Home Ownership

5 Reasons Homeowners Should Consider Refinancing

One of the best features about mortgages is that a homeowner does not have to live with the same one forever. Even though the original mortgage came with a long term 30 year commitment, the most common length of mortgage, a homeowner can turn it in for better terms. At a time when mortgage rates are low, which is happening right now, there are 5 reasons that homeowners should consider refinancing.

1. Low mortgage rates are in place and have never been better. Homeowners need to consider the fact that once rates rise, they may never fall this low again. For at least a year, rates have bounced around historical lows which has set new records. With this in mind, anyone who has a higher mortgage rate should take advantage of a rare opportunity to move to lower rates. Homeowners who are interested in a lower monthly mortgage payment can refinance to the same terms that they currently have, but at a lower rate. Although this will return the loan to the original term, such as 30 years, the lower monthly payments will instantly put more cash in the hands of the homeowner which they can use for other expenses.

2. When mortgage rates are low, it gives the homeowner more options to work with. Another solution for homeowners is to reduce the term of the loan. When going from a 30 year mortgage to a 15 year mortgage, the amount of time that the loan is active is shortened. Since 15 year mortgage rates are even lower than 30 year rates, the mortgage payment could possibly be equal to the current payment or, in some cases, even slightly less. The benefits of doing this type of refinance is that the mortgage is paid off faster, the overall interest paid is significantly less and the homeowner ultimately grows equity at a faster pace. For this reason, refinancing to a 15 year mortgage has become very popular in recent years.

3. There has never been a better time to move from an ARM to a fixed rate product. Many homeowners opted for an adjustable rate mortgage in the past when rates were higher. Now that rates are low, it is the ideal time to refinance to a low fixed rate mortgage. The fixed rate mortgage offers a homeowner stability because the rate never changes and security because the mortgage payment remains the same throughout the life of the loan.

4. Many long term homeowners have accumulated equity in their homes over the years of paying their mortgage. In recent years, the interest charged on credit cards has increased significantly. The cash out refinance is often used for debt consolidation which ultimately combines all of these payments into one monthly payment. There is usually a significant amount of money that can be saved each month by doing this type of refinance. In other cases, the cash out refinance is used for home improvements instead of obtaining a home equity loan which usually has a higher rate. It doesn’t really matter what the need is, as long as the equity is there, the cash out refinance is a way to use the equity as cash at the lowest rate of interest available today.

5. For diligent homeowners, refinancing can be used as a savings tool. When the new mortgage payment is lower, some homeowners will put away the savings each month. The accumulated savings can be used for other things, such as financial planning. However, the savings can also be used at some point to make a principal payment on the mortgage which will reduce the years and total interest due on the loan. This is usually done when a homeowner opts for the longer term loan which reduces the monthly mortgage payment. The longer term loan is then reduced with each payment made to the principal amount. Even though many homeowners feel secure with the lower monthly payment, they can still shorten the term by making payments to the principal.

Since refinancing is a financial decision, homeowners must take into account that there are costs involved. For those who will be staying in the home for a short period of time, refinancing may not be the best idea. For the long term homeowner, it is definitely something that should be considered. To determine the best option available, it is always wise to compare both the long term and short term loan. Lenders can easily give a homeowner a Good Faith Estimate for both types of loans which will show all of the costs, as well as, the estimated monthly payments. When looking at it in black and white, always remember what the original goals are for choosing to refinance.

Rosemary has been writing since 2010 for FreeRateUpdate.com, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, mortgage processor, property manager, and a mortgage underwriter.

Comments (1)

  • When you have an asset that is not liquid, you may want to borrow against it! With interest rates so low, you may be able invest the proceeds in a better place. Perhaps a second home to rent out.


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