The Benefits To Refinancing A Mortgage In The Current Rate Market

With loan rates dropping to all time lows, many homeowners are wondering if refinancing their mortgage is a good idea. Obviously, there are many reasons to consider a home refinance, especially with loan rates so low. A few reasons to consider a home refinance are reduce monthly payment, lower interest rate, pull out extra cash, change mortgage term and go from an adjustable rate loan to a fixed rate loan.

Mortgage Rates At All Time Lows

The current market has caused home loan rates to drop to historic lows making this a great time to consider a home refinance. As long as there is a benefit to the new mortgage, now is a great time to refinance your loan. There are several opportunities to save thousands of dollars in today’s loan rate environment and mortgage rates will not stay at these levels forever.

Time to refinance and save money is now, but remember, it is very important that you have a reason to refinance along with a benefit for the new mortgage home loan. Here are a few of the benefits to refinancing a mortgage loan.

Lower Monthly Mortgage Payment

When considering refinancing your house to lower your monthly payment, you need to take into consideration how much your payment will reduce by. Most believe the payment must reduce by at least 5% in order for the refinance to have a benefit.

Lower Mortgage Rate

Reducing your payment is in large part affected by the interest rate. If you refinance your house and reduce the interest rate by at least 1%, then you will see a reduction in payment as well. Many people do not consider refinancing if the rate does not drop by at least 1%. Keep in mind, that even a slight reduction in rate can have a huge impact on the mortgage.

Cash Out Mortgage Option

Many consumers will pull out cash during a refinance. The cash out home loans allow homeowners to refinance their current mortgage loan and get extra cash that can go towards debt consolidation, home improvements or anything else the homeowner may want to use the cash for. Keep in mind that cash out home loans have a slightly higher rate and that a homeowner needs to take into consideration the overall financial picture. There are times that a cash out refinance loan could have a higher rate than the current mortgage, but the overall benefit for the loan could outweigh the higher rate. For example, if a person has a $200,000 mortgage loan at 5% with a payment at $1400 and has over $10,000 in credit card debt paying $500 per month, by refinancing into a new loan at 5.25% with a payment of $1500 will save this person $400 a month.

Change in Loan Term

Some people refinance their house to change the term of the loan. The most common change is to go from a 30-year loan to a 15-year mortgage. The idea is to pay off the mortgage quicker and save more money over the lifetime of the mortgage. The payment could increase, but the benefit to this type of refinance is paying the home off earlier.

ARM to Fixed Rate Loan

Finally, another reason to consider refinancing is when you are taking an adjustable rate note and refinancing into a fixed rate home loan. ARM loans can have a low rate, but the rate is variable and will change throughout the mortgage. ARM mortgages are designed for people who plan on only staying in the home for a short amount of time, ordinarily 5-7 years. By refinancing into a fixed rate home loan, you are locking in the rate for the entire loan term.

There are some reasons to not refinance. If you are planning on selling your home in the next year or so, refinancing might not be the best option. You will have to consider the cost of refinancing and what the overall benefit will be.

With rates at all time lows, it’s crucial to consult with a home loan banker and discuss your loan options to see if there is a benefit to a refinance home loan.

David White specializes in Home Loans. David is a Sr. Home Loan Officer with over twelve years experience with refinance home loans.