While increasing and decreasing mortgage rates are often in the news, what news articles rarely offer is an insight into is whether a drop in rates would yield tangible benefits to you.
Some people decide to refinance without understanding the true benefits. And some refrain from doing anything only because they don’t understand the implications very clearly.
So let’s try to understand whether it makes sense for you. So when you see such a news item next time, you’ll hopefully make a more informed decision.
When should you think about refinancing?
Mortgage rates and one’s own financial and personal situation change all the time. If you belong to one of the following categories, you have a good reason to be looking into a refinance.
- Mortgage rates have dropped and your current rate is higher than prevailing rates
- You have other debts (credit card, education loan, auto loan etc) where the rate of interest is higher than the rate at which you can refinance your home.
- You have a private mortgage insurance because your loan amount is high.
- If your financial situation has changed and you can afford larger payments to pay off your loan sooner.
- If your credit score has improved significantly since you got your mortgage, it might save you a lot by refinancing.
How much will you save?
People read about drop in rates and the first question that comes to mind is how much will I save every month. There are plenty of mortgage calculators on the internet to help you with that. Read about how to use mortgage calculators.
- Type your loan amount, mortgage term and the current rate. See your monthly payment
- Now do the same again, but with your new rate.
- The difference in payments is your savings every month.
Isn’t that quite long?
Well, that depends on how long you plan on keeping the mortgage. There are two primary reasons people get out of their mortgage early:
- Either they refinance their mortgage for a better deal, or
- They sell the property.
Refinancing can be worthwhile even if rates haven’t dropped much
For many people, refinancing may not yield any benefit at all if rates haven’t dropped much. But in quite a few situations, it may be a great idea. Following are some examples:
- Need a personal loan – Refinancing can be a very powerful avenue for those who need to borrow money for any personal use. How? Say your home price has gone up since you bought and you have more equity in your home. By doing a cash-out refinance, you can get cash as a part of the refinance. This cash can be used to do a renovation or for your kid’s college education or for any other purpose you want. Since the rate you pay on this cash is the same as your mortgage rate, you can avoid taking the more expensive personal loans at much higher rates.
- Consolidate debt – Say you have credit card debts and other debts that have very high interest rates. You can take a similar approach. Do a cash-out refinance against your home and pay-off the high interest debt. The total amount of borrowed money does not change. But you effectively start paying a much lower interest rate on that other debt.
- Get rid of mortgage insurance – Most lenders require a down-payment when you get a mortgage. But when you make a smaller down-payment than that, lenders often ask you to buy mortgage insurance. And that can be expensive. If you are one of those and your home price has gone up, refinancing into a new mortgage can effectively be used to get rid of mortgage insurance if your loan balance is less in comparison to your current appraised home value. Homeowners can pay large sums of mortgage insurance every year. There can be significant savings if you can get rid of it.
Depending on your situation, there are many different ways in which a refinance can help you save.
The myriad examples and situations described above are different from each other. But the common binding thread is the savings it brings to everyone.
So whether you are trying to lower your monthly mortgage interest payment or pay off high rate loans, at the heart of it lies one or more net tangible benefits.
If you are not sure whether it’s right for you, get a quote at stemlending.com/quote. We’ll be delighted to discuss your situation and assist you with exploring potential options.
NMLS#1648699 STEM Lending, Inc. Ph: 833-600-0490. (nmlsconsumeraccess.org). The Principal, Interest and MI Payment on a $300,000 30-Year Fixed-Rate Loan At 3.5% is $1,374.08. The Annual Percentage Rate (APR) is 3.663% with Estimated Finance Charges of $6,000. The Principal and Interest Payment does not include taxes and home insurance premiums, which will result in a higher actual monthly payment. The APR is calculated using the Actuarial Method.