Taking out a mortgage is a long-term commitment, often 30 years long. But that doesn’t necessarily mean that you have to ride out each mortgage for the entire term. Most homeowners, in fact, sell a house and buy a new one before the original mortgage is through. In this way, they trade one mortgage for another. In some cases, they get an even better deal on the second mortgage, with lower interest or lower monthly payments. This is exactly what refinancing a mortgage is for people who want to stay in the same home.
Refinancing your mortgage is trading one mortgage for another. There are specific times in your finances and in market conditions when mortgage refinancing can save thousands for homeowners, shorten mortgages, and otherwise attain better terms than the original loan.
Is it time for you to refinance? It all depends on the national interest rate, local market conditions, and the state of your current mortgage. Let’s take a closer look.
2020 Mortgage Rates are Low
The first thing to consider is the trend in mortgage interest rates. Mortgage rates have been dropping since their last big peak in the 80s when mortgage rates reached above 18%. Mortgage rates ranged between 7% and 9% in the 90s before they began the millennium drop. In 2012, they hit a historical low of 3.4% and have been very slowly rising again. Now is a better time to refinance than five or ten years from now when the average mortgage rate will likely be higher.
There is also the usual rise and fall of the trend chart. The current range is between 3.4 and 4.5. Mortgages reached another trough in 2016 and right now in 2020 it is at another low. Mortgage rates today stand at around 3.5. This means that everyone who’s been waiting for the right conditions to refinance their mortgage should grab their chance in this trough before the trend brings the mortgage interest rates back up again.
For all homeowners who haven’t been planning a refinance, now is a good time to check if your personal finances are in the right place to take advantage of this trough.
When Refinancing Reduces Your Monthly Payments
Refinancing your mortgage means taking out a new mortgage with new conditions. The interest rates of today matter, but so does the size of your mortgage. The more equity you have in the house, the smaller a new mortgage you will need. When smaller debt is stretched out over the same amount of time, that can significantly lower your monthly payments. This optimizes your income so that more of what you earn each month is available to you for spending or saving. It can considerably change a household lifestyle to have less money going to the mortgage each month.
If you can refinance your mortgage so that you are paying less each month, this is a good sign for your refinancing options.
When Refinancing Accelerates Repayment Without Increasing Monthly Expense
Another useful option is refinancing to own your home sooner. If, for example, you have a 30-year mortgage that you are 10 years into. If you can refinance that to cost about the same or less monthly with a 15-year mortgage, you can fully own your home five years sooner without impacting the household finances. If this sounds appealing to you, then it’s time to start collecting refinancing quotes.
It is absolutely possible to maximize your mortgage by refinancing. If you want to string out smaller payments for a longer time, you can do that. But you can also strategize to get better terms on repaying your mortgage more quickly. You might even arrange for larger payments, considering that your career and finances may have evolved since you initially took out the mortgage.
When You Have More Than 20% Equity – Drop Mortgage Insurance
Mortgage insurance is something that is required of buyers who have less than 20% down payment. The down payment is supposed to be an indication of responsibility and financial ability to pay the rest of the mortgage. Mortgage insurance will pay the bank if the lender falls through. However, you can trade equity for down payment when refinancing a mortgage. If you have more than 20% equity, then you can drop mortgage insurance and get better terms on the new mortgage.
Refinancing gives you the opportunity to negotiate better terms and to get rid of that mortgage insurance that’s been following you around. This is an entire expense and payment, separate from the mortgage payments that you can completely get rid of. Our financial advisors can help you arrange your refinancing to exclude mortgage insurance this time.
When Local Home Values Drop
When you refinance, the value of your home may be re-evaluated based on current market conditions. While home prices are on the rise, if your region is experiencing a small home value dip, it’s a good time to scope out your refinancing options.
When Your Credit Score Has Risen Significantly
Another serious consideration is your personal credit score. Your credit score impacts many aspects of a mortgage, most importantly the interest rates available to you. If your credit score has raised significantly since you purchased the home, then refinancing may have a lot to offer you. Combined with the low mortgage rates, the interest rate you get with a higher credit score could noticeably improve your household finances.
When the Timing is Right
Mortgages can be customized, but most come in 15-year and 30-year loans. So when you refinance, you are negotiating payments for a new 15 or 30 years. If your mortgage is less than 10 or 15 years old, you may be able to renegotiate with a standard-length mortgage for better terms and/or a shorter repayment schedule.
However, with a community credit union, you can often find more flexible options to make the new mortgage work for your needs. When the financial institution is in it for the community rather than profit, there’s less need to stick to the 15 and 30 year standard contracts. We will happily work with you to build a mortgage schedule with terms that suit your new finances and lifestyle.
When the Savings Exceed Closing Costs
Finally, don’t forget the closing costs. Taking out a mortgage has a certain amount of processing cost, new interest to consider, and closing payments. You will want to get all of these costs in your quotes. Then compare the combined new costs with the savings you’ll get in interest and payments from refinancing. If you are saving more than you’re spending, and the amount of that savings is with the effort of negotiating a new mortgage, then it’s a good time to refinance.
The first determiner of refinancing conditions, the mortgage rate, is at a historical low with signs set for a rise soon. That means that now is the right time for homeowners to consider refinancing. If your finances and current mortgage are in the right place for this maneuver, then you can gain some considerable benefit from taking advantage of today’s low mortgage rates. Here at Heritage Financial, we specialize in helping homeowners find the right new mortgage for their new circumstances and lifestyle. Contact us today to consult on your refinancing opportunities.