If you are considering refinancing a mortgage loan, you need to make sure the net tangible benefit is large enough in order to justify doing so. A last several weeks, mortgage rates have touched on a historic market lows with a 30 year fixed-rate mortgage dropping down to 3.75% for a short time.
As the equities market continues to experience long-term financial pressure, investors are going to be hard-pressed to keep their money in risky investments. In economic times like these, with the future of the economy still stagnant, investors look to park their money where they can get a safe haven, that vehicle is the fixed income market otherwise known as bonds. The buying and selling of mortgage-backed securities is what has caused mortgage rates to become very favorable for people looking to refinance their home loans.
Consider the long-term ramifications of mortgage refinancing into your decision-making.
Simply stated-determine the net tangible benefit as a result of refinancing and does it actually makes sense right now?
Determine your breakeven point-consider the costs of refinancing. Let’s say you’re looking to refinance your current mortgage rate of 5% into a new 30 year fixed rate loan. Let’s say your original loan amount was $350,000 giving you a monthly principal and interest payment of $1878.88 per month. Because you’ve been diligently paying on your loan every month for the last couple of years, your new principal balance is $322,000.
The costs associated with refinancing add up to$3000. So if you choose to finance the closing costs, your new loan amount will be $325,000. On a new 30 year fixed-rate mortgage, you can secure a rate of interest at 4%, saving you $341.61 per month. This will allow you to break even in 8.78 months. See how to refinance without starting over 30 years.
Shorten the loan term- let’s say you’re presently in a 30 year fixed-rate mortgage and you’re looking to pay off your house faster and be mortgage free. Consider looking at the 15 year fixed-rate mortgage . 15 year fixed rate mortgage loans are tougher to qualify for because you’re on an accelerated amortization schedule and you’re paying the loan down in half the amount of time.
Put another way, qualifying for 15 your money requires double the income and/or less debt than qualifying for 30 year fixed-rate mortgage. If you can qualify however, sliding into a 15 year term will greatly accelerate time it takes you to actually pay off your house in full. You should be looking at 15 year fixed rates in the low to mid threes.
Debt Reduction- there’s an old saying don’t throw good money after bad. Doing a cash out refinance to pay off on preferred debt if it can significantly reduce the total household cash outlay, could be a tremendous benefit of a mortgage refinancing. Getting rid of auto loans, credit cards, personal loans and wrapping them into preferred debt might save you several hundred dollars per month.
The key in a situation like this is to not let the circumstances that led up to the debt accumulation happen again. If history is poised to repeat itself, instead of refinancing be smarter with your money.
Improve Cash Flow- have a second home or investment property that has an out of date mortgage rate associated with it? Refinancing that mortgage, with today’s rates, could provide substantial cash flow to a negative payment situation. 75% of the gross rental income on investment properties can be used for qualifying purposes.
“If you’re considering mortgage refinancing, there’s really no point in waiting.”
This according to the chief economist at Freddie Mac, Frank Nothaft. He and other economists believe mortgage rates will hit 5% in 2013 and will slowly start to rise at the end of 2012. Whether it’s a primary residence, second home or investment property it would be a good idea to compare your current home loan against available rates in the market today including 30 year fixed rates, 25 year fixed rates and 15 year fixed rates.
Mortgage Tip: if there is one thing about this economy with the way mortgage rates presently are, you will likely never have to refinance your mortgage loan again.
Homeowners considering mortgage refinancing should work with a mortgage lender that can close a loan within at least 30 days. Also best to work with the direct lender who sells loans directly to Fannie Mae and Freddie Mac as they have the news Making Home Affordable Program, that allows no refinancing loan-to-value restrictions. Run the numbers, do the math and see if refinancing makes sense. Speak with a couple of different lenders to get the full perspective. If it makes sense, go for it. You don’t want to be sitting on the fence waiting for the 2% mortgage rate when rates begin to rise.
Get a free mortgage refinancing interest rate quote today. Discover why if you’re thinking about mortgage refinancing, now is the right time.