Many homeowners think a drop in mortgage rates automatically makes it a great time to refinance a home. It’s true that refinancing can lead to lower monthly payments, or paying lower interest, but many factors can affect whether a refi will allow you to simply pay less now (and more later) or lower your home’s mortgage costs entirely. Before you spend money on closing costs, we asked Sonny Yambao, Mortgage Originations Manager at Travis Credit Union, to share some industry insight on how your personal situation could shape your decision to refinance.
Short-Term Reason to Refinance
If you have a cash crunch, there is an option to use your home’s equity to consolidate debt by refinancing your mortgage. This could lower your monthly payments and increase cash flow. This is known as a cash-out refinance.
One thing to consider is whether the costs to refinance justify the means. Remember that refinancing your home to pay less now can lead to longer payment terms and paying more costs, later. For example, when lenders offer to include closing costs with your loan to spread out the payments, you’ll end up making more of those lower payments to pay off your mortgage plus added interest and closing costs.
Long-Term Reasons to Refinance
All homeowners have their own reasons for accessing the equity in their home or lowering their payments. Here are some helpful factors in deciding when is a beneficial time to refinance, for you.
- Lower interest rates. A drop in interest rates below your current mortgage rate could lower your payments and the cost of your house.
- Higher credit score. Your credit score has gone up enough to secure you a lower interest rate.
- Eliminate PMI (mortgage insurance). Your current mortgage may have a monthly premium known as private mortgage insurance (PMI) for Conventional Loans or (MIP) or mortgage insurance premium on FHA loans. Depending on your home’s current market value, you may have the equity to remove this added monthly premium off your mortgage by refinancing into a Conventional mortgage without MI. Doing so may lower your payments and/or shorten your payoff time.
- Get a fixed rate. You want to convert your Adjustable Rate Mortgage (ARM) to a fixed rate one with lower interest than the bump-up rate of your ARM, to keep payments from ballooning in the future.
- Investing. You want to put more money into retirement now, though it might mean adding years to pay off your house.
Any discussion of refi should begin with a calculation of how much refinancing will cost you in total (including closing costs, interest costs from making more payments, or tax savings lost from a lower deduction), and whether that will save you money on the purchase of your home.
Sometimes, however, immediate savings is the most important factor. Whatever your questions, Travis Credit Union is here to help you. We have knowledgeable mortgage loan experts available to answer your questions – whether you wish to lower your rate to save a little more every month, shorten your loan term to pay off your mortgage faster, or use your home’s equity to consolidate debt or finance a future home improvement project.
Let’s discuss if it makes sense for you to refinance while mortgage rates are near historic lows. Apply online at traviscu.org/homeloans or call 888-698-0000 to schedule an appointment, start a refinance, or get help deciding on next steps.
Or if you want to read more about refinancing, first, check out our FAQ, here.