Build Equity More Quickly
Many homeowners refinance their home mortgage with the intentions on build equity more quickly. The money is coming in and they want to do the smart thing and get that home paid off as soon as possible. In this scenario, ask a mortgage professional about shortening the term of your home loan. Say you’re currently paying off your home on a 30 year term, you’re able to afford a higher mortgage payment, you may want to reduce the term to a 15, or a 20 year term. It will greatly reduce the interest over the life of the loan; you will own your home free and clear, and able to invest the savings into another investment.
Refinancing Your Home Mortgage to Change the Loan Type
Many have been sold on adjustable rate mortgages (ARM) when interest rates were much higher than they are today. If the lowest interest rate you could obtain was your main goal, an ARM is more than likely the product that you had chosen.
However, when mortgage rates drop, it would be wiser to take advantage of the lower interest rate and get it fixed to keep that rate over the life of the loan. If you keep an ARM, your mortgage rate is going to adjust to a higher rate in some point in time over the life of loan. In more cases than not, the interest rate skyrockets and makes the monthly mortgage payments to the homeowner unaffordable.
You can speak to a mortgage professional and ask him about what is called a “conversion period,” a conversion period would allow you to alter the mortgage note to a fixed rate without the need of refinancing. If you fall into this scenario, please make sure you ask your lender about it. It can save you a lot of fees that you would have to pay if you were to refinance.
Refinance to Cash-Out the Equity in Your Home
If you’re want to cash-out some, or all of the equity in your home for home improvements, payoff a car at a lower interest rate, whatever the case would be, you would want to ask your mortgage professional about a cash-out mortgage refinance. This transaction will allow you to take cash out of the equity you have built in your home. Home equity is the difference in the appraised value of your home and the amount you owe your lender. For instance, let’s say that your home is valued at $50,000 and the amount you own on your home is $25,000. This would mean that you have $25,000 in equity.
Please be aware that if you do deiced to cash-out equity in your home, it is possible to make your payments higher, so please take this into consideration.
Is a Mortgage Refinance Suitable For You?
Now that you know about the different options that you have, you’re going to have to ask yourself what these questions.
- What is the extent of time that you plan on living in the home that you’re refinancing?
- How much longer is it going to take to payoff your current home loan?
- Are you okay with paying the closing cost that it’s going to take to refinance your home? Example: broker fee, appraisal, underwriting, etc.
- Are you going to save money, or get out enough funds with the guidelines to make the mortgage refinance worth it?
These are the essential questions that you have to ask yourself to determine if refinancing your mortgage is worth it to you. If you would like to proceed with the transaction, your lender is then going to check your financial eligibility such as your credit score, the loan to value, your current income, etc.
Always get multiple quotes from multiple lenders before proceeding with your mortgage transaction. Always try your local bank first, since they tend to have lower closing costs then mortgage lenders and always read the fine print. I can’t tell you how many people I’ve heard of have gotten ripped off for not reading the fine print.