If you’ve been sitting on the fence about refinancing your home, now is the time to consider making your move. After all, it does take time to refinance your home. The good news is that you may not find a better time to refinance your home in the near (or distant) future. These are just three important reasons why now is the time to stop kicking the tires and make your move to refinance your mortgage.
1. Interest Rates Continue to Have Near Historic Lows
The other side of that equation is that they will one day, probably soon, begin to rise again. In fact, many economists have marveled at the fact they’ve stayed low for so long. Many things affect your interest rates for a refinance loan, such as:
- Your credit score. The higher your credit score, the better interest rates lenders will offer in general.
- The loan term (10, 15, 20, or 30 years).
- The type of interest rate you choose (adjustable rates provide lower initial interest rates but will rise when interest rates increase while fixed-rate loans allow you to plan for the future knowing your payments will remain the same).
- The size of your down payment. If you make a 20 percent or greater down payment on a conventional mortgage you can not only eliminate the need for private mortgage insurance (PMI) but you can also enjoy even lower interest rates.
However, the current interest rates, established by the Federal Reserve have an even greater impact on overall interest rates that are used as a base when lending institutions assess their risks in lending you the money you need for your mortgage.
Why do Low Interest Rates Matter When Buying a Home?
Low interest rates are your best friend when financing or refinancing a mortgage. Let’s say you purchased a home 15 years ago at seven percent APR with no down payment, your monthly payments would be $1,330.60 per month for 30 years. Look at how this information stacks up for a 30-year, $200,000 home mortgage refi loan at different interest rates. It won’t take long to understand why lower interest rates are your friend.
|Interest Rate||Monthly Mortgage Payment||Total Loan Payment||Interest Paid|
You can play with the numbers in many different ways to get the best value for your mortgage refi loan. For instance, reducing the loan term to 20 years at 3.25 APR increases your monthly payment to $1,134.39 but only costs you $272,253.60 over the life of the loan. That means you only pay 72,253.60 in interest.
If you make a 20 percent down payment on the same loan with the same terms, it reduces monthly payments to $907.51 and you’ll only pay 217,802.40 in addition to your $40,000 down payment. Only $17,802.40 of which is interest payments.
Your mission is to go the extra mile to be certain you’re paying as little interest as possible. The less you pay in interest, the less you will ultimately pay for your home.
Interest rates today are near an all-time low. If your original mortgage was made at a time when interest rates were higher, either due to poor credit, federal interest rates, or unfavorable terms, now is the time to correct the situation and begin enjoying the rewards. You can even use the equity you’ve built in your home to make a down payment that would eliminate monthly private mortgage insurance (if you have it).
You can also take this opportunity to refinance an adjustable-rate mortgage while the interest rates are low and before the market moves toward higher interest rates that could cost you even more on your mortgage.
The main point is that you are quickly running out of time to refinance your loan at these low interest rates. Something you may never see again within your lifetime. Once the opportunity passes, it may never return.
2. Your Credit is Better Now than When You Purchased Your Home
Many people buy their first homes at times when they have limited or rocky credit. On the one hand, you know that buying a home is a financially sound plan that will ultimately save you money rather than paying rent.
On the other hand, you feel like you’re stuck in a whole paying rent. One from which you can never truly be free until you own your own home. Many people feel like they are simply spinning their wheels paying rent, so they purchase a home, whether they are truly ready for it or not.
There’s nothing wrong with it, other than the fact that you are buying your home in less than ideal circumstances for doing so. Lenders understand that there is a risk involved in loaning money for mortgages. The bottom can fall out of the real estate market, for instance. Or borrowers can face unexpected life emergencies such as unemployment, medical expenses, and other problems that cause them to default on their mortgages.
