Refinancing booms hit whenever mortgage rates drop significantly, falling below the trigger rate for many homeowners. This trigger rate is not the same for everyone — it’s the rate a homeowner decides is low enough to make refinancing worthwhile. There have been several refinance booms since the early 1990s. Generally, if refinancing will save you money, help you build equity and pay off your mortgage faster, it’s a good decision. With rates this low, even people who have fairly new mortgages may be able to benefit from refinancing. Consider refinancing if you can lower your interest rate by one-half to three-quarters of a percentage point this can substantially lower your monthly payment.
There are a variety of ways to refinance your mortgage. Finding the right loan depends on your goals. You may want to switch from an adjustable-rate mortgage to a fixed-rate loan that has a steady monthly payment, or you may want to shorten the term of your loan from a 30-year to a 15-year and save yourself a bundle in interest charges. A refi is also a way to get rid of private mortgage insurance after you have reached 20 percent equity in your home.
When the Federal Reserve lowers short-term interest rates, many people expect mortgage rates to follow. But mortgage rates don’t always move in lockstep with short-term rates. Avoid focusing too much on a low mortgage rate that you read about or see advertised. Mortgage refinance rates change throughout the day, every day. And the rate you’re quoted may be higher or lower than a rate published at any given time. Most homeowners opt for a straight rate-and-term refinance that lowers their interest rate and gives them a comfortable repayment term. Here are a few reasons, why homeowners (borrowers) should refinance:
- Lower Monthly Payment – To decrease the overall payment and interest rate, it may make sense to pay a point or two, if you plan on living in your home for the next several years. In the long run, the cost of a mortgage finance will be paid for by the monthly savings gained. On the other hand, if a borrower is planning on a move to a new home in the near future, they may not be in the home long enough to recover from a mortgage refinance and the costs associated with it. Therefore, it is important to calculate a break-even point, which will help determine whether or not the refinance would be a sensible option. Go to a Fixed Rate Mortgage from an Adjustable Rate Mortgage. For borrowers who are willing to risk an upward market adjustment, ARMs, or Adjustable Rate Mortgages can provide a lower montly payment initially. They are also ideal for those who do not plan to own their home for more than a few years. Borrowers who plan to make their home permanent may want to switch from an adjustable rate to a 30,15, or 10-year fixed rate mortgage, or FRM. ARM interest rates may be lower, but with an FRM, borrowers will have the confidence of knowing exactly what their payment will be every month, for the duration of their loan term. Switching to an FRM may be the most sensible option, given the threat of forclosure, and rising interest costs.
- Get Rid of Private Mortgage Insurance (PMI) – Low or zero down payment options can allow buyers to purchase a home with less than 20% down. Unfortunately, they usually require private mortgage insurance. PMI is designed to protect lenders from borrowers with a loan default risk. As the balance on a home decreases, and the value of the home itself increases, borrowers may be able to cancel their PMI with a mortgage refinance loan. The lender will decide when PMI can be removed.
- Avoid Balloon Payments – Balloon programs, like ARMs are a good ideal for lowering initial monthly payments and rates. However, at the end of the fixed rate term, which is usually 5 or 7 years, if borrowers still own their property, then the entire mortgage balance would be due. With a ballon program, borrowers can easily switch over into a new fixed rate or adjustable rate mortgage.
- Cash out a portion of the home’s equity – Generally, most homes will increase in value, and are therefore a great resource for extra income. Increased value gives the opportunity to put some of that cash to good use, whether it goes towards purchasing vacation property, buying a new car, paying your child’s tuition, home improvements, paying off credit cards, or simply taking a much needed vacation. Cash-out mortgage refinance transactions are not only easy, they may also be tax deductible. The 2017 tax bill changed how HELOCs and home equity loans are treated to where they are no longer tax deductible unless the debt is obtained to build or substantially improve the homeowner’s dwelling. The limit on second mortgage debt interest deductibility is the interest on up to $100,000 of second mortgage debt. Interest paid on a traditional first mortgage loan or refinance is tax up to a limit of the interest on a $750,000 loan balance.