Things to Remember When Deciding on a Mortgage Refinance
Financial decisions for 2020 are risky at best; the COVID-19 crisis complicates any choice related to money and subjects your livelihood to the volatility of the economy. Though the federal government does not decide on mortgage rates, other regulations they set still have an impact. For example, the federal government can drop interest rates to nearly zero percent, creating a liquidity crisis.
Combined with the unstable stock market and low levels of local production, it’s easy for things to seem out of control. However, you can look to short and medium-term solutions like refinancing your mortgage. Expert financial advice always mentions refinancing as a way to lock in lower interest rates and take on a shorter loan.
Refinancing in the U.S. is up by 192 percent compared to this time last year, with more people anticipating losses of income or challenges in meeting house payments. If you are on the fence about refinancing, here are a few things to keep in mind:
1. Reducing your loan term means a shorter time in debt
Interest rates favor the borrower when he pays for the product or service in a shorter amount of time. If you signed on to a 30-year housing loan, refinancing will help you reduce your term. A 15-year term is a much more viable and leaves you with more money to allocate for your principal every month, making the duration of your payments even shorter. If your credit score is too low for your mortgage, refinancing can help you get a rate that you can afford.
Note, though, that your lender will have to perform a “hard inquiry” on your credit. This means your credit score will decrease slightly, regardless of whether or not you make a switch. Furthermore, when you decide to refinance, you will start your credit history over. Once you’ve proven that you can make on-time payments, though, your credit score will improve.
2. Private mortgage insurance slows your progress
Private mortgage insurance protects your lender if you cannot meet monthly payments. If your home goes into foreclosure, the PMI gives them a way to cut their losses when the house goes up for auction. Homes with a down payment of less than 20 percent of the mortgage are usually covered by a PMI.
For you, though, a PMI is not ideal. It is an additional expense on top of your principal and your interest and makes it difficult for you to reduce the principal. If you will be refinancing your home and are taking a loan that is 80 percent or less than the current appraisal, you can request for your PMI to be removed.
3. Choose fixed-rate over an adjustable-rate mortgage
An adjustable-rate mortgage or ARM is great for certain years; they have below-market interest rates when you start and can result in you being several thousand dollars ahead in your payments than if you stayed with a fixed-rate scheme.
With an ARM, though, all of the risks are transferred from the lender to you. Though they take longer, 15- and 30-year fixed-rate mortgages are stable and virtually risk-free. With this type of mortgage, you can be more strategic about your financial plans.
4. Refinance when you intend to stay longer
If you are planning to keep your home for a long time, you should refinance now. Speak with your loan officer and learn how low your monthly mortgage payment can drop based on the new rates. Try to see how long it will take for you to recover from the cost of refinancing.
For example, if your monthly payments go down by $260, that leaves you with $3,120 each year. If closing is $8,000, that means it will take you only two and a half years to meet the closing cost. If you are staying in the same home for no fewer than five years, you get to save at least $7,600 from the reduced monthly payments and the closing costs.
Refinancing your mortgage is a great way to save money and start your credit score over. Getting a lower interest rate for your home will help you pay back the principal and be in debt for a shorter amount of time.
For mortgage professionals in Colorado, get in touch with our team at Move Mortgage today. We help our clients buy their dream homes through our unique loan process. Call us today and let us move forward together!