Refinance the Right Way!

Refinancing is a common buzz word these days.  It’s all over the news, television commercials, and of course the internet.  How do you know when it is a good time to refinance your mortgage? Which lender should you select?  These are difficult questions, often with no 100% correct answers.  Each individual’s situation is different, and therefore no two homeowners will have exactly the same answers.

Refinancing is the equivalent of paying off your primary mortgage with the proceeds of another loan.  The difference is that usually this new loan has a much lower interest rate and the payments can be spread out over several years, making the loan more affordable for borrowers.

So, why is refinancing such a hot topic right now? The answer is complex.  On one hand, interest rates are dropping, but that is not to say that they are at an all-time low.  Borrowers who purchased their home several years ago most likely received lower rates on their original loans that on their refinancing loans.  On the other hand, there has been a push toward adjustable-rate loans over the past several years.  As these loans begin to reach the expiration point for their introductory interest rates, refinancing is a more affordable option for many borrowers.  One additional reason that refinancing seems to have become more common is that lenders have become more willing to extend loans with sub-prime interest rates to borrowers with blemished credit and low income over the past several years.  Now that many of these borrowers have successfully improved their credit score and/or income, they are finding themselves eligible for refinancing with a significantly lower interest rate than that offered at the inception of their mortgage.

Here are some of the specific reasons that borrowers are refinancing:

Lower Monthly Payments
Borrowers who would like to lower their monthly payments are looking for refinancing programs that offer reduced interest rates or longer repayment terms.  On common approach being taken by lenders is to offer adjustable-rate refinancing with handsome initial interest rates. However, borrowers who are considering this type of refinance loan need to know that unless they will be prepared to sell within the introductory interest rate period, this loan might not be the best option.

Lower Interest Rate
Borrowers who received less-than-ideal interest rates at the time of purchase, either due to the market interest rate at the time or due to sub-prime lending, may be considering refinancing with a lower interest rate.  One striking advantage of this type of refinancing is that borrowers who can comfortably afford to continue the same level of payment after refinancing will save money and pay off the loan much faster.

The other advantage of refinancing with a lower interest rate is that borrowers can increase the amount of the loan in order to make upgrades and repairs to their home, or even to pay off high-interest credit card balances.  The repayment may carry a similar payment, but the length of time left to repay the loan will be extended in accordance with the terms of the selected refinancing program.

Longer Repayment Time
Many borrowers are seeking refinancing programs that will allow them to spread the remaining principal on their mortgage over several additional years in order to lower their monthly payments and reduce the interest charges.  A homeowner who purchased a home 15 years ago is likely to have watched the home appreciate significantly.  Also, interest rates were generally higher back then.  If that homeowner borrowed a 30-year loan, he or she will have reached about the half-way point in the pay-off.  Paying off the remaining principle and spreading that principle over 30 additional years at a lower interest rate will almost certainly guarantee a significant drop in the monthly payment.  Some borrowers are finding that even a 15-year loan will drop their payments while extending repayment for only five additional years. This type of refinancing program can greatly benefit homeowners who have been in their home for a long time.

Home Improvement
Homeowners who have lived in their home for a long time have most likely generated quite a bit of equity in their home.  This is especially true when the property has appreciated over the years.  Home equity can be useful for owners who would like to improve their property, either to prepare for a sale or to simply change the home to meet their needs.  When a homeowner takes out what is known as a home equity loan, he or she is basically refinancing the home with or without an outstanding mortgage in order to benefit from the accumulated equity.  Lenders are offering very competitive rates on home equity loans and many homeowners are choosing to reap the benefits while interest rates are low.

Interest-Only Refinancing
An interest-only refinancing loan can be a risky option for homeowners who intend to stay in their home for more than a few additional years.  The benefit is that homeowners are able to boost their savings and other investments as a result of much lower monthly mortgage payments.  With this type of refinancing, the borrower pays only the interest on the loan amount for a specified period of time.  Principal can be paid down as well, but this is not a requirement of the loan program.  Generally, the homeowner will need to either sell the home to satisfy the remaining balance of the loan or refinance again before the end of the interest-only payments.  This presents significant risk for the borrower, so carefully plan how you will pay off the loan at the end of the initial period.

Eliminating the Risk of an Adjustable-Rate Mortgage
As mentioned above, many homeowners are nearing the end of the three- or five-year introductory period on their ARM.  Because interest rates are low right now, refinancing the remaining principle with a 15- or 30-year fixed-rate loan is a very attractive option.  When the homeowner prefers to know in advance what the payment amount will be and when the home will be paid off, a fixed-rate mortgage is the way to go.

Conclusion
Refinancing is an attractive option for today’s homeowners because of the availability of many different refinancing programs that can meet the needs of nearly any borrower.  Refinancing gives the homeowner the opportunity to take advantage of property appreciation and home equity and also to increase savings and financial stability.  Refinancing is not right for everyone, but if trends are any indication, the number of refinancing loans issued will increase significantly over the next few years. The more popular refinancing becomes, the more competitive the available rates and programs will be for prospective borrowers who seek relief from high monthly payments and inflated interest rates.