You’ve probably heard it often — another friend or neighbor has refinanced and is enjoying lower monthly mortgage payments. You may have read headlines that talk about mortgage interest rates reaching historical lows. So, you ask, is now the best time to refinance my mortgage?
Refinancing is essentially paying off your existing mortgage and taking out a new one. This section discusses the basics of refinancing, such as the reasons for refinancing and the steps involved. It also discusses your financing options. After you understand these basics, your Mortgage Advisor can help you with more information or get the refinancing process started.
When does it make sense to refinance?
Refinancing can help you lower your monthly payments, withdraw cash via the equity in your home, or switch to a different loan program that better suits your needs. Being clear about your refinancing goals will help you choose the loan program that’s right for you. What are your goals for refinancing?
- I want to lower my monthly payments
- I want to access ready cash
- I want to shorten the term of my mortgage
- I want to switch to an ARM or a fixed-rate mortgage
Overview of the refinance process
Five steps to refinance
Refinancing to lower your monthly payments
Refinancing to lower your monthly payments is easy: you simply switch to a loan with a lower interest rate. How do you know when to refinance? A good rule of thumb is to wait until interest rates drop .75%-1% below your current rate.
Another way to lower your monthly payments is to switch to a different type of loan. Interest rates on ARMs (adjustable rate mortgages) are typically lower than interest rates on fixed-rate mortgages, and loans with a shorter term (15-year, for example) come with a lower interest rate as well.
One last thing to consider may be your improving credit record. You may have taken out a higher rate mortgage because of inability to verify income, less-than-perfect credit, or bankruptcy or foreclosure. It was a great idea to get on the home ownership bandwagon and now it makes sense to take advantage of a lower rate.
Your Mortgage Advisor can help you find the loan that’s best for you!
Refinancing to access ready cash
The difference between your home’s value (what it might sell for) and the balance on your current mortgage is equity you can turn into cash to remodel your home, pay for college, or pay off high-interest debts. Used wisely, refinancing can be a smart way to free up cash and put your home’s value to good use.
Refinancing to shorten your mortgage term
The shorter the mortgage term, the better the interest rate and the less interest you pay overall. Provided you can afford the higher monthly payments, refinancing to reduce the term of your loan is generally a smart move. Shortening the term of your mortgage can also enable you to pay off your home before retirement, making it easier to live well on less income. The shorter term allows you to build equity in your home much faster.
Refinancing to change how interest is calculated
If you plan to move in a few years, switching from a fixed-rate mortgage to an ARM (adjustable rate mortgage) can significantly reduce your monthly payments. Because ARMs carry a lower interest rate during their initial, fixed-rate period, you pay less interest during the first few years of your loan than you would with a fixed-rate mortgage.
By the same token, if you plan to stay in your home for longer than the initial fixed-rate period of an ARM, you may want to switch to a fixed-rate mortgage so your monthly payments are predictable.
If you enjoyed this post, make sure you subscribe to my RSS feed!
