Is it Time to Refinance?

As a homeowner, the potential to save money every month is appealing.  And as interest rates continue their downward trend, refinancing a current loan can lay the foundation for a new phase of financial freedom.  

In this article, we’ll discuss how refinancing can reshape a homeowner’s current payment structure by securing a new loan with a lower interest rate and payment, by shortening the term of repayment without significantly increasing monthly payment amounts, and by consolidating higher-interest debt.  

With interest rates reaching new lows, now may be the time to refinance, and avoid any potential rate spike in the future.  Even after a recent purchase, a new homeowner still has the potential to save money monthly. If following the rule of thumb to refinance when interest rates drop by three-quarters of one percentage point, 5.9 million homeowners can confidently make the decision to do so.  


Nearly one million homeowners who bought a house in 2018 can refinance into a loan with a lower interest rate today. 


Why Should I Refinance?  


Lower Monthly Payments:  

Refinancing offers homeowners the ability to replace their existing mortgage with a new loan at a lower interest rate, securing possibly hundreds of dollars in savings a month.  A $400,000 mortgage for a $500,000 home with a 5% interest rate results in a monthly payment of $2,626.45. However, by refinancing into a new loan with a 4% interest rate, monthly payments can decrease to $2,388.83, an annual savings of $2,851.44.  


Refinancing provides a great way to take advantage of the historical decline of interest rates.  Regardless of the potential closing costs, the money you can save from a new mortgage at a lower interest rate may offset these and other transaction costs.  Assess your needs and use HomeLend USA’s free tools to find out if refinancing is the right option for you.


Shorten a Loan’s Term:  

Whether lowering the total cost of a loan by reducing the number of payments regardless of interest rates, or maintaining similar payment amounts with a significantly shorter loan term, refinancing is a versatile option for many homeowners.  

Small increases or decreases in interest rates may stir-up concern and deter a homeowner from making the decision to refinance.  But, even with small changes in either direction, significant reductions to the total cost of a loan are possible by refinancing into a shorter-term loan.  While monthly payments will increase when shortening a loan’s repayment schedule, the money saved from fewer interest payments will result in a lower total cost.  


Using HomeLend USA’s Mortgage Calculator, you can easily determine the new monthly payment and corresponding total cost over time after refinancing into a shorter-term loan.  You can use the Mortgage Calculator to determine your own potential savings by refinancing into a shorter-term loan by clicking here.


For example, a $240,000 mortgage on a $300,000 home and 5% interest rate paid over 30 years results in monthly payments of $1,575.87, for a total cost of $567,313.20.  This same loan paid over 25 years with the same interest rate increases monthly payments to $1,690.52 but results in a lower total cost of $507,156.00: a savings of $60,157.20.  

When interest rates have decreased below the rate of an existing mortgage, a homeowner can refinance into a significantly shorter term loan without a similar increase in monthly payments.  The increased cost of a shorter-term loan can be offset when refinancing into a loan with lower interest rates.  

Consolidate Debt Under a New Mortgage:  

The credit cards, car loans, school loans, and other high interest debts have become common characteristics of the typical borrower.  But as life changes and efforts to repay these debts seem progressively fruitless, the lower interest rates of a mortgage become increasingly appealing.  

As the market fluctuates and values appreciate, the equity built-up in a home over time, together with the lower interest rates of a home loan, can be tremendous resources to homeowners seeking to pay-off their debts at a lower cost in a  shorter amount of time. Pursuing a cash-out refinance allows a borrower to leverage the increased equity of their home and secure a loan to pay-off credit card debt, car loans, school loans and other high interest personal debt.  

Many loan programs require a borrower to maintain a loan-to-value ratio of 80% or less before beginning the refinance process.  However, HomeLend USA offers several options to fit your unique conditions.  

Visit our website to get a free Refinance Analysis and learn how HomeLend USA can help you, by clicking here.  


To calculate your loan-to-value ratio, add the amount of debt you would like to payoff to the remaining mortgage amount, and divide by the current home value ( (current mortgage amount + debt to payoff) / approximate home value = loan-to-value ratio). 


A cash-out refinance into a loan with a lower interest rate can save money not only from the payments on the previous mortgage, but also from the high-interest payments on the multitude of other loans and debt.   

While refinancing can open up new resources to homeowners to pay off debt or to cover other large expenses, like home remodels, college tuition, and new investment opportunities, it is important to exercise caution when deciding if this course of action is right for you.  

Changing Loan Type:  

Multiple options exist to fit the various scenarios of a borrower.  The ability to change a loan’s type, moving from a fixed-rate loan to an adjustable rate mortgage (ARM), or vice versa, enables a borrower to take advantage of lower rates.  However, the decision to change from one type of loan to another depends upon the future plans and financial preferences of a homeowner.  

Declining interest rates, for example, may draw a borrower from an existing adjustable rate mortgage (ARM) to a fixed-rate loan to secure lower monthly payments.  Whether a homeowner plans on remaining in the same home for a significant period of time or seeks more stability, a fixed-rate loan can lock a borrower into a known rate.  While there is no guarantee that this fixed-rate will not be beaten by a lower rate in the future, it protects a homeowner from sudden increases. So, switching from an ARM to a fixed-rate loan is a great way to allay those concerns over future interest rate increases while maintaining a new lower rate for the rest of the repayment period.  

Refinancing from a fixed-rate loan into an ARM becomes a more optimal option for a homeowner who plans to stay in their current home for a relatively short period of time.  While rates may appear to be consistently declining at the time of refinancing, the volatile nature of interest rates does not guarantee they will stay low. An ARM not only allows payments to decrease with lower interest rates, but can also result in increased payments if rates increase.


Refinancing to change your loan type can be a great option to take advantage of decreasing interest rates.  But be sure to choose the best type for your specific conditions by asking, “How long do I plan to stay in this home?”


Conclusion: 

Ultimately, the goal of refinancing is to save money by reducing a current monthly mortgage payment, shortening the term of an existing loan, or controlling personal debt.  When an individual uses the opportunity to refinance as an excuse to restart rampant spending, however, the potential benefits and cost savings are lost.  

Refinancing itself is not a free process.  And to avoid taking on wasted fees on transaction costs, the loss of equity in a house, the addition of years of payments for a larger mortgage, and the return of high-interest debt, the advantages and disadvantages of refinancing should be heeded.  


Two key questions may help you, as a homeowner, decide whether refinancing is the right decision, so you can make the savings work for you:

1.  How long do I plan on staying in the house I plan on refinancing?

2. How much money will I save by refinancing?


 

Jack Chaben

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