Main Reasons To Refinance Your Mortgage
Refinancing your home can have plenty of benefits that will help out a family. For many, it means lower payments that make monthly income go further. For others it means a financial return of sorts. The personal reasons vary, but here are some reasons that families typically refinance their homes and how it can benefit you as well.
Record Low Interest Rates
Depending on when you first purchased your property and took out a loan, you could be paying too much in terms of interest rates on the home. Currently, in order to stimulate the market, interest rates are at a record low. This means major benefits for homeowners and those that refinance their homes. Some of these lower interest rates could mean that you will be saving tens of thousands of dollars.
Less Time For Repayment
When you refinance your home, you are given a lower interest rate payment, but it could actually mean that you pay the homes off more quickly as well. When you do the necessary work to determine what your new interest rate could be, you may find out that a shorter loan period is well worth it. Not only will this save you money, but it could also result in you having a shorter loan period and paying off your home much more quickly than you had previously imagined. This has great advantages and once your home is paid off, that home can be used elsewhere.
Lower Monthly Payments
As alluded to in the previous paragraphs, lowering your interest rate and changing the amount of time for repayment could result in lower overall monthly payments as well. By refinancing and saving money on interest rates, the amount that you owe overall could be drastically reduce, meaning that you’ll be paying less with each month that goes by. Saving a few hundred dollars with each monthly payment on your home can easily turn into a few extra thousand dollars each year; which is surely a welcome addition to anyone.
Cash Out Options
For some, the option presents itself to refinance your home for getting a cash out in home equity in return. This usually means that you’ll get a sum of cash in exchange for the refinance that you just filed for. Witt this money, you can directly put it back into your home or use it on other large financial payments. Either way, the amount of a large sum of money is very tempting to some people and can have other financial benefits if allocated properly.
Changing Of The Loan
Looking back at the first reason to refinance, it was mentioned that loan options change drastically over time. If you were someone who originally entered into a loan that with an adjustable-rate mortgage, now might be the time to change that to a fixed-rate loan. Considering you don’t know what will happen with the economy or housing marketing the future, a fixed rate can help you plan accordingly for the future with a specific monthly rate for your loan. The idea is to get the fixed-rate loan when it is low, so that you can reap the benefits for the long term.
Refinancing your home is typically the best idea when you can put money directly into your wallet. Maybe that means on a monthly basis or maybe it means all at once. Either way, consider taking that money that you now have an use it to invest in other options. One idea is to put it directly into another housing project and use that investment property for financial gain. Be sure to consider that once you have that extra money, you use it wisely rather than just let it sit around or blow it on something pointless.
When the terms are in your favor
Refinancing your home can be a fantastic option. It will likely put money back in your pocket, either directly or indirectly, with monthly payments or cash sums. Either way, the financial investment you made into a home can look much more appealing as in the future if you refinance your home.
When Should You Convert a 30-Year Mortgage to 15 Years?
By: Aaron Crowe
Refinancing a 30-year fixed home loan to a 15-year loan can help homeowners own their home outright sooner, but it can also lead to an advantage they may enjoy just as much: saving thousands of dollars.
If you can afford the extra monthly mortgage payments, switching to a 15-year loan can be a good choice.
The shorter loan usually has a lower interest rate that will result in less interest being paid over the life of the loan, though the monthly payments will be higher than they were for a 30-year loan.
But there are other considerations, financial experts say, including other debts and if the extra money that would be put into paying off a home loan sooner could be better used elsewhere.
Patrick Ruffner, branch manager at GuaranteedRate.com, offers the example of a $200,000 loan on a 30-year fixed mortgage at 3.875%, which will pay $138,570 during the life of the loan.
The same loan at a 15-year fixed rate of 3.125% will have total interest payments of $50,779, while increasing the monthly mortgage payment by $400 a month. The interest savings is $87,000.
Here’s a rundown of things to consider if refinancing to a 15-year mortgage loan is right for you:
1. Afford higher payments?
The savings listed in the example above is enticing, but should raise the first question to anyone considering changing loans: Can I afford the higher payment? The increased payment may affect how comfortably you live, and could affect if you qualify for the loan because it will change yourdebt-to-income ratio, Ruffner says. full article
Refinance tips from MortgageLoan.com
What is a refinance?
The term “refinance” is a bit misleading. While it sounds like you are somehow reworking your old mortgage, you are actually taking out a new mortgage and using the proceeds to pay off your old mortgage. In other words, you’re trading out your old mortgage for a brand new one.
When does it make sense to refinance?
To really take advantage of the benefits of a refinance, it’s important to time it correctly. Here are a few ways to know if the timing is right:
- If you have a fixed rate mortgage and the rates have fallen to levels below the rate that you are paying.
- If you have an A.R.M. and rates are starting to rise.
- If you are less than ten years into your current 30-year mortgage and rates are lower than what you are paying now. If you have been paying your mortgage for longer than that, you are currently paying more principal than interest. If you get a new mortgage, you start the cycle over again and will be paying mostly interest again, which may not make sense.
Is a refinance worth it?
The easiest way to figure out whether or not it’s worth it to refinance is to use one of the many available online refinance calculators. They will help you to determine how long it will take to recoup the expense of refinancing with the new savings.
