Only a small percentage of Americans owned homes, until what you know today as mortgages came into existence in the early 1930s.
However, the very thing that has become the embodiment of the American dream can sometimes source distress if managed poorly.
Although the number of foreclosures is at an all-time low of just 0.47%, the risk of foreclosure or full repossession remains an issue for many homeowners across the country.
A recent report by the New York Times shows that mortgage rates have shot up significantly making it harder to own a home.
Fortunately for homeowners, there is another way out, refinancing.
What is Refinancing a Mortgage?
Refinancing a mortgage means paying your existing loan by taking up another loan to replace the loan.
It’s increasingly becoming popular because it provides the homeowner with a unique opportunity to seek better terms. There are additional costs associated with refinancing a mortgage like closing costs and applications fees that you must consider.
Here are some of the instances when it makes sense to refinance your mortgage.
Interest Rates have Gone Down
This is the most common reason why a lot of homeowners’ refinance and for obvious reasons. Choosing to refinance when the interest rates are at a historic low could potentially save you thousands of dollars.
According to a report by CNBC, it is estimated that refinancing could save you an average $250 a month. Make sure the math adds up, the fall in interest rate may not be low enough to justify a refinance once you factor in the tax deductions and other relevant fees.
Your Credit Score has Gone Up
Like any other loan application, your credit score determines the interest rate you are charged. If your interest rates have improved significantly, then you should refinance.
Mortgage interest rates vary by as much as 1.5 % depending on your credit score. A credit score of 760 or more is guaranteed to get you the best rates.
When You Want to Lower Your Monthly Payments
Sometimes you need to reduce the amount you pay every month. Assuming no other factors change, increasing the payment period by say 5-10 years at the same interest will significantly reduce the amount of your monthly payments.
Although you end up paying more, it could free up some money to deal with more immediate and pressing financial needs.
To Convert an ARM to A Fixed Rate Mortgage
There are many types of mortgages available in the market today. The two most common types are the Adjustable Rate Mortgage (ARM) and Fixed Rate Mortgage.
The main difference is that ARM rates change every year and are locked in at that percentage for the rest of the year while fixed rates are reviewed once for the entire term of the mortgage. Currently, a 30-year fixed rate mortgage falls between 4% – 4.37%.
To Change Loan Products
You could have opted for a loan product either because it was the only product you qualified for or you were misinformed.
Many first-time homeowners go for the Federal Housing Finance Agency (FHFA) loans that are provided by the government at a subsidized rate.
Refinancing such a mortgage can give you the chance to switch to conventional loans because they have shorter terms and offer flexibility.
Owning a home is the single biggest financial investment most Americans will ever make in their lives. You should, therefore, be cautious when it comes to refinancing.
If done correctly, it can shorten your payment period, reduce your monthly payments, and increase your home equity. Remember it’s all about the math, if it doesn’t add up, don’t do it.