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Refinancing
There are several reasons for a homeowner to refinance. Some
of the most popular ones are:
- obtaining a lower monthly payment
- build equity faster
- change loan type
- take advantage of an improved credit rating
- pull out equity in the home
By obtaining a lower mortgage interest rate a homeowner
can lower their monthly payment and this is the most common
reason homeowners refinance. Building equity faster is also
a popular reason because owning a home can be one of the
safest and most profitable investments you can make.
Lenders usually require that a homeowner have at least 5
percent equity accumulated in your property. Equity is the
difference between what your property is worth and the amount
you still owe on the mortgage. For example, if your house
is valued at $100,000, and your mortgage balance is $80,000,
you have $20,000 equity in your home. In this example, that
equals 20 percent equity.
So how much lower of an interest rate should you receive
on your new lown before you consider refinancing? A rule
of thumb that your new interest rate should be at least 1
percentage point lower than your current mortgage rate for
the new loan to provide beneficial savings. This is
just a rule of thumb, however, you need to consider how long
you plan to stay in your home after refinancing and whether
that amount of time will justify your upfront costs in refinancing
your mortgage loan. If you know you will be moving or paying
off your home in the next couple of years, it may not make
sense to refinance.
When considering whether to refinance or not, be sure to
monitor mortgage interest rates, and not bank or the federal
funds rate. Some homeowners think that each time the
Federal Reserve lowers the federal funds rate, that mortgage
rates will decrease as well. This often isn’t the case,
because most mortgage rates are not tied to the Federal Reserve’s
fed funds rate. Fixed-rate mortgage interest rates typically
track longer term rates set by the bond markets. The
most common benchmark is the U.S. treasuries 10 year bond
interest rate. So when deciding when to refinance your home
and lock in your new interest rate, be sure you look at the
movement of interest rates for the type of mortgage you want,
as opposed to just news headlines about Federal Reserve actions.
Switching from an adjustable-rate loan to a fixed-rate loan
is another popular reason for refinancing. When interest
rates are higher, homeowners often choose adjustable-rate
mortgages (ARMs), which usually have lower interest rates
during their early years than fixed-rate loans. When rates
drop, a homeowner might want to refinance for a fixed-rate
loan, which provides the stability and predictability of
knowing exactly what your mortgage payment will be for the
life of the loan. Some ARMs are conversion ARM’s. They
have conversion periods that allow you to convert your loan
to a fixed-rate mortgage for a one-time conversion fee. If
you have an ARM now, be sure to ask Jeff Daily about this
option.
Another reason is to obtain a loan that recognizes your
improved creditworthiness. If you had a history of credit
problems when you obtained your current mortgage, you may
find that you can now refinance and receive a loan package
that recognizes your improved credit by offering you a more
competitive interest rate. People with a history of credit
problems usually have to pay higher mortgage interest rates.
However, credit records change over time. If your credit
has improved since taking out your current mortgage, talk
to Jeff about refinancing into a loan product that recognizes
your current improved credit status.
Even if you still have shake credit ask Jeff about
Fannie Mae’s Timely Payment Rewards mortgage. It’s
a new mortgage designed for people with less than perfect
credit that offers a competitive interest rate—plus
up to a 1 percentage point drop in your interest rate when
you make your mortgage payments on time over a two-year period.
If you can qualify, it may prove to be a better deal than
your current mortgage.
Pulling out equity already built up in your home is another
of the most popular reasons a homeowner refinances. It
is often referred to as a “cash-out” refinance. You
can tap a portion of the equity that has accumulated in your
home and receive cash at your loan closing. Equity
is what your home is worth minus the amount you still owe
on your mortgage. You can use this equity to pay for expenses
such as your children’s education, or home improvements,
or to consolidate other debt payments such as getting rid
of high interest rate credit card debt. For example,
if your home is now valued at $120,000 and your loan balance
is $80,000, you might be able to get a new $108,000 mortgage
(cash-out refinances generally are limited to 90 percent,
sometimes less, of the total value of your home). That
would allow you to repay the existing $80,000 balance and
use the $28,000 for other financial needs. Another
important factor in deciding if you should refinance your
home is understanding just what’s involved. There
wil be costs and fees you’ll have to pay. You
will need to figure out, with the help of Jeff Daily if you
don’t feel comfortable doing it yourself, determining
how long it will take you to recover those costs. When
you refinance, you generally will repeat many of the same
steps, provide the same information, and encounter the same
types of costs that were involved the first time you obtained
a mortgage.
There are numerous reasons to refinance. Not every
homeowner refinances just to lower the interest rate or monthly
payment. You may want to refinance to get a shorter
term loan so you can pay off the mortgage before you retire,
or you may want to convert your mortgage from an ARM to a
fixed-rate loan. Because these refinancing for these reasons can
result in a lower interest rate, but probably won’t
result in a lower monthly payment, there’s no simple
formula for determining when it makes sense to refinance. Following
are some of the things you need to consider if you want to
refinance:
- How long do you plan to remain in your home?
- How many years remain on your existing mortgage loan?
- What costs are involved in the refinancing?
- How much will you save in total interest costs over
the life of the loan if you choose a shorter term mortgage?
- Do you value “peace of mind” you will receive
from knowing that your payment for a fixed-rate loan won’t
change if interest rates go up compared to your current
ARM loan?
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