With home mortgage rates falling to all time lows, several people are wondering if refinancing their mortgage loan is a good idea. Obviously, there are many reasons to consider a home refinance, especially with mortgage rates so low. A few reasons to consider a home refinance are reduce monthly payment, lower interest rate, pull out extra cash, change mortgage term and go from an adjustable rate home loan to a fixed rate loan.
Loan Rates At All Time Lows
Today’s market has caused mortgage loan rates to fall to historic lows making this a fantastic time to consider a home refinance. As long as there is a benefit to the new mortgage, now is the best time to refinance your home loan. There are several opportunities to save thousands of dollars in today’s mortgage rate environment and mortgage loan rates will not stay at these levels forever.
Time to refinance and save money is now, but remember, it is important that you have a reason to refinance along with a benefit for the new mortgage home loan. Here are a few of the benefits to refinancing a mortgage loan.
Reduce Monthly Loan Payment
When considering refinancing your property to reduce your monthly payment, you need to take into consideration how much your payment will be lowered by. Most believe the payment must reduce by at least 5% in order for the refinance to have a benefit.
Lower Mortgage Loan Rate
Lowering your payment is in large part affected by the interest rate. If you refinance your house and lower the interest rate by at least 1%, then you will see a reduction in payment as well. Most people do not consider refinancing if the rate does not drop by at least 1%. Keep in mind, that even a slight reduction in rate can have a major impact on the mortgage.
Cash Out Mortgage Loan Option
Many homeowners will pull out cash during a refinance. The cash out home loans allow homeowners to refinance their existing mortgage and get extra cash that can go towards consolidating debt, home improvements or anything else the person may want to use the funds for. Keep in mind that cash out mortgages have a slightly higher rate and that a homeowner needs to take into consideration the overall financial picture. There are times that a cash out refinance mortgage could have a higher rate than the current mortgage, but the overall benefit for the mortgage could outweigh the higher rate. For example, if a person has a $100,000 mortgage loan at 5% with a payment at $750 and has over $10,000 in credit card debt paying $500 per month, by refinancing into a new loan at 5.25% with a payment of $1000 will save this person $250 a month.
Change in Mortgage Term
Some homeowners refinance their house to change the term of the mortgage. The most common change is to go from a 30-year mortgage to a 15-year mortgage. The idea is to pay off the note faster and save more money over the lifetime of the mortgage loan. The payment could increase, but the benefit to this type of refinance is paying the house off earlier.
ARM to Fixed Rate Mortgage
Finally, another reason to consider refinancing is when you are taking an adjustable rate mortgage loan and refinancing into a fixed rate mortgage. ARM loans can have a low rate, but the rate is variable and will change throughout the mortgage. ARM mortgages are configured for people who plan on only keeping the loan for a short amount of time, ordinarily 5-7 years. By refinancing into a fixed rate mortgage, you are locking in the rate for the entire mortgage term.
There are some reasons to not refinance. If you are planning on selling your home in the next year or so, refinancing might not be the best option. You will have to consider the cost of refinancing and what the overall benefit will be.
With rates at all time lows, it’s important to discuss with a home loan officer and discuss your loan options to see if there is a benefit to a refinance home loan.