It’s no secret that the housing market has experienced fluctuations over the last decade. In turn, so have mortgage rates. In 2008, the average interest rate for a 30-year, fixed-rate mortgage was 6.03%. Compare that to the average rate of 3.65% in 2016 and you could be looking at a difference of more than $100,000 over the duration of a 30-year loan. A mortgage refinance, essentially taking out a new loan to replace your old mortgage, can be a sound investment in these types of situations. Read on to understand a few of the common situations where a homeowner might consider refinancing their mortgage.
Reduce Your Interest Rate
There may come a point during the life of your loan where interest rates will dip below your current rate. Refinancing allows you to take advantage of the lower rate and save money. For example, if you took out a $200,000 mortgage loan in 2008 under a 30-year, fixed rate mortgage at the average rate of 6.03%, your monthly payment (principal and interest) would be about $1,203. If you refinanced your home in 2016 with the average rate of 3.65%, your monthly payments would have dropped to $915 saving you $288 per month. That’s a savings of $3,456 a year!
Change The Term Of Your Loan
Even if the interest rate has not changed significantly for the type of mortgage you currently hold, you may choose to refinance to shorten the term of your loan. The traditional 30-year, fixed-rate loan is one of the more popular types of mortgages. However, in some situations, it may make sense to refinance and shorten the life of the loan (e.g. 10, 15 or 20 years). Although this will lead to higher monthly payments, the loan will accrue less interest over time and save you thousands of dollars in interest payments. Alternatively, you may currently hold a 15- year mortgage but need to lower your monthly payments. Refinancing to a loan of a longer duration, even at a higher interest rate, could do the trick.
Switch Between Loan Types
Additionally, refinancing allows you to change your loan from a fixed-rate to an adjustable-rate mortgage (ARM), or vice-versa. There are benefits to both fixed-rate and ARMs, with opportunities to save money via refinancing to one or the other depending on your situation. For example, if you know you will be moving within the next few years, it could be a wise investment to switch from a fixed-rate to an ARM. This usually leads to lower rates and lower monthly payments, saving you money until you are ready to move.
The last reason to consider refinancing is to cash out, or take out a loan that is more than the amount remaining on your current mortgage. A wise use of this extra money could include paying down existing debt with other creditors, such as credit card companies, that is held at a higher interest rate. Generally, rates on cash-out refinances are more stable than other types of loans, however the rate itself will be higher than a traditional refinance.
Other Things to Consider
It’s best to come up with a goal when considering refinancing. Homeowners tend to refinance their homes to save money on their monthly payments. However, you must also consider the overall length of your mortgage, as well as the corresponding total amount of those payments.
For example, if you are 3 years into a 30-year mortgage and decide to refinance to another 30-year mortgage at a lower interest rate, you’ll be starting the clock over again on that 30 year term. The extra payments you make could offset the interest rate savings should you decide to stay in the home for the duration of the loan.
Additionally, don’t forget that a refinance requires a similar process to your original loan approval. As such, there may be fees associated with items such as closing costs and home appraisals. Be sure to weigh these costs against the potential savings that a refinance can provide.
If you have any questions about your refinancing options, give us a call or stop by your local Equity Bank branch. Our team of lending specialists can help you analyze all of these factors so that you understand the exact impact, down to nickels and pennies, of a refinance in your situation. As the Official Bank of Homeowners, we want to make sure that you are aware of the various options that could save money for you and your family.