With mortgage loan rates falling to all time lows, several homeowners are wondering if refinancing their mortgage loan is a good idea. Obviously, there are several reasons to consider a home refinance, especially with home loan rates so low. A few reasons to consider a home refinance are reduce monthly payment, reduce interest rate, get extra cash, change mortgage term and go from an adjustable rate home loan to a fixed rate mortgage.
Mortgage Rates At All Time Lows
The current market has caused mortgage loan rates to fall to historic lows making this a fantastic time to consider a home refinance. As long as there is a benefit to the new home loan, now is the best time to refinance your mortgage. There are many opportunities to save thousands of dollars in today’s mortgage rate environment and mortgage rates will not stay at these levels forever.
Time to refinance and save money is now, but remember, it is very important that you have a reason to refinance along with a benefit for the new mortgage home loan. Here are a few of the benefits to refinancing a mortgage loan.
Reduce Monthly Loan Payment
When considering refinancing your house to reduce 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 reduce by at least 5% in order for the refinance to have a benefit.
Reduce Mortgage Loan Rate
Reducing your payment is greatly affected by the interest rate. If you refinance your property and lower the interest rate by at least 1%, then you will see a decrease in payment as well. Most people 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 huge impact on the mortgage loan.
Cash Out Mortgage Option
Many homeowners will pull out cash during a refinance. The cash out home loans allow homeowners to refinance their current mortgage 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 home 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 loan could have a higher rate than the current mortgage, but the overall benefit for the loan could outweigh the higher rate. For example, if a person has a $200,000 mortgage loan at 5% with a payment at $1400 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 $1500 will save this person $400 a month.
Change in Loan Term
Some homeowners refinance their home to change the term of the mortgage. The most common change is to go from a 30-year note to a 15-year loan. The idea is to pay off the mortgage faster 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 house off sooner.
ARM to Fixed Rate Loan
Finally, another reason to consider refinancing is when you are taking an adjustable rate note and refinancing into a fixed rate mortgage loan. ARM mortgages can have a low rate, but the rate is variable and will change throughout the loan. ARM mortgages are configured for people who plan on only staying in the property 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 cost of refinancing and what the overall benefit will be.
With rates at all time lows, it’s important to discuss with a home loan officer and talk about 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 Officer with over twelve years experience with refinance home loans.