Refinancing is done to earn homeowners a lower interest rate on their mortgage. If you’re interested, you may be able to earn a lower interest rate too, given your credit score has improved or the condition of the market has changed since you started your original mortgage.
According to Nerwallet.com “On Thursday, July 16, 2020, the average rate on a 30-year fixed-rate mortgage was unchanged at 3.162%, the average rate on a 15-year fixed-rate mortgage went up two basis points to 2.705% and the average rate on a 5/1 ARM rose two basis points to 2.9%, according to a NerdWallet survey of mortgage rates published daily by national lenders. A basis point is one one-hundredth of one percent. Rates are expressed as annual percentage rate, or APR. The 30-year fixed-rate mortgage is one basis point higher than one week ago and 93 basis points lower than one year ago.”
Lower interest rates help make your mortgage more affordable, and they can also allow you to build equity quickly. To help you make the decision and find out if you should refinance, you can compare your current payment rate to the rate you would pay with your refinanced loan by using a loan calculator.
Before refinancing you will need to find out your eligibility.
Your mortgage lender will review your existing debts, credit score, income, assets, the amount you wish to borrow, and the current value of the property during the application process. This is all similar to what you did when you purchased the house. Individuals that have improved their credit score or paid down other debts may be eligible for a better interest rate on their new mortgage.
The lender may also consider the loan to value ratio of your home. If it does not fit their guidelines they may offer less favorable terms or decline to offer a loan.
If housing prices have fallen in your area, your property may not be worth as much as you currently owe on your mortgage. If that is the case, it will be more difficult for you to refinance your home.
There are various benefits you can take advantage of when choosing to refinance your home.
You may choose to increase the term of your mortgage to lower your monthly payments or decrease the term to lower your interest rates.
Those currently with an adjustable-rate mortgage that tend to see an increase in interest payments may refinance to secure a fixed-rate mortgage that will not increase.
Sometimes those with an adjustable-rate mortgage can refinance to get a mortgage that has better terms, for instance, lower payment caps.
When refinancing for an amount larger than what you owe on your home, you could be able to take a cash-out option. The lender will provide you with a cash payment for this difference. The difference could be placed on your savings or used to make improvements to your home.
Yet, taking a cash-out option means you will have less equity, actually own less of your home.
WHEN NOT TO REFINANCE
Later on, in the years of your mortgage, you will earn a greater amount of equity for each payment, which limits the value you can earn from refinancing and restarting the payment process.
A lender may charge you for refinancing or paying your home off early if your mortgage has a prepayment penalty applied. If the charge can’t be waived it may limit the amount you will save by continuing with a refinancing plan.
If you plan to move in the near future, the amount you will save from lower mortgage payments may not surpass the amount it costs to secure your financing option. Calculate the number of payments you will be making, to find out whether or not you are likely to break even.
A break-even calculation can be used to compare the amount you are set to save when refinancing, weighed against any additional costs associated with refinancing. If you’re not pleased with the difference it might not be worth refinancing your mortgage.
Evaluating equity build-up on your current mortgage side by side to your refinancing options helps you decide if your new mortgage loan will allow you to earn more.
Hopefully, this quick glance at information will help you with the financial decision if you are considering refinancing.
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