First things first, refinancing a mortgage means paying off an existing loan and replacing it with a new one! There are many reasons why homeowners refinance such as; to get a lower interest rate, to shorten the term of their mortgage, to convert from an adjustable-rate mortgage to a fixed-rate mortgage, to tap into home equity to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt! Still with us?
Refinancing can cost between 2% and 5% of a loan's principal and requires an appraisal, title search, and application fees; meaning it's important for you to determine whether refinancing is a wise financial decision for you! Below we will go over some of the most important reasons why people would consider refinancing.
Refinancing to Secure a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan; the general rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment.
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term. For example, a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817.
Refinancing to Convert to an ARM or Fixed-Rate Mortgage
While ARMs often start out offering lower rates than fixed-rate mortgages, adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes. On the other hand, going from a fixed-rate loan to an ARM can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.
If rates continue to fall, the rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments eliminating the need to refinance every time rates drop.
The Bottom Line
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. Before you refinance, take a careful look at your financial situation and ask yourself: How much money will I save by refinancing? How long do I plan to continue living in the house?
Our experienced loan officers are always available and ready to help you make these types of big financial decisions. If you think you’re ready to refinance, don’t hesitate to reach out today!