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 the state of interest rates, which fell rather sharply in 2018.
The general rule of thumb is if you can lower your interest rate by 0.5% or more, refinancing is worthwhile by virtue of helping you save potentially 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 two options you can choose from when it comes to how long you intend to pay off your home loan: 15 and 30 years. Overwhelmingly, the most common choice is 30 years. However, with the economy in bull territory, salaries increasing, job availability outnumbering those looking for work and the national unemployment rate as low as it's been in over half a century, you may be in a better position to pay more per on a per-month basis. 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 find out exactly how much you stand to spend per month by changing to a 15-year term length - and how much you'll save - with a mortgage calculator.
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 is the most common choice because it provides borrowers with the predictability they need to make the appropriate adjustment with their budget and how much they can expect to spend.
However, depending on how long you've owned your residence, your circumstances may have changed, making an adjustable-rate mortgage a better option. 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.
Alternatively, if you no longer plan on relocating, switching to fixed with rates where they are now can help keep your monthly payments in historically low territory so you never have to worry about the impact rising rates will have on your wallet when - not if - they do climb.
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 direction of home prices, as they've risen consistently on a year-over-year basis for 92 months in a row, according to the most recent figures available from the National Association of Realtors. Similarly, home equity levels have also surged. In the third quarter of 2018, over 54 million homes were equity-rich, according to estimates from ATTOM Data Solutions. That's the equivalent of more than 1 in 4 homeowners. Meanwhile, just 3.5 million mortgages were underwater.
Tapping into the equity your home has built up can provide you with more options when it comes to decisions that cost money. For example, if you want to refurbish your kitchen, bathroom or dining room, cashing out can supply you with the funds necessary to pay for the equipment and labor involved. You may also want to use the proceeds to 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 3.5% 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.
Whether you should or not depends on your goals first and foremost. If you don't know or they're still a work in progress, avoid refinancing until you're sure of the path forward. You may want to speak with a financial advisor for some direction. A loan officer may also be able to help you to chart out a strategy for real estate investing decisions.
The other thing to be mindful of is refinancing qualification. 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 your lender about the documentation necessary to refinance. Much of the material you'll need is similar to what's required in order to pre-qualify.
Talk to your lender for more news and information on refinancing and whether you're in a situation that makes you an ideal candidate.