Mortgage rates had fallen to one of the all-time lows. The trend started a year or so before when the Covid-19 pandemic hit the global economy. With lower interest rates, everyone going for refinancing or opening a new mortgage plan isn’t surprising. However, you should carefully analyze your situation before making the final call.
Refinancing is a great choice when interest rates are lower. However, not everyone’s circumstances are similar. For instance, if you initially had a 15-year fixed interest rate mortgage, and you’re into the 11th year of it, will it make sense for you to refinance?
There are some other repercussions as well with refinancing. Let us briefly discuss some of them and some smart reasons before you can make the final decision on a mortgage refinance.
Before you Think of a Mortgage Refinance
A mortgage refinance comes with great benefits. However, closing costs and some other critical factors may compel you to give it a second thought. You should always perform a cost-benefit analysis before going for a cash-out refinance option.
Closing costs can be around 2%-5% of your refinanced loan. Some lenders offer zero closing costs with certain conditions. These options will embed the closing costs with a slight adjustment in the interest rates.
Along with closing costs, here are some key points to remember:
- Clearly define your objectives with a mortgage refinance
- Verify if your credit score is ready for a refinancing
- You’ll have hard inquiries on the credit report
- Consider the closing costs
- Consider the remaining term of your existing loan against the new term
Refinancing can be your best option if you’re planning to live in your current house for a long time. If you wish to relocate or sell your house, the closing costs can prove costly.
Top Reasons to Refinance Home Mortgage
Lower interest rates are the prime motivator behind the refinancing trends. However, that shouldn’t be the only reason to opt for cash-out refinancing.
Here are our top reasons that you should consider for a mortgage refinance.
Lower your Interest Rate
The current national average interest rates for a 30-year mortgage are down to 2.86%. The current rates for 15-year fixed and 5/1 AMR mortgages are 2.08% and 2.17%, respectively. These rates were around 3.70%, 3.60%, and 3.40% two years ago, respectively.
Lowering your interest costs and hence the monthly payments are prime objectives of any mortgage refinance option. If you have a high monthly payment on your current mortgage, you can lower it with a refinancing option.
Refinancing your mortgage will come with lower interest rates right now. However, these rates are not going to stay in the lower slabs forever. Thus, it’s an ideal time to go for a cash-out refinance.
A refinancing would also reset your loan maturity term. It means your monthly payments would get even lower. Additionally, you may save some cash out of refinancing for emergency funds as well.
Debt Consolidation
All right, the mortgage rates are currently at their lowest. Does that mean all types of loans are offering the same rebate? Unfortunately, not.
Credit cards are one such type of loan that comes with high-interest rates. Credit cards still come with double-digit interest rates. Unsecured loans also come with higher interest rates than a house mortgage that comes with collateral.
If you are looking for debt consolidation, a home mortgage refinance is a wise option right now. You could lower the total monthly payments by consolidating the interest rates of different loans into a single one. You’ll be better off paying lower interest rates on a mortgage loan for a more extended period than paying higher interest costs on unsecured loans for a shorter period.
Debt consolidation can be a viable option for many borrowers. However, you must consider the additional costs that may come through refinancing. For instance, you may end up using all of your home equity, which in turn may make refinancing a riskier option. Hence, you may need a PMI or incur a slightly higher interest rate than usual.
Settle Your PMI
Lenders ask for private mortgage insurance (PMI) if you fail to pay at least a 20% down payment. Lenders also ask for a PMI from borrowers with bad credit scores. It also depends on the home valuation. If your down payment does not cover 20% of the total home valuation, you’ll need a PMI.
Apart from the interest rates, PMI cost is an important factor to consider for refinancing. If your home value has increased and you’ve covered at least 20% equity, your lender should remove the PMI condition. However, lenders often consider it a risky move with changing interest rate environment. A cash-out refinancing with lower interest rates and a tapped home equity will remove your PMI costs.
Caution: If you do not meet the 20% down payment rule, refinancing with lower interest rates may not prove beneficial as PMI costs would come in with the new loan.
Tap your Home Equity
If you’ve been planning for a house repair, renovation, or maintenance work, you can go for refinancing as well. You can save some cash from a home refinancing deal if you have built home equity over time.
You can utilize this option if you’ve already paid a substantial portion of your existing mortgage. Else, if your house price has increased over time. Tapping home equity is a viable option for many borrowers with a cash-out refinancing option. The upside of tapping home equity is that you can utilize these funds as you wish.
Tapping home equity with a cash-out refinance only makes sense if you plan to live in that house for a longer time. Make sure to fully analyze the cost-benefit here and the purpose of extra cash you receive with a mortgage refinance.
You have an ARM Mortgage Plan
Lenders charge adjustable mortgage rates higher than fixed interest rates. Variable rates can go down such as in the current economic fall that makes it risky for lenders. Hence, they charge higher variable rates on mortgages than fixed interest rates.
If you have a home mortgage with a higher ARM, it’s the right time to convert that into a fixed interest rate mortgage. Fixed interest for a long-term loan such as a house mortgage makes sense for the borrowers. You know the exact monthly interest payments and terms of the loan.
Adjustable mortgage rates change over time. AMR mortgages often involve balloon payment after a certain time. Hence, switching to a fixed mortgage loan when interest rates are lower makes sense financially.
So, is it the right time for you to get a mortgage to refinance?
In short, yes. If interest rates are your prime considerations, then it is the right time. Interest rates will increase gradually from now onwards and wouldn’t stay low forever. However, not every borrower’s situation is similar.
Remember, refinancing means you are resetting the loan term. In that sense, your final decision for a mortgage refinance should align with your life goals. Only you can make the best decision after comparing the benefits and risks associated with a refinancing decision.