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Timing is Important When you Refinance
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Refinancing - Is Now a Good Time to Refinance?
Homeowners refinance for many reasons. Before
you decide if and when to refinance your mortgage, you should consider
the following:
- your reasons for refinancing.
- the interest rate of the existing mortgage.
- the interest rate of the new mortgage.
- the cost of refinancing.
- how much equity you have built up in your home.
- your current income and credit status.
To
Get a Lower Interest Rate Mortgage
One of the main reasons homeowners refinance their mortgages is
to take advantage of lower interest rates. For example, suppose
you have a fixed-rate
mortgage, but interest rates have declined since you first
obtained your loan. You may find that now you can get a new loan
at a lower rate of interest. You can reduce your monthly payments
when you refinance from a higher rate loan to one with a lower rate.
If you plan to remain in your home for several years, the savings
you will realize in the form of a lower monthly mortgage payment
could justify the costs of refinancing your home.
To
Build Equity Faster
Many homeowners want to build the equity
in their homes more quickly and choose to refinance from a longer
term mortgage to one with a shorter term. That’s because each
month a certain part of your payment goes to the interest
expense on your loan, with the remainder being applied against the
principal,
or loan balance. With shorter term loans, a greater percentage of
your monthly payment goes to the principal. For example, if you
currently have a 30-year fixed-rate loan, you might consider refinancing
to a 15-year loan, which will lower the total amount of interest
you will pay over the life of the loan and speed up the growth of
equity in your home.
To
Switch from an Adjustable-Rate Loan to a Fixed-Rate Loan
During those times when interest rates are higher, homeowners often
choose adjustable-rate
mortgages, which traditionally offer lower interest rates
during the early years of the loan than fixed-rate
loans. When rates come down, you may want to refinance to
a fixed-rate loan, which provides the stability and predictability
of knowing exactly what your mortgage payment will be for the life
of the loan.
To Switch from a Fixed-Rate Loan to an Adjustable-Rate
Loan
There are instances when a homeowner may wish to refinance
from a fixed-rate
to an adjustable-rate
mortgage (ARM). For example, if you feel constrained by
the expenses of your current mortgage, you could refinance to an
ARM to gain the benefits of lower payments. Remember, however, that
the interest rate on an ARM can increase at its periodic reset date,
which means that your reduction in monthly payment amount may only
be for a limited time. However, if you plan to live in your home
for only a short time and then sell, refinancing from a fixed-rate
to an adjustable-rate mortgage may make sense.
To
Draw on the Equity Already Built Up in Your Home
Through what is often referred to as a “cash-out” refinance,
you can tap the equity that has accumulated in your home to pay
for expenses such as the education of your children and home improvements.
For example, if your home is now valued at $150,000 and your loan
balance is $80,000, you might be able to get a new $112,500 mortgage
(cash-out refinances generally are limited to 75 percent of the
total value of your home). That would allow you to repay the existing
$80,000 balance and use the $32,500 for other financial needs.
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