Now might be just the right time to refinance your mortgage. Even if you already have a low interest rate mortgage, you could still benefit, thanks to the record-low rates that are present right now. Indeed, even someone with a 5% interest rate on a mortgage could save money, since rates on 30-year fixed mortgages are even lower.
Consider an adjustable rate mortgage, and you could end up with an even lower interest rate. With financial policymakers still trying to keep interest rates and Treasury yields low, there is a good chance that you will be able to take advantage of low rates for some time. However, since no one truly knows what’s coming, it helps to consider your options now.
Just remember: If you have costs associated with closing your refinance, you want to make sure that you will be in the home long enough for your interest savings to matter.
Fixed Rate Mortgage or an ARM?
When refinancing your mortgage, you will have to decide whether you want a fixed rate mortgage, or whether you want an ARM. Some might argue that an ARM is always a bad idea, but this is not so. In some cases, refinancing to an ARM can be smart — and save you money. If you can afford to pay a little more if interest rates rise, an ARM can give you big savings right now. It is also possible to apply for a hybrid ARM. You will have a low fixed rate for the first three to seven years, and then have a variable rate after that. As long as you pay down your loan principal, you should be able to refinance to a fixed rate before rates rise too much.
However, if you know that you might not be able to handle a higher interest rate later, or if you are concerned about an adjustable rate affecting your finances, a fixed rate mortgage with a known amortization schedule that lets you know exactly how much you will have to pay each month might be preferable.
Before you refinance, you will also need to decide on a mortgage term. While you can lower your monthly payment by refinancing to a longer term (for example, refinancing a loan with 18 years left for 30 years), you could end up paying more in the long run, and you will be in debt for longer. With mortgage rates as low as they are right now, it is quite possible that you could refinance to a shorter term and pay only a little more each month. It’s a way that can help you save thousands in interest, and be done with your mortgage that much sooner.
Qualifying for a Refinance
While lending standards have eased somewhat in the last couple of years, they still aren’t as loose as the standards seen prior to the 2008 financial crisis. Indeed, you will need good credit and sufficient equity in your home to qualify for a refinance. Some homeowners can get help from government programs like HARP, but many need to bring up their credit scores and reduce their mortgage debt before gaining approval.
If you want to refinance, it’s best to consider your options and plan ahead. It’s especially important to make sure your finances are in order, and your credit score is sufficient to allow you access to the best interest rates.
Now might be the time to refinance. You can’t earn a high yield on your cash, but you can take advantage of low borrowing costs. Refinancing is one way to do that.