As a homeowner, it’s important to know about mortgage refinancing: taking out a new loan to pay off and replace your old loan. You might be wondering if it is a good time to refinance, and to find out what’s in it for you if you do. Can you get a mortgage with a better rate? Find a better type of mortgage? Or reduce your overall amount of debt? Below are three reasons to refinance your mortgage.
While you may have a lot of questions, refinancing your mortgage might be something you’d want to look at more closely. And although the process can seem like a lot to take on, a trusted financial advisor or lender can help you navigate the process to make sure you are making smart decisions that will ultimately save you money.
- Refinance your mortgage to get a lower rate
Refinancing your mortgage to a lower rate is a no-brainer if you’re looking to save money. Homeowners who refinance with a lower interest rate can reduce monthly payments, and in some cases, pay more principal and reduce the amount of the loan overall.
Instead of throwing your money away on interest, you could use that cash on your kid’s college fund, boost your emergency account, add to your retirement, or get those delayed home improvements done while increasing your home’s value.
A good industry standard rule is it’s a good idea to refinance your mortgage if you can lower your interest rate by at least one percentage point. This is a general rule, however, and should not be strictly followed. There are a few things that can influence your decision. One thing is the costs in doing so. You’ll want to find out how many months of interest savings it will take to break-even, or recoup the cost of doing the refinance, by running a refinance break-even analysis.
- Converting from an adjustable rate to a fixed mortgage rate
Before the housing market crashed, adjustable-rate mortgages (ARM) were a solid option that many homeowners and lenders took advantage of. And when rates are low, everything seems great because your payments are manageable. The problem with this type of loan is it’s easy to forget about your mortgage when rates are low. When interest rates go up, your loan will adjust as well as your payments, and you could be in for a rude awakening about how much you will owe.
An ARM made great sense when rates were high, and you expected them to drop in a few years. Refinancing your mortgage to a fixed interest rate can be ideal if rates are low when you get the loan, depending on your circumstances. If you’re looking for more stability in your finances and planning to stay in your home for the long term, locking into a low fixed rate means your payments will stay the same, unless you decide to refinance later on. You might see more savings in the short-term with an adjustable rate loan but switching to a fixed rate will benefit your bottom line in the long run.
- You Want to Pay Off Your Home Faster
Traditional mortgage loans are designed to be paid off over a longer period of time, which means you’ll pay more in interest, but your payments will be lower each month. If the idea of paying your home off over the course of a few decades doesn’t sound attractive, refinancing to a shorter mortgage term can help you pay it down faster.
Before you refinance your 30-year loan into a 15-year term, you need to consider the impact to your budget. Shortening your loan term means your monthly payments will be higher. You need to make sure you’ll be able to afford your mortgage loan now and in the future. You should ask yourself whether you’d be able to make the payments if you lost your job or had to take time off from work because of a health crisis.
If you’re worried about the possibility of not being able to make the payments, you might want to consider refinancing to a lower rate with the same term and just prepaying your mortgage. Even making just one extra payment each year toward your principal can save you a significant amount of money. Plus, you have more flexibility than you would with a shorter loan term.
While refinancing a home loan doesn’t make sense for everyone, as a homeowner, you want to look at all your options to find out what is right for you financially.
Refinancing your mortgage can be a great option to meet your specific goals and objectives. It can help ease your monthly budget, finance some home improvements, or even help you own your home free and clear in a shorter time. Whatever your goals, consult with one of our experienced loan originators today. They will help you weigh the benefits and costs and can provide a strong recommendation to fit your unique needs.
If you have questions and you need help, please contact us.
American Star Mortgage has helped many first-time homebuyers across Southern California find the perfect home loan. With years of mortgage experience, our team prides itself on assisting our clients in understanding all the elements of the refinancing process. Contact us at (844) 880-6296 or email us at [email protected].