If you’re a home owner you’ve probably come across a time or two where you’ve considered the benefits of refinancing but got overwhelmed with all the things that come with it; applications, credit check, new survey and title search, as well as an appraisal and inspection fees.
As you know, this process can be quite lengthy but it could all pay off in the end. There are many benefits of refinancing, the main reason and the most obvious is to get a lower interest rate resulting in a lower monthly payment. You can also shorten the loan term to 20 year or a 15 year loan which depending on the rate, may increase your monthly payment, but would pay off your loan much faster!
Rule of thumb
The rule of thumb in the 1980s used to be that you should refinance when you can lower your mortgage rate by 2 percentage points. However, today you should consider refinancing if rates have declined at all since the time you took out your last mortgage. According to the Bureau of Economic Analysis, interest rates in the beginning of 2012 were at an average of 5.098%. Since then lenders are offering rates much lower than that, which makes it a no-brainer to refinance, but a lower interest rate is not the only reason to refinance.
What happens if rates change direction and start increasing and you have an adjustable rate mortgage (ARM) that is coming up on an adjustment period? With inflation being a concern, more and more home owners are starting to convert to a more stable loan program like a fixed rate. This way they don’t run the risk of the rate increasing over time. Also when house prices rise, and you have more equity in your home, millions of borrowers chose a cash out refinance. This can help you in many ways if you want to consolidate debt or do some home improvements which can be a double benefit because it can increase your home’s value.
With all these benefits of refinancing you may be wondering when you should refinance. If you base your decision on the interest rates alone, you could monitor them regularly and would see an interest rate that is lower than the one you have. If it works with your financial goals, then you better grab it!
Shailee Zobell, Loan Processor