Refinancing your mortgage is a great way to save money and/or give you financial flexibility.
Its crazy to believe that interest rates went from 8% in the 1970, to 18% in the 1980’s and have dropped to record lows in the past 4 years. The federal reserve has dropped 30 year fixed mortgage loans from 6.5% four years ago to 3.4% to help boost the economy.
Because of the incredible drop in mortgage interest rates, experts agree, now is a great time to refinance your mortgage.
But before we get into the additional benefits of mortgage refinancing, here is a background on what refinancing is.
What is Refinancing?
Refinancing is the act of getting a new mortgage to replace the original mortgage on your home. This is done to allow the homeowner to get an even better interest rate and term.
During the process of refinancing, the original mortgage loan is paid off and the second mortgage is created. So it is NOT like the original mortgage is rewritten into a new one.
What are the Advantages of Refinancing?
Refinancing your house has numerous advantages and should only be done in a way that gives you the best return on your investment down the road.
Here are some of the biggest advantages of refinancing your mortgage.
Cash-out refinancing is where you can take out a new mortgage for more than you owe, but less than the home is worth, and you take out the difference in cash. A cash-out refinancing is very similar to taking out a home equity loan, so talk to a mortgage company to see which loan option is right for you.
Cash out refinancing allows you to take a huge lump sum of cash and apply it to anything you want, such as:
- Paying off credit cards
- Remodeling your house
- Medical bills
Lower Your Monthly Payment
Due to the incredible interest rates, now is a great time to refinance your mortgage and lower your monthly payment. For example, if you still have a mortgage from 5-10 years ago where your interest rate is still at 6-8%, you can refinance your mortgage and get your interest rate at 3.5% – 4.5%. Saving you 3% – 4% in interest alone.
Interest rate savings comparison for a $200,000 mortgage over 30 years:
In this example, lowering your interest rate of 6.5% to 3.5% will save you $367.05 / month and over $131,776.80 in interest over the life of the mortgage.
Refinancing to help lower your monthly payment is a great way to put over $300 back into your monthly budget. Think of what you can do with an extra $300 every month!
Change the Loan Program Type
One of the most popular reasons to refinance your home is to change loan types. For instance, if you have an Adjustable Rate Mortgage, and your fixed rate period is coming to a close, it may be wise to refinance your mortgage in order to lock in a lower interest rate over 15, 20 or 30 years.
Another popular reason for changing the loan type is to go from a 30 year mortgage to a 10 or 15 year mortgage and pay off your loan sooner. Many times homeowners start with a 30 year mortgage, but later, have the desire to pay off the home sooner after an increase in finances and ability to pay the higher monthly payment.
Managing Your Credit
Has your credit score increased since you qualified for a mortgage?
A higher credit score is another huge reason for homeowners to refinance their mortgage to qualify for a lower interest rate.
Managing your credit cards, vehicle payments and paying your mortgage on time will drastically help increase your credit score and help you to qualify for a lower interest rate.
Refinancing can also help with getting cash out and consolidating debt like credit cards. Essentially this is the same as transferring debt into your mortgage and is highly beneficial as the interest rate on credit cards is significantly higher than the interest rate on your mortgage. Plus, you can write off the interest rate on your mortgage.
Use the Equity in Your Home
Refinancing is a great way to use the equity in your home to give you an incredible return on your investment.
For instance, if you use the cash from your refinanced loan to improve your home’s value by landscaping or remodeling your house, you can easily recoup the value of the refi.
However, the flip side is that if you use the cash out to pay off credit cards and then run up the credit cards later, you’ll end up with the same credit card payments and more in debt.
Disadvantages of Refinancing Your Mortgage
There are a couple disadvantages with refinancing your mortgage that may be too cost prohibitive to make it worth while. Two of the most common disadvantages of refinancing are:
- Refinancing fees: The costs associated with refinancing your home has quite a few variables. Such as: credit score, lender and loan amount.
- Lower principal payment: Because you are starting over on a new mortgage, you will be starting from scratch on the amount of principal you will be paying each month. So if you are 10 years into your current mortgage, you have already paid the 10 highest interest portions of the loan and a refi will start that process over again.
This isn’t to say that you shouldn’t refinance your current mortgage, but you will need to see when your break even rate is and weigh the costs.
For instance, if you are planning on buying a new house before your break even rate, after fee’s and interest increase, then you will end up losing money on the refi.
However, if you plan on living in your house past your break even rate, then you can end up saving hundreds long term.
Refinancing a mortgage is great financially if it helps you to reduce your mortgage payment, or if it shortens your loan term, or helps you build equity more quickly.
The best thing to do is to contact a mortgage company to go over the best options that are available.
If you have questions on refinancing your house or would like to see if now is the right time to refinance, give us a call. We’d love to see if refinancing is right for you.
Frank Perea is a mortgage broker based out of Midland, Texas and serves clients all throughout eastern Texas including: Odessa Texas, Monahans Texas, Big Springs Texas among others.