Today’s low interest rates have spurred interest in something else: refinancing! There has never been a better time to refinance your mortgage if you’re looking to secure an insanely low rate.
There are seven advantages to refinancing and locking in these low rates now, though, as always, you should consider your individual situation, goals and financial health before doing so.
- Low Rates
Let’s start with the obvious. The interest rate environment is extremely attractive right now. Refinancing into a lower rate can mean a lower monthly mortgage payment, putting more money back in your pocket.
You want to do the math on this one, however. Locking in a lower rate can seem like a no-brainer, but with costs and fees, it may not pencil if you plan to move in the foreseeable future. While every situation is different, it generally takes about five years to recoup these refinancing costs and see the benefits from a lower interest rate.
- Reduce Your Mortgage Term
A lower interest rate means more money toward your principal, which means you can pay off your mortgage faster. You can also refinance into a shorter-term mortgage to expedite this process.
For example, if you have a 30-year mortgage you can refinance into a 15-year mortgage. Some companies also offer 20, 15 and 10-year mortgages. A condensed mortgage timeline can put you on the fast track to financial independence – as long as you’ve done your homework and feel confident you can swing your new mortgage, which will include a higher monthly payment.
- Eliminate Mortgage Insurance
Borrowers who aren’t able to put 20 percent down (with the exception of VA loans) on their home have to pay private mortgage insurance, or PMI. This lowers the risk for lenders, but results in additional costs to your monthly mortgage.
PMI typically represents 0.5 percent to 1 percent of your entire mortgage on an annual basis. Borrowers can get rid of this extra fee through a refinance if their total home equity now exceeds 20 percent. Just like securing a low interest rate, eliminating PMI can result in noticeable savings every month.
- Consolidate Debt
Mortgages aren’t the only debt where interest rates play a vital role. High-interest debt, such as credit cards, private loans, auto loans and student loans should also factor into your financial decisions. A cash-out refinance can help you consolidate this debt and tackle the highest balances first.
While a cash-out refinance may sound like an easy solution to your debt problems, it does require some discipline. You need to be sure the funds go toward paying down this high-interest debt – and not to accruing any more of it. You also need to establish a payment plan that will allow you to pay down the remaining debt on a fixed monthly schedule.
- Fund Home Improvements
Reinvesting can be a great financial strategy, particularly when it comes to your home. These upgrades, renovations and repairs can be costly, however. A cash-out refinance allows you to use some of the equity in your home for these purposes.
One thing to note about home improvements is they’re not all created equally. There’s a difference between customizing a home to your family’s unique tastes and needs vs. enhancing the overall appeal of your home, which can increase the value. Always do your research to ensure this reinvestment is a sound strategy based on your home and your neighborhood.
- Combine a First & Second Mortgage
Homeowners who can’t put 20 percent down but want to avoid PMI sometimes take out a second mortgage that piggybacks off the first mortgage. This is normally achieved by obtaining two home loans from two different lenders. As you can imagine, holding two mortgages – often with two different interest rates – isn’t ideal for everyone. That’s where a refinance can help.
A refinance can combine the two mortgages, thereby streamlining the payments and interest rates. As with eliminating PMI, you want to be sure you have built up at least 20 percent equity in your home before combining your mortgages. Most lenders will also require at least a 12-month period between the time you secured the second mortgage and your refinance. Check with an experienced loan officer to see if this option is right for you.
- Provide Cash for Another Home
One of the benefits of building up home equity is the ability to leverage that equity. For some savvy investors, this may come in the form of purchasing a second (or additional) property. The funds from a cash-out refinance can help you do just that by providing a partial or full down payment on the new home.
As with any investment, you want to go into this one with open eyes. You’ll want to be clear on how much your new loans – including your new mortgage and your refinance – will cost per month and how long it will take you to see a return on investment (ROI). Though this option isn’t for everyone, it can be a great tool for some real estate investors.
There are many reasons to refinance in today’s low interest rate environment. You just want to be sure those reasons align with your goals. Refinancing can free up some cash now or secure more favorable terms for the future, but these options can come with a cost. That’s why APM’s experienced loan professionals are here to assess your situation and answer any questions you may have.
Contact us today for all your refinance needs!