Why it Is a Great Time to Refinance Your Mortgage

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Author: Matt Dimler

A sellers’ housing market exists when there is more demand than supply, which is to say more people want to buy houses than there are houses to buy. In this scenario, the competition affords lenders the liberty of offering higher interest rates, knowing that given the demand, people will pay them. As interest rates in the past decade were driven up and up, people were less and less able to afford them. When we say, “the bubble burst,” we are referring to the widespread onslaught of foreclosures and defaults on houses. In order to combat this epidemic, lenders, in conjunction with the federal government, have reduced interest rates in an attempt to encourage people to buy homes and even out the supply. As a result, we now live in a buyers’ market. Interest rates are lower and homeowners are having a difficult time selling their homes at prices that, under mortgage, prove to the buyer more advantageous than renting. For current homeowners, this could mean one of three things: 1) You bought your home when home prices and interest rates were high, and now have a comparatively high monthly payment. 2) You bought your home at a time when rates were low. You may wish to sell it, but sale prices are so low that it is difficult or impossible to sell and break even, let alone turn a worthwhile profit, especially given the amount of work it needs. 3) You bought your home when mortgage rates were high, have high monthly payments, and now can’t afford the necessities of life. This may cause you to default on your payments, forcing you to sell your house at a loss because prices are down. Even if you fall somewhere in the middle, because of the lowered interest rates, now is a good time to refinance. Refinancing High Fixed Rates and ARMs The current state of the market is a ripe time for refinancing both fixed rate mortgages and ARMs because, while small fluctuations occur week to week, interest rates on the whole are lower than they will be when the market’s inventory is eaten up, and the ratio of supply to demand evens out. A two percent shift is typically the rule of thumb when considering whether to refinance to a lower rate. Consider how much you will have to pay in penalties, costs, and fees, versus how long it will take you to net zero when compared with what you save. However, you must also consider how long you plan on keeping the home. For example, if on a 30-year, $125,000 mortgage at a fixed 7% interest rate, you were looking to drop down to a 5% rate over 30-years, your monthly payments would go from $832 to $671 â€" a difference of $161. If the cost of refinancing was $2000 (it can often be much more), it will take you 13 months to break even.

If you plan on staying in your home for seven to ten years, now is the time to refinance your home. If you are hoping to move within the next two to three, then refinancing may not be for you.

For Home Improvements

While it is not a sellers’ market, it may be a good time to stay in your home and fix it up, so when the condition of the market changes your investment on the improvements will grow with the economy. Cash-back refinancing, if used for some well-budgeted improvement projects, could increase the appraisal value of your home.

Cash-back refinancing also allows homeowners to pay off outstanding debts during difficult times, essentially consolidating it into one low-interest monthly payment. If you can afford the upfront costs, this could prove a wise financial decision.

To Gain Equity

Perhaps, when you bought your home, interest rates were such that you couldn’t afford the monthly payments that accompany a 15-year mortgage, and so you have a 30-year mortgage at a given percent, paying much more in interest than you would have liked. Given today’s lowered interest rates however, in addition to the equity already built up in the home, a refinance with a 15-year term might now seem more feasible.

Refinancing to a shorter term allows owners to pay off the principal on their mortgage, own their home sooner, build up equity, and save on the back end the interest they didn’t have to pay over the additional 15 years. How to Decide if it’s Right for You Whatever you decide to do, get multiple quotes, do the math, and weigh the pros and cons. Be prepared for the costs and fees. If you are seeking to increase your cash flow by refinancing a short-term mortgage into a long-term, be aware that it could cost you as much as 5 to 6% of your principal amount, as well as $5000 in fees â€" an investment that reduces your short-term cash flow.

Matt Dimler is a freelance writer who writes about real estate, mortgages and how to refinance.