Mortgage lenders operate on the thin line between risk and reward. Their mission is to make money through successful moneylending when you pay interest on the loan. Charging higher interest rates is one way lenders manage their risks. If your credit is less than excellent, they will assess certain penalties. Many mortgage lenders operate under a tiered penalty plan that rewards those who have nearly perfect credit while penalizing borrowers, with higher interest rates, based on the amount of risk lenders feel they are taking on by extending credit. It could look something like this:
|Credit Score||Interest Rate|
|800+||Standard interest rate|
|750-799||Standard interest rate + 0.5%|
|700-749||Standard interest rate + 1%|
|650-699||Standard interest rate + 1.5%|
|600-649||Standard interest rate + 2%|
|550-599||Standard interest rate + 5%|
While this is a highly simplified example it gets the point across. The further away your credit score is from the ideal credit score, the more you will pay on your mortgage. If your credit is nearly perfect now and you can shave two to three percent from your interest rates by refinancing at today’s rates, it is well worth your effort to do so now. More importantly, if you were originally financed at what banks consider subprime interest rates and now have good credit that can save you as much as five percent interest you can save hundreds of thousands on your mortgage.
It’s never a bad idea to explore your options to see how much of a difference it can make for your monthly payments, your total payments on your home, and even the duration of your loan. If you’re making ends meet now, you can refinance for a higher term, eliminate private mortgage insurance, get a lower interest rate, and reduce the term of your loan by 10 or 15 years, saving you even more money on the total price of your loan. It’s a real win for you.
3. Eliminate PMI
Private Mortgage Insurance (PMI) is something most lenders require from anyone who makes a down payment of less than 20 percent on their mortgages. FHA lenders require a mortgage insurance premium (MIP). With conventional loans, you can eliminate private mortgage insurance once you have 20 percent equity in your home. That is not the case with MIP. You will have to transition from an FHA loan to a conventional mortgage loan when refinancing if you want to eliminate the mortgage insurance payments.
Why Do Lenders Require Mortgage Insurance?
The answer is simple. Mortgage lenders are seeking ways to minimize their risks. By paying the premiums every month, you’re offering them some degree of guarantee that you will continue making timely payments on your mortgage or that the insurance will cover a portion of the lender’s loss if you default on the mortgage.
How are PMI Fees Determined?
Many things affect the amount of money you’re spending out of pocket on your home mortgage. Many factors also go into determining your private mortgage insurance (PMI) rate, including:
- Credit score.
- Loan-to-value ratio.
- Debt-to-income ratio.
In general, the amount varies between 0.41 percent and 2.25 percent. While the amount is due as an annual payment most lenders will roll it into the monthly escrow along with your principal, interest, taxes, and homeowners insurance. It becomes one of those hidden expenses that greatly affects your out-of-pocket payments each month.
How does Eliminating PMI Affect Your Bottom Line?
It all comes down to out of pocket expenses when you think about it. Once you’ve reached 20 percent equity in your mortgage, or if your home value has increased over time, you can refinance your loan, make a 20 percent (or more) down payment from the equity in your home and your new monthly payments will be lower in more ways than you can imagine. How does that work? By eliminating or reducing the following:
- Interest rates and payments.
- Reducing your principal amount by borrowing less.
It’s a huge win for you, financially, that you can use in many ways. However, if you were able to make ends meet you can place some or all of your new monthly savings toward the principal of your loan to repay your mortgage much faster. Before you do that, though, make sure your mortgage lender doesn’t penalize early repayments and that they will allow you to apply additional payments to the principal rather than making advance payments on future mortgage payments.
It’s a tricky game that can help you save tens of thousands of dollars on your home, if not more, over time. There’s also the knowledge that by eliminating your monthly PMI payments, you’ve crossed a threshold in your homeownership journey. It is a huge relief for many homeowners to be rid of this.
Even if you don’t take advantage of opportunities to repay your mortgage faster by refinancing at lower rates or to reduce your PMI, you can enjoy substantial savings over your initial mortgage payments that allow you to make investments, plan for retirement, pay off debt, and more. Plus, you may have enough equity in your home to enjoy cash in your pocket that you can use to make improvements, purchase a new vehicle, or fund your child’s education. The sky is the limit!
These are just three reasons why now is a good time for practically anyone to consider refinancing your mortgage loan. Other reasons are more personal and may be unique to you. The bottom line is that if you’ve been thinking about refinancing your mortgage, the odds are good that there will never be a better time to act on those thoughts.