7 Reasons to Refinance Your Home Today
By Garrett Clayton | March 20, 2020
Schools are closed. Restaurants are take-out only. Group gatherings are restricted. And, apparently, the entire country is out of toilet paper.
As we adjust to the “new normal” brought about by growing concern surrounding the global COVID-19 or coronavirus crisis, it can be difficult to find the silver lining. But in addition to staying in your pajamas all day, Netflix marathons, and extra time to tackle the hobbies you’ve always promised yourself you’d take up, we have one more reason for you to keep your head up and look on the bright side—interest rates are at historic lows, making right now a great time to refinance your home loan.
Read on for seven reasons you may benefit from refinancing while rates are low and you’ve (very likely) got nothing but time!
1. Interest Rates Are At A Near All-Time Low
The week of March 5, mortgage interest rates dropped to an all-time record low of 3.29% for a 30-year fixed-rate mortgage (30-Yr FRM). It is the lowest rate on record since Freddie Mac began tracking mortgage rates in 1971.
As you might expect, many homeowners rushed to capitalize on the low rates by refinancing. In response, mortgage companies have temporarily increased rates in order to give themselves time to work through the backlog of refinance applications. Still, rates remain very low, at 3.65% for a 30-Yr FRM, well below the 4.25% average rate for 2019.
As mortgage companies work through the backlog, rates are expected to drop back down to record or near-record lows in the low 3% to high 2% range.
Those wishing take advantage of the market’s very low rates should apply now to avoid having to wait too long for their refinance application to be processed. Refinancing can reduce your mortgage rate by as much as 1-2%, decrease the size of your monthly payments, and increase your equity in your home.
As Julia Carlson, founder and CEO of Financial Freedom Wealth Management Group, advises, “This is the time to refinance.”
2. Decrease Monthly Payments to Alleviate Financial Stress
With so many industries, businesses, and individual workers experiencing the negative financial repercussions of COVID-19-related closures, many homeowners could benefit from reduced monthly payments during these difficult economic times. By refinancing while rates are likely 1-2% lower than your original mortgage rate, you could reduce your monthly payments by hundreds of dollars while still paying off your mortgage in the same amount of time.
3. Shorten Term of Your Mortgage
For homeowners who can afford to keep their monthly payments the same, a refinance at a lower rate and for a shorter term, like switching from a 30-yr FRM to a 15-yr FRM, will allow you to pay off your home sooner and increase your equity in your home more quickly.
A refinance for a shorter term is an excellent way to reduce your mortgage debt by paying off your principle more quickly, thereby reducing the total amount you pay in interest. Additionally, more equity in your home and owning your home outright provide additional financial security for you and your family in time of economic uncertainty
4. Switch From Adjustable-Rate to A Fixed-Rate
Adjustable-rate mortgages (ARMs) are those mortgage whose interest rates change over time, as opposed to fixed-rate mortgages (FRMs) whose rates are locked in for the life of the loan. There are many different terms that can affect how an ARM adjusts, but typically ARMs rise and fall with the market index. Often initial rates for ARMs are low and then increase with the market or based on other preset terms of the loan.
For those whose ARMs interest rates are higher than current FRM rates, refinancing from an ARM to an FRM can reduce monthly payments in both the short and long term. By switching to an FRM you can also alleviate uncertainty about future rate hikes since you know your rate will remain constant regardless of market conditions.
5. Switch From Fixed-Rate to An Adjustable-Rate
Yes, we know, we just told you to switch from an ARM to an FRM, so why would you also consider the opposite? Since ARMs typically fluctuate with the market index, switching to an ARM from an FRM while rates are historically low may be a sound financial decision for homeowners who don’t plan to stay in their homes for more than a few years. These homeowners can take advantage of the initially low interest rates typical of an ARM without having to worry about higher interest rates down the road since they will be selling the home before their rates increase.
6. Relieve Cash-Flow Issues
During these trying economic times, many homeowners may find it difficult to pay their regular monthly bills and expenses. Cash-out refinancing is an option to increase your current cash-flow at a low-interest rate that you can then pay off over the life of your loan. Essentially, your existing mortgage is replaced with a new mortgage of a higher value and you are able to take out the difference in cash to cover other expenses.
The advantage of a cash-out refinance over a credit card is that the rates are typically lower and remain at a fixed rate. The disadvantage is that you are essentially putting your house up as collateral for the loan, which may put your house at risk should you default on the loan. While a cash-out refinance may not be right for everyone, it can alleviate financial stress for those individuals in need of a cash injection now but who are also confident they will be able to maintain payments over the life of the loan.
7. Eliminate Private Mortgage Insurance (PMI)
A current trend in real estate is putting down less than 20% of the house’s value as an up-front payment. This method allows homebuyers to purchase a more expensive home than they may have been able to secure with a higher down-payment. The downside, however, is that putting down less that 20% often requires the homebuyer to take out private mortgage insurance (PMI), which can increase monthly mortgage payments by hundreds of dollars.
If, however, your home value has significantly increased since you purchased your home or you have paid down more than 20% of the principle on the loan, a refinance can both lock in a lower interest rate and eliminate your PMI payments. It’s a win-win.
Just as different mortgage products are right for different homebuyers, the reasons and ways to refinance will also vary based on your individual circumstances. Refinancing typically costs 2-5% of the home’s principal value and requires applicants to go through the mortgage approval process again. That’s why enlisting the help of a mortgage professional, like those at AmCap Home Loans, should be the first step in your process. Not only can they help you navigate the application process, but with an in-depth knowledge of mortgage programs and products they can also help you make the most of your refinance and ensure any changes to your mortgage benefit you financially both now and for the future of your new loan.
When life gives you lemons, refinance with the help of an experience mortgage professional! To learn more or to get started with your refinance, visit AmCap Home Loans online.
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