It is no question that mortgage rates are still low right now, the real question is how long are they going to stay like this? Well unfortunately there is no exact answer for this but rates are looking to increase by this year. So would this be the right time for you to refinance? Let’s start with the basics.
What is refinancing? Refinancing is the process of obtaining a new mortgage in an effort to reduce monthly payments, lower your interest rates, take cash out of your home for large purchases or change mortgage companies. The reasons for refinancing are explained further below:
Securing a Lower Interest Rate
With rates being as low as they are now, refinancing might have crossed your mind. This is one of the most common reasons people refinance. The rule of thumb used to be that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, some believe that even 1% savings is enough of an incentive. Reducing your interest rate will lower your monthly payments and also increases the rate at which you build equity in your home.
Shortening the Loan’s Term
When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another loan that has a shorter term. If you currently have a 30-year fixed-rate mortgage, this could be a great chance to switch to shorter term mortgage. If you can afford a slightly higher monthly payment, it will be worth the change because you will save money on interest in the long run.
Converting between Adjustable-Rate and Fixed-Rate Mortgage
While ARMs start out offering lower rates than fixed-rate mortgages, ARMs are not locked into certain rates like Fixed-Rate Mortgages are, so therefore it is likely their rates have gone up. If this has happened to you, now might be a time to consider switching to a Fixed-Rate Mortgage which will result in a lower interest rate as well as eliminates concerns over future interest rate hikes.
On the other side of things, converting from a fixed-rate to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly payments, eliminating the need to refinance every time rates drop. Converting to an ARM could be a good possibility for homeowners who are not planning to stay in their home for more than a few years. If interest rates are falling, these homeowners can reduce their loan’s interest rate and monthly payment but they won’t have to worry about interest rates rising in the future.
Equity and Consolidating Debt
Homeowners often access the equity in their homes to cover big expenses like home remodeling or their children’s college education. People also use the equity to pay off some of their debt. Refinancing to tap into the equity is a good idea if the money is being used wisely, it can lead to a slippery slope of debt that can be dangerous to get into.
If you have any questions about if refinancing would be the right option for you, call us today! We are happy to discuss the options with you.