Real Estate is often a family’s largest investment, and largest debt. Managing interest rates can save you tens of thousands of dollars over the life of the loan. But it is also true that your needs will change as your life changes as well, as your kids go to college, as your credit improves, and so like other investments, your loan should compliment your life goals and needs.
Some reasons for considering a mortgage refinance:
Saving interest with a Lower Rate
Naturally, a lower rate is better. With the right strategy, this will always save you money, however, you really need to analyze both the interest rate and payment savings with respect to the other factors like the loan pay off date to make sure your strategy will save you money over the life of the loan. We have great tools to help you compare new opportunities side by side with your current loan any and all transaction costs that go with a new loan.
Saving interest with a Shorter Term loan
Moving from a 30 Year Fixed to a 15 Year Fixed could be one of the best financial strategies. Even if you have a rate which is below the current market rates, moving to a 15 Year Fixed can save you thousand, if not tens or hundreds of thousands of dollars. Of course, you need to qualify for the larger payment that results from the faster principal payoff, and should be comfortable with a higher payment.
Sometimes, it’s the other way around; you got into a short-term mortgage to save on interest cost. But because of changed circumstances you really need a lower monthly housing obligation. In that case moving from a 15 Year Fixed to a longer term like 20, 25 or 30 Year mortgage may be a better idea, and give you some financial cushion.
Alternatively it may be that you want to be able to pursue other investment opportunities: to take advantage of employer ESPP programs,or fund your retirement account (401k, IRA or other), or invest in your education, etc. Especially in areas like California where real estate is so valuable, spreading your principal payoff over a larger number of years will lower on your monthly payment and give you greater flexibility.
If you have had an Adjustable Rate Mortgage and are getting worried about the future rise in rates, moving to a Fixed-rate mortgage (FRM) may be a good idea. This is recommended if you plan to keep the mortgage for a very long time. Fixed rates loans are at a very low level historically, so locking in a low fixed rate for the life of the loan gives you the peace of mind.
If your ARM loan is nearing the adjustment period and you are not planning to keep the loan for a long time, moving into another ARM will save you on interest cost. With 5 and 7 Year ARM pricing at least 1% lower than the fixed rate loans, it makes sense to save on monthly payment and interest cost by moving to an ARM from another ARM.
Home appreciation or the paying down your loan amount over time, and usually a combination of the two, may allow you to refinance to drop the mortgage insurance you pay each month on your loan. If your loan is at 80% of market value, then removing your MI is possible. Assessing your value may also allow you to take advantage of other options such as a HELOC 2nd that can remove the MI if you aren’t quite at 80% equity. While Mortgage Insurance may have been a key tool in getting you into your home. Removing it is advantageous.
If you have big expenses or major purchases, doing a cash-out refinance may be a great idea. Many people use cash out to diversify into other investments, like a down payment on a second home, other will utilize that equity to invest in a child’s college. Debt Consolidation – Alternatively, if you have revolving accounts (credit cards) that are snowballing, it can be an effective way to improve your monthly cash flow, consolidate debts and lower the total interest you are paying to regain a financial footing. Typically it will be much less expensive than borrowing from some where else or breaking into your retirement account early.
If your had low credit when you acquired your current loan or have a higher rate, refinancing will help you lower the rate.
There are different aspects that can affect needs and your borrower profile over time, so analyzing your options periodically is something we do with all of our clients. It’s a long term, trusted partnership.