After the economic downturn of recent years, refinancing became a new trend. There has been a couple of reasons for this.
1. The market dropped, and homes weren’t selling as easily.
2. Refinancing a loan is a lot like getting a new loan but with different terms.
3. People are trying to save money.
Refinance a Home to Save Money
With the economy in recovery, most people today are thinking of saving money. They’re asking themselves, where can I save money, where can I cut expenses? Naturally, the home comes into this conversation. When you purchase a home, it is considered an investment, and most of the time it is an asset. However, sometimes situations arise where the payment can be overwhelming. Refinancing can help that. Two of the most common reasons people refinance are to save money either on the interest rate or the mortgage payment. In many cases, these are combined, and a refinance will save you money on both.
But how does it work? How do you save money when you refinance a home if the refinance itself costs money? True, refinances do come with an up-front investment. Typically closing costs and fees are a few thousand dollars. However, by refinancing you can adjust the terms of the loan. As of right now, the rates today are very low, historically low. With interest rates hovering right around 3.8%, it’s a good time to lower your rate. By dropping your interest rate a point or two you can potentially save thousands of dollars over the life of the loan. A natural result of reducing the interest rate is the mortgage payment tends to drop, depending on the loan term you’ve chosen. So refinancing to reduce the interest rate can save you monthly cash as well as long-term cash. Depending on which refinance program and lender you go with, you may be able to throw it on the back of the loan.
Fixed Rate Loans and ARM Loans
In many cases, people are signed into an ARM loan. An ARM is an adjustable rate mortgage. Initially, it’s tempting because they tend to have a lower up-front rate than a fixed loan, but over time that will change. Most ARM loans start to adjust to the market rate a few years into the loan. If the rates today stay low, that won’t be a problem for the homeowner, but real estate is constantly fluctuating, and it’s not uncommon for interest rates to jump. As a homeowner, you’ll feel the impact if the rates take a leap from 4% to 6% or even 8%. Because the risk on an ARM loan tends to increase over time, many homeowners refinance into a fixed rate loan before the rate can start to fluctuate. They’ll watch for a lull in the marketplace where rates are low, and they’ll lock in the low rate through the refinance. This move will make it so their rate can’t decrease, but it makes it so it can’t increase as well. It’s a good way to reduce the risk.
Homeowners also refinance to adjust the length of their loan term. Typical loans are approved with a thirty-year loan. However, by the time the house is paid off thirty years later, you will have spent at least double, probably more. The interest amortizes in such a way that if you sign on a $200,000 loan for a thirty year period, you’ll probably end up paying $400,000 or more by the time you make the last payment. When homeowners get into a good place financially, they’ll often refinance and reduce the loan term by ten or fifteen years. That reduction will cost more initially but could save thousands over time. This is a good place to crunch numbers before you refinance, but it’s a tactic that is often used to reduce debt.
When it comes to refinances there are many, many reasons people choose to refinance a home, but they often fall into one of these categories or some variation of these categories. Refinances, when done correctly and with the help of a professional loan officer, can be very beneficial to the homeowner. They make it possible to create the mortgage in a way that works with the homeowner’s budget, while simultaneously helping the homeowner save money. However, they aren’t without risks, so it’s imperative that you enlist the help of a professional when you decide you want to refinance.