(Article Updated June 24, 2019)
Interest rates for mortgages are low, and that may have you thinking about whether now is a good time to refinance your mortgage.
Here we discuss five financial situations in which you may benefit from a mortgage refinance:
✔ Getting a lower mortgage rate and lower monthly payments may save you money and create financial breathing room.
✔ Converting from an adjustable rate loan to a fixed-rate loan to lock in a low rate for years to come.
✔ Reducing your loan term could make you mortgage-free by retirement age or sooner.
✔ Consolidating a first and second mortgage with one loan could reduce your total monthly payments.
✔ Refinancing a Home Equity Line of Credit (HELOC) before it undermines your personal finances.
Let's look at each of these situations:
1. Lower rates and payments
One reason to refinance when rates are down is to reduce monthly payments and loan interest costs. If you can secure a lower rate than your original, you’d save in interest over the life of the loan. Refinancing also makes sense if you have Private Mortgage Insurance, or PMI, and your home value has increased enough that you have more than 20 percent equity. Refinancing into a lower rate not only saves in interest costs but also knocks out monthly PMI payments, which are typically 0.5 to 1 percent of the total loan on a yearly basis. For example, borrowers with a $300,000 mortgage and a PMI payment of 1 percent, that's a savings of $3,000 per year or $250 per month.
2. Convert from an adjustable rate to a fixed
When rates are low and borrowers expect to be long-term owners, it often makes sense to refinance from an adjustable-rate mortgage (ARM) into a fixed-rate loan. This will ensure that the monthly cost for principal and interest is set for the life of the loan. When you don’t convert before the introductory fixed period expires, you run the risk of your loan adjusting to a higher rate. So, if you think you’re going to stay in your home for the long haul, now’s a good time to opt-in for a fixed rate loan.
3. Refinancing for retirement
As you prepare to retire, you may be considering ways to reduce your expenses or increase your cash flow. For this reason, you might want to refinance to become mortgage-free by the time you reach retirement age. For instance, Joey is 45 and has 25 years left on his 30-year mortgage. If he is able to obtain a lower rate than his existing one and shorten the loan term to a 15-year mortgage, he’d save thousands of dollars in interest and become mortgage-free ten years sooner than with the original mortgage.
4. Combine two loans into one
Before the mortgage meltdown, borrowers often financed with two loans such as an 80 percent first loan and a 15 percent second (known as the “piggyback” loan). The problem is that the second mortgage may have had a higher rate and – more importantly – it may have had a shorter term, say 10 years. For many borrowers, the second mortgages are actually balloon notes with a huge payment due at the end of the loan term.
The strategy here is to refinance both the first and second loans and replace them with a single 30- or 15-year mortgage. In this situation, the balloon note disappears because it has been refinanced.
5. Exploding HELOCs
Home Equity Lines of Credit, known as HELOCs, allow people to borrow against the equity in their homes, serving much like a credit card with a given balance limit. With a typical HELOC, there might be a 10-year draw period when money can be taken out against the line-of-credit and then a five-year pay-down period when no withdrawals are allowed, and all the money must be repaid.
You can see the problem. Imagine that you owe $60,000 in home equity debt and must repay the entire amount over five years. At 4.19 percent, the monthly payment will be $1,110 – a figure that might be completely unaffordable. The alternative? Avoid foreclosure and refinance into a single loan to replace both the existing first loan and the line of credit.
Interest rates are still at historical lows. If any of the reasons discussed above could help you meet your financial goals and bolster your bottom line, then it may be time to consider a refinance. Speak with a loanDepot loan consultant today!
Disclosure: Information contained herein is provided for informational purposes only and is not an advertisement to extend consumer credit as defined by section 1026.24 of Regulation Z.