With mortgage rates falling to all time lows, many homeowners are wondering if refinancing their mortgage loan is a good idea. Obviously, there are many reasons to consider a home refinance, especially with mortgage rates so low. A few reasons to consider a home refinance are reduce monthly payment, lower interest rate, get extra cash, change mortgage term and go from an adjustable rate loan to a fixed rate loan.
Mortgage Rates At All Time Lows
The current market has caused mortgage loan rates to fall to historic lows making this a outstanding time to think about a home refinance. As long as there is a benefit to the new home loan, now is the best time to refinance your home loan. There are many opportunities to save thousands of dollars in today’s loan rate environment and mortgage loan rates will not stay at these levels forever.
Time to refinance and save money has never been better, but remember, it is important that you have a reason to refinance along with a benefit for the new mortgage home loan. Below are a few of the benefits to refinancing a mortgage loan.
Lower Monthly Loan Payment
When considering refinancing your home to lower your monthly payment, you need to take into consideration how much your payment will reduce by. The rule of thumb is that the payment must be lowered by at least 5% in order for the refinance to have a benefit.
Lower Mortgage Rate
Lowering your payment is greatly affected by the interest rate. If you refinance your home and reduce the interest rate by at least 1%, then you will see a decrease in payment as well. Many homeowners do not consider refinancing if the rate does not drop by at least 1%. Keep in mind, that even a small reduction in rate can have a major impact on the loan.
Cash Out Home Loan Option
Many homeowners will pull out cash during a refinance. The cash out home loans allow homeowners to refinance their existing mortgage loan and get extra cash that can go towards debt consolidation, home improvements or anything else the homeowner may want to use the cash for. Keep in mind that cash out loans have a slightly higher rate and that a homeowner needs to take into consideration the overall financial picture. There are times that a cash out refinance mortgage could have a higher rate than the current mortgage, but the overall benefit for the mortgage could outweigh the higher rate. For example, if a person has a $100,000 mortgage loan at 5% with a payment at $750 and has over $10,000 in credit card debt paying $500 per month, by refinancing into a new loan at 5.25% with a payment of $1000 will save this person $250 a month.
Change in Loan Term
Some people refinance their house to change the term of the mortgage. The most common change is to go from a 30-year loan to a 15-year note. The idea is to pay off the home loan quicker and save more money over the lifetime of the note. The payment could increase, but the benefit to this type of refinance is paying the property off sooner.
ARM to Fixed Rate Mortgage
Finally, another reason to consider refinancing is when you are taking an adjustable rate note and refinancing into a fixed rate mortgage. ARM loans can have a low rate, but the rate is variable and will change throughout the loan. ARM mortgages are designed for homeowners who plan on only staying in the home for a short amount of time, usually 5-7 years. By refinancing into a fixed rate mortgage, you are locking in the rate for the entire mortgage term.
There are some reasons to not refinance. If you are planning on selling your home in the next year or so, refinancing might not be the best option. You will have to consider the amount of money of refinancing and what the overall benefit will be.
With rates at all time lows, it’s crucial to talk with a mortgage officer and discuss your loan options to see if there is a benefit to a refinance home loan.
David White specializes in Home Loans. David is a Sr. Home Loan Banker with over 12 years experience with refinance home loans.