Additional benefits to block low rates now. (iStock)
As the number of coronavirus cases increases this summer, interest rates remain low. For those with a steady job who bought their home before the pandemic, now may be the perfect time to take advantage of low rates by refinancing a home mortgage.
On the fence of securing a mortgage refinance before rates rise again? Not sure if now is the best time to refinance? Check the available rates at Credible and consider this: While refinancing comes with the costs of the loan and paperwork, there are actually multiple benefits to refinancing in addition to saving money on interest and lowering your monthly payment.
What are the benefits of refinancing a mortgage?
1. Expedited payment
A homeowner refinances a $ 400,000 30-year mortgage at 4.5 percent to one at 3.35 percent and saves $ 345 of the monthly payment. Instead of depositing the savings in a savings account, the owner continues to pay the old mortgage payment. By using the refinance savings to pay for the house, the owner, in this example, reduces the term of the mortgage by seven years and five months with the money in his budget that they already have.
See how much you could save today with a refinance by visiting Credible.
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2. Accumulate capital faster
Refinancing a 30-year loan to a 15-year mortgage will substantially increase the monthly payment, discouraging many homeowners. While paying more each month is no fun, refinancing for a shorter loan dramatically reduces the amount paid in interest over the life of the loan. For a homeowner who refinances a $ 400,000 30-year to 15-year mortgage, the interest savings (less closing costs) would be $ 100,000.
Refinancing to a shorter loan means that you will accumulate more equity in the home at a faster rate, which is a good idea if you plan to use the equity in the home in the future for large purchases or eventually move into a larger home.
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3. More predictable costs
If you purchased an adjustable rate mortgage (ARM) when you first bought your home, you probably did so because the low interest rate at the beginning of the loan term was very attractive. The good news is, with rates as low as they are now, homeowners can set a low rate for the life of their loan without worrying about rising interest rates as markets continue to change due to to the pandemic.
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4. Debt consolidation
A cash withdrawal refinance is a lesser-known type of mortgage refinance product that can help homeowners take advantage of the accumulated value of the existing home in the short term, while taking advantage of current low interest rates.
For example, a homeowner owes $ 350,000 on a 30-year mortgage for a home worth $ 400,000. A homeowner can refinance a 30-year mortgage for $ 400,000 and receive $ 50,000 in cash after paying off the first loan. The 30-year term begins again and the payment may be longer, but now they can use the cash as they see fit. Many homeowners use this tactic to “borrow” against their home equity at a very low interest rate, and then use the cash to pay off higher-interest credit card debt.
Since most credit card interest rates exceed 17 percent, consolidating debt at 3-4 percent is the smartest money move.
5. Discard Private Mortgage Insurance (PMI)
Most conventional mortgages allow homeowners to lower their PMI once they have reached 20 percent of the home’s equity, but this is not allowed on FHA loans. For homeowners with FHA loans, refinancing would be the only way to get rid of the monthly PMI payment.
Homeowners in areas where values are increasing rapidly should take advantage of refinancing to increase the amount of equity in their home. If a homeowner owns 10 percent equity on a $ 350,000 mortgage, but their home is now worth $ 400,000, they actually have 22 percent equity, based on the home’s current market value.
Refinancing the home to the new value would allow the owner to earn a lower interest rate, but would also eliminate the monthly PMI payment each month. Credible can help you compare offers from multiple mortgage lenders at once to find a loan estimate with the best rates.
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Is now a good time to refinance?
Since interest rates fluctuate with the market, it is best to set interest rates low now before they rise again. This is the reason why many are refinancing now instead of waiting to see what is stirring with the pandemic in the fall and in 2021.
Before restructuring your home loan, it is best to buy rates first to determine what you may be eligible for with your credit score. This can be done quickly and easily through a website like Credible. After the purchase rates, do the homework to estimate first whether any savings through refinancing offset the cost of the loan fees.
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Living in unprecedented times means everyone should explore every possible avenue when it comes to putting more money in their pockets. With what lies ahead so unknown, every dollar counts.
