There is no better way to save money than to refinance your biggest and most persistent debt — a mortgage loan. No other loan in the history of mankind has caused so much anxiety and distress, especially in today’s times of high housing prices. Nevertheless, there is always a way to take some of the burden off your back if you know what to do, and fortunately for you, refinancing your loan is a simple process. I will guide you through the when, why, and how of refinancing, so that you will be better informed to take advantage of all the savings that a loan refinancing can offer you. If you’re ready to put some extra long-term money in your pocket, then read on.
What does it mean to refinance your home?
A refinance is when you, as a homeowner, decide to change the terms of your loan. These terms reflect things like your interest rate and length of repayment. There are several types of refinancing options in the United States. Two of the most common are Rate-and-Term Refinancing and Cash-Out Refinancing.
Rate-and-Term Refinancing is the most common option pursued for the purpose of lowering interest payments. The two variables being manipulated are the interest rate and the loan term.
Cash-Out Refinancing allows you to leverage your equity for the purpose of you taking out a second loan called HELOC(home equity line of credit), which works similarly to a credit card with its own limits. If you want to make improvements to your home or pay off a debt, taking out a second mortgage may be advantageous, especially because the payment on this type of loan will be low. Your home will be used as collateral, so make sure to spend your home equity money wisely.
Home equity is defined as your home’s current market value minus the debt remaining for you to pay off. In other words, it’s your present day ownership of a fraction of your home, which is based on your downpayment, mortgage payment history, and the amount your home has appreciated in market value.
Why should you refinance your home?
If the market is favorable, it may be a good idea to refinance for the purpose of snagging a lower interest rate for your loan. This can save you thousands of dollars in the long-run, as well as shorten the time it takes for you to fully pay off your mortgage.
For instance, let’s say you paid off 10 years of your loan already. The interest rate has fallen from the 5% you were paying to only 3%. You want to refinance to take advantage of the lower rate. The bank will let you refinance for another 30-year loan at a lower monthly payment. However, if you want to pay it off sooner, you can borrow for the remaining amount you owe on the home with a 20-year fixed mortgage at the lower rate. The monthly payments will be a bit higher compared to the first option (and lower than when you were paying 5% interest), but the debt will be paid off sooner and save you money.
If you have what’s called an Adjustable-Rate Mortgage (ARM), which is a loan that starts with a low introductory rate for a period of time, and then adjusts to a new, higher rate, you might want to take advantage of the low interest rates by switching to a fixed-rate mortgage. This will secure the current rate for the life of the loan.
If your credit status has improved, this is another situation where you can seek a better rate on your loan. On the flip side, if you’re in financial straits and need to lower your monthly payments to something more manageable, extending the loan term is an option. You may end up paying more over the life of your mortgage, but it could be beneficial for your day-to-day financial situation.
When is it a good time to refinance your home?
It’s not always a good option to refinance a current loan, so it’s important to know the right time to do it. As of July 2019, The Federal Reserve cut interest rates, which is fantastic news for borrowers. We are now seeing a major uptick in mortgage refinancing. According to Freddie Mac, a 30-year, fixed rate mortgage now carries an average rate of 3.64%. If you can save at least 1/2% on a loan, then this would be a good time to refinance.
How do you go about refinancing your home?
Before you refinance your home, there are a few requirements that you need to meet. In order to be considered a qualified borrower, you should have good credit, a stable income, and equity in your home. If a mortgage lender determines that you have a proper debt-to-income ratio (you can afford the monthly payments), your new mortgage loan will replace your old one.
Refinancing your home does not come without its costs. This is where comparing different lenders comes in handy. Costs vary by lender and location, and include the lender’s origination fee (typically 1% of the loan), home appraisal, document fees, and others. Weighing these costs with the long-term savings of refinancing is essential in deciding if this is something worth pursuing, and this largely depends on how long you expect to live in your home before selling it.
When looking to refinance your home, make sure it’s appropriate to do so. In these days of historically low interest rates, it might be time to seriously consider refinancing your home. The financial savings provided here are well-worth your peace of mind.