Interest rates have dropped and given the recent market conditions we cannot be certain how long they will hold in place. You can learn why we are seeing fluctuating rates in this related blog post.
There are a variety of reasons someone would want to refinance their mortgage. We will consider some of the goals our customers have achieved through refinancing to assist in determining if it is something you should consider.
Reduce monthly bills.
The true fallout from COVID-19 is unknown but has potential to cause stress where income is concerned. Reducing the amount of monthly bills could prove to be a real difference maker for a family’s future. A refinance could allow you to extend the life of your loan but in turn, reduce the amount you pay per month, making you feel more comfortable with your mortgage payment.
Consolidate debt.
If you have been living in your home for awhile now, you may have built up quite a bit of equity. This equity could be used to consolidate your debt and save money over time. See below for an example:
You owe $90,000 on your home but now your home is worth $118,000.
You want $10,000 cash to pay off your credit card debt which you are paying 13% interest on.
You refinance your mortgage for $100,000 (the balance of what you owe plus the cash you would receive) at a lower interest rate*.
You pay off your credit cards and save yourself thousands of dollars you would have spent in interest.
This option may not make sense for everyone but if a customer is truly committed to paying down debt, then refinancing and taking on the debt at a lower interest rate can be a smart solution.
Lower the rate.
This feels like the most traditional reason to refinance. As we have witnessed over these last few weeks, interest rates vary. Perhaps the rate was higher when you obtained your mortgage. By refinancing at a lower interest rate, you could save yourself money over the life of the loan.
Reduce or eliminate PMI (private mortgage insurance).
Over the last five years, we have seen an extreme increase in home values. This could mean that you may be able to reduce or eliminate the PMI (private mortgage insurance) that was required when you first secured your mortgage.
Reduce the loan term.
Another common goal of refinancing is to reduce the term of your loan; reducing the number of years you will be paying on your mortgage. In fact, there are some refinancing scenarios where the borrower can go from 30 to 20 or 15 years with little or no increase to payment.
Refinancing is not always the best option for each person and each situation. However, considering your options is never a bad decision. Take a minute to talk to your mortgage banker about your current financial situation and your goals. There is no commitment for a conversation, but we can’t help you reach your goals unless you start the conversation. Contact a mortgage banker today to discuss your options.
*While an interest rate lower than 13% is likely, it is not guaranteed.