Homeowners commonly choose to refinance for a variety of good reasons. Mostly, it is to score better mortgage terms–whether it is to lower your interest rate, shorten your term, remove mortgage insurance or any other personal benefit. According to recent news, refinances have been in high demand lately.
THE HIGH DEMAND FOR REFINANCING
Ellie Mae recently released the latest Origination Insight Report showing an increase in mortgage refinance loans.
The October ’17 data reveals that refinances made up 39 percent of all closed loans; the highest refi percentage since February. Refinances have stayed steady or increased every month since spring.
The facts don’t only show that mortgage refinancing is in demand, homeowners are refinancing faster, too.
According to the same report, refinances took an average of 40 days to close. In comparison, refinances took an average of 48 days to close last year.
THE RIGHT TIME TO REFINANCE
When you have a mortgage, you need to pay attention to the housing market and interest rates throughout the term of your loan. Always consider your existing loan and other better options.
You can’t just close a mortgage, pay it, and ignore what’s going on in the market around you.
Refinancing is something that all homeowners should consider periodically. Good timing can produce great savings.
It then begs the question, is now the right time for you to refinance?
There are many things to consider when asking yourself this question. To help you decide, here are some things you can consider.
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Interest Rates
Getting a lower interest rate for your mortgage is the best reasons to refinance.
Securing a lower mortgage rate reaps several benefits.
First, it helps you create monthly cash-flow savings by simply lowering your monthly payment. That savings can then be applied to paying off other higher interest debts or just added to your savings.
Second, a lower interest rate increases your home’s equity faster. The savings not seen through a lower payment is the increased portion of your payment that goes towards principle. Each month your loan balance goes down faster.
All things being equal, a lower interest rate could save borrowers tens of thousands of dollars over the life of their loan.
Borrowers should also consider higher interest rates if they have a different benefit created through a refinance such as removing mortgage insurance or debt consolidation.
Mortgage Terms
Refinancing to shorten your mortgage term creates unbelievable benefits. The difference in interest paid out over 30 years versus 15 years is staggering. Most 30 year mortgages require paying around three times as much interest.
If you refinance your 30-year loan to a 15-year mortgage you can score a lower rate but depending on how many years you have left your payment might go up to cut those years off your loan.
However, some borrowers can actually lower their payment if they convert to a 15-year loan. That usually happens when the borrower has paid somewhere over ten years already.
The other part of the equation when considering a 15-year term loan is what you would do with the money that would otherwise go to paying your mortgage since your loan is paid off earlier. Imagine putting thousands each year into savings or other investments.
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Mortgage Type
Mortgage types are something you should consider, too. If your current mortgage is an adjustable-rate mortgage (ARM) and rates seem to be moving higher, you might want to lock your mortgage to a fixed-rate loan. That way, you won’t have to deal with higher mortgage payments once the rates increase.
Conversely, changing a fixed-rate mortgage to an adjustable-rate mortgage can be a strategic move for specific situations.
Some homeowners know they will only be in their new home for a short-term period, so matching financing to be fixed for only that period can save a lot of money. Since the ARM usually starts off with lower interest rates, and the homeowner knows they will eventually move or refinance, they can enjoy the perks of a lower payment without having to worry too much about rising rates in the future.
Mortgage Insurance Elimination
Some borrowers with higher loan-to-values and all FHA borrowers will have mortgage insurance included in their monthly payment. Mortgage insurance doesn’t provide any benefit to you as a homeowner. It just makes your mortgage payment higher to protect HUD or the bank.
Borrowers would be wise to eliminate mortgage insurance even if it means taking a higher rate to do it. You must look at the total cost of the loan including mortgage insurance, not just the interest rate, when considering a refinance to drop mortgage insurance.
Equity
If you’re thinking about tapping your home’s equity to cover any major expenses, a cash-out refinance mortgage might be the answer for you.
After refinancing, the homeowner may pocket the difference and use it for whatever purpose it may serve. This can vary from home remodeling costs, paying a child’s tuition, debt-consolidation, and many other reasons.
This is another reason a borrower might consider a higher mortgage interest rate. Increasing your mortgage slightly to eliminate hundreds or thousands of dollars in monthly consumer payments can have life-changing benefits.
Cash-out refinances are easiest when equity is high. Recently equity in America has reached all-time highs making cash-out refinances very popular again.
THE DECISION IS IN YOUR HANDS
Keep in mind that refinancing is not for everyone. But, you should periodically assess your situation with an expert and see if your current mortgage calls for a refinance or not. Shop around if needed, get insights, and weigh the pros and cons.
You can also take advantage of mortgage tools like an online mortgage calculator to see whether it’s a good time to refinance.
Establish a trusted relationship with a lender you can depend on for your whole life so that someone else is helping you stay on track with the right mortgage.
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