Non-rate reasons for refinancing your mortgage
When it comes to the very latest in residential real estate events, stories that tend to make the news are usually related to asking prices, and the availability of homes for first-time or move-up buyers. But another newsmaker is homeowners taking advantage of low interest rates to roll over old mortgages into new ones resulting in refinance lending more than doubling over the past year.
The general rule of thumb is if you can lower your interest rate by 0.5% or more, refinancing is worth considering, as it could potentially save you thousands of dollars over the life of the loan. However, a low-interest rate environment is not the sole reason why refinancing can be a smart move. Here are a few other reasons why it can be worth the time and effort:
Reduce the loan's term
Generally speaking, there are three options you can choose from when it comes to how long you intend to pay off your home loan: 10-, 15- and 30-year terms. Overwhelmingly, the most common choice is 30 years. However, in today’s low interest rate environment, and with job availability on the rise, you may be in a better position to cover the higher monthly payments associated with converting from a 30-year to a 15-year term mortgage. The upshot here is, you'll be able to pay off the entirety of the loan more quickly and ultimately pay less than you would with a 30-year mortgage. You can consult one of our experienced RMS loan officers, or use an available mortgage calculator to gain a better understanding of whether a 30- or 15-year term mortgage makes more sense for you.
Switch from FRM to ARM
Just as you typically have two choices of terms, you also have dual options for the type of interest rate: Fixed Rate Mortgage (FRM) or Adjustable Rate Mortgage (ARM). Fixed rate mortgages are the most common choice since they provide a consistent and predictable payment amount.
However, depending on how long you’ve owned your residence or if circumstances have changed, an ARM may be a better choice for you. For example, if you're thinking about moving in a few years - which you may not have considered when you first applied for a mortgage - an ARM may be a wiser option, in part because rates at the outset may be lower than they are with fixed rate mortgage products.
Alternatively, if you currently have an ARM and you don’t plan on relocating in the near term, then with rates where they are now switching to a fixed rate mortgage would allow you to lock in a rate for the life of your loan, protecting you against rising interest rates.
Tap into home equity
It's said that real estate is one of the best investments you can make. This is largely due to the nine-year U.S. housing-market boom. Equity has continued to improve because price increases have widened the gap between what homeowners owe on mortgages and the value of their properties, according to the most recent figures available from the National Association of Realtors. Similarly, home equity levels have also surged. In the first quarter of 2021, over 17 million homes were equity-rich, according to estimates from ATTOM Data Solutions. That's the equivalent of more than 1 in 3 homeowners having an equity-rich property. Meanwhile, just 2.6 million mortgages were underwater.
Tapping into the equity you have built up in your home can provide you with more options for covering other expenses. For example, if you want to refurbish your kitchen, bathroom or dining room, you may be able to tap into the equity in your home to cover the expenses related to paying for those renovations. You may also want to take advantage of some of your established home equity to help fund the purchase a business or make a down payment on an investment property. All this can be done by refinancing.
Forego mortgage insurance
Many people are under the assumption that they have to make a 20% down payment in order to buy a house. In reality, you can buy a house with as little as 3% down, and if you're a veteran or active duty member of the military, or purchase in a designated area, you may not need a down payment at all.
Perhaps the main reason why this 20% down requirement myth has persisted is due to mortgage insurance. If you put down less than 20% of the house's listed price, mortgage insurance is generally required so the lender can be made whole if the borrower defaults.
If you're someone that currently has mortgage insurance and you want to avoid paying the premiums associated with keeping the policy current, you may be able to eliminate it by refinancing into a conventional mortgage. Since more properties these days are equity-rich, you may have the 20% equity that is necessary to waive mortgage insurance.
There's a caveat
As you can see, the reasons why refinancing can make a lot of sense aside from taking advantage of historically low mortgage rates run the gamut. However, just because a variety of other scenarios exist does not necessarily mean that you should - or will even be able to.
When it comes to home financing, it’s important to explore a variety of alternatives, and make a well-informed decision. You may want to consider speaking with a financial advisor about how your home financing options factor into your broader overall financial objectives and strategies. An experienced loan officer can also help you better understand your home financing options.
The other thing to be mindful of are the requirements related to the home financing application and approval process. Refinancing a mortgage is just like a purchase mortgage, in that you need to have the appropriate qualifications in order to be eligible. Some of the things your lender will look at are your income, your loan-to-value ratio, credit history and FICO® score. Talk to an RMS Loan Officer about the documentation necessary to refinance. Much of the material you'll need is similar to what's required in order to pre-qualify.
Give one of our RMS loan officers a call for more information and guidance about refinancing, and whether it makes sense for you.
*This article was originally posted 1/31/2020. The rates and figures have been updated to reflect data as of June 2021.