Mortgage rates rarely stay constant. As rates drop, homeowners often ask themselves “Is it the right time for Mortgage Refinance?”
When rates drop, you may find yourself continually monitoring for the lowest rate. It’s important to understand when the right time to refinance is.
Lower Interest Rates
One of the primary reasons homeowners consider a mortgage refinance is to take advantage of lower interest rates.
Lower rates decrease your monthly payment and reduce the amount of interest you will pay over time. As most loans last 15 or 30 years, interest rates can vary widely during the life of your loan.
Before pursuing a refinance, it’s important to research why interest rates are low. Understanding what is affecting the current mortgage rates can help you understand other varying conditions around the mortgage.
Some lenders may alter when you can lock in an interest rate during the refinancing process. This is especially true if the rate market is volatile, such as during a national crisis or events like the recent COVID-19 pandemic.
If the risks are high, interest rates will change quickly. In these cases your lender may not let you lock in an interest rate until you are further into the underwriting process.
Mortgage Refinance To Change The Loan Terms
Another reason to pursue a refinance mortgage is if you want to alter the terms of your loans.
For example, if you want to move from a 30-year to a 15-year mortgage. Shortening the term of your loan will save you money on interest and pay off your home earlier.
You can also change from a 15-year option to a 30-year option. Though this will reduce your monthly payment, it is generally not recommended. Over the life of the loan you will pay significantly more interest.
You may also want to refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. With a Fixed rate mortgage, the rate is locked for the life of the loan.
If switching to an ARM loan, make sure you fully understand the terms of the loan. These include the lifetime, annual, and first cap on the loan adjustment and how often your loan adjusts. You should also verify which index your loan is tied to.
Many homeowners refinance their mortgage to borrow against the equity in their home to pay off other debts.
While this may seem like a great idea if you have a lot of high-interest debt accounts, you’re trading out unsecured debts like credit cards that may impact your score if you miss a payment, to a loan that you secured with your home.
When you use your property as collateral, if you default on the loan could ultimately lose your home.
If you struggle with staying out of credit card debt, this may not be a wise option.
Cash-Out Mortgage Refinance
Refinancing for debt consolidation is just one example of using refinancing as a cash-out refinance.
You may also consider cash-out refinance for getting extra cash for remodeling your home. You can also use this to paying for unexpected medical expenses or replace living expenses due to loss of income.
Cash-out refinances can be risky – you are using your home for collateral. However, using the money to improve your financial worth through investing or increasing the worth of your home may be a good reason to pursue this type of loan.
You may also consider cash for building accounts that protect your future, like your emergency fund. Consider working with a financial advisor to ensure you’re making the right decisions for your long-term financial goals.
Mortgage Refinance: Start The Process
If you’ve weighed your options and are ready to pursue refinancing your mortgage, starting is as easy as an application.
Expect to provide the same information that you did when you purchased your home. This includes a credit report, proof of income, and a list of assets. Additionally, a home appraisal will be necessary after you enter the underwriting process.
These days, much of this process can be completed online or over the phone. This makes applying for a refinance mortgage easier and more accessible than ever.
If you’re ready to refinance your mortgage, remember that research and preparation are your greatest tools.
While it’s tempting to jump while rates are low, today’s rates might not necessarily be the right rates for starting the process.
Compare rates not only between potential lenders but the historic rates from when you purchased your home as well.