People often refer to this as the “break even” point, which basically means that you figure out how much you will be saving each month and compare it to the cost of the refinance to figure out how long it will take to recoup your money.
The rule of thumb is that, if you plan to stay in the house long enough to recoup the entire cost of refinancing, then it is worth it.
How is the process different from getting your original mortgage?
The refinance process is very similar to the one you went through when getting your original mortgage. It is the same process of inspections and the same round of closing costs and fees. In most cases, an appraisal will also be performed on your house. The only real difference is if you are responsible for a prepayment penalty.
If you fumbled any part of this process due to inexperience the first time around, this is your chance to learn from your mistakes and come out ahead.
What are some of the main benefits of a refinance?
Saving money is the primary reason that most homeowners decide to refinance, but there are many other benefits. Here are a few of them:
Smaller monthly payments with a lower interest rate: When you first purchased your home, you may not have qualified for the best rate due to the financial environment at the time, as well as your personal finances. Since then, market rates may have fluctuated and, hopefully, your credit and other finances may have improved. Whatever the case, you may be able to get a lower interest rate on your mortgage, which will mean lower monthly payments for you.
Shorten or lengthen the payoff term of a mortgage: Shorten the term: In a nutshell, shorten the length of your mortgage, pay it off sooner, and owe less in interest payments over the life of the loan. This many mean that your monthly payments are actually higher, but the amount you pay in the end will be lower. Let’s say, for example, that you originally had a 30-year mortgage and have been paying it off steadily for eight years. Thanks to mortgage refinancing, you can switch to a shorter term of 10, 15, or 20 years. This can save you thousands of dollars of interest. Also, if the refinance rate is lower, but you maintain the same monthly payment, you will build up equity in your home more quickly, because more of your payment will be going towards principal.
Paying off your mortgage loan in 15 years rather than in 25 can save you tens of thousands of dollars in interest over the life of the loan. If you can afford the higher monthly payment and plan to stay in the home indefinitely, it’s well worth it.
Alternately, you can also lower the length of your mortgage as well as your interest costs without refinancing by paying extra on the principal every month. Refinance or not, it’s a good idea to try to squeeze in an extra mortgage payment or two every year if you can afford it.
Lengthen the term: If you are having trouble making your monthly payments, you can increase the length of your mortgage and bring those monthly payments down by spreading out the costs over a greater number of years.
Consolidate debt:If you are carrying a good deal of credit card or other debt, you can lower your monthly repayments through consolidation. To do this, you take out a mortgage loan large enough to pay off all the debts on your cards plus the balance on your old mortgage.
Raise money with a cash-out refinance: One way to put more money in your pocket is to tap into the equity that you’ve invested in your home with a “cash-out” refinance. In this scenario, you can raise the funds you need by taking out a loan that’s larger than your current one. As soon as you pay off the old loan, the excess funds can be used to pay for home improvement projects, college tuition, your daughter’s wedding, long-term care expenses, etc..
Increase your principal to avoid paying Private Mortgage Insurance: If you were not able to pay 20% down on your home when you first purchased it, you probably have to pay private mortgage insurance (PMI) every month in addition to your mortgage payments to secure your loan. If you now own at least 20% of the equity in your home, you may want to refinance your loan in order to stop paying the (now unnecessary) monthly PMI expense.
Some reasons not to refinance
Though it may seem on the surface that a refinance is always a good course of action, there are times when it is definitely not to your advantage:
It will ultimately be too expensive: If you only plan to stay in your home for a few more years, you may not break even after paying the costs of the refinance before you move out. There are many online calculators that can help you to figure out your “break even” point. Also, if you plan to extend the life of your loan to lower your monthly expenses, you should check to see what the total interest is that you’ll be paying over the course of the loan. Ultimately, your house is going to cost far more if you stretch out your payments, in which case it might be worth it to stick it out on a monthly basis—especially when you add in closing costs.
You’ve had your loan for a long time: If you’ve been paying off your mortgage for many years, you are now paying more of your principal than interest. By refinancing, you start that process again and most of your monthly payment will now be dedicated to paying down interest and not building new equity in your home—sort of a step back. Not to mention that sometimes that late in the process, you will not break even with the refinance charges.
Prepayment penalties: Some mortgages have a prepayment penalty for paying it off early, and that includes refinancing, which is essentially paying off your mortgage early. Again, you have to figure out whether or not you are breaking even with the penalty charges if your lender will not waive them—and sometimes they will.
Consolidating credit card and other debt: While using a mortgage to pay off high interest debt like credit cards is a great idea, you have to be sure that you can keep up with your payments. Defaulting on unsecured debt in the form of a credit card is not great for you credit, but defaulting on a mortgage where your house is the security could lead to foreclosure. If you know that you’ll quickly run up your credit card debt again, that is another reason that consolidating your debt might not be the best idea.
Taking cash out for an investment: Unless you are a savvy investor, this is probably not a great idea, especially if your mortgage rate is higher than the interest rate that you’d be getting from investing—and it likely is.
Is a second mortgage a better option than a refinance?
While a refinance is a great way to get your finances in order, sometimes a second mortgage can accomplish many of the same objectives. Here are a few of the goals of getting a refinance:
- Lower your monthly payment
- Shorten your pay-off term
- Optimize your loan structure
- Consolidate your debt
- Fund large, one-time expenses