Consider Refinancing While Rates Are Still Low
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accurate as of
April 11, 2017
in Blog

Consider Refinancing While Rates Are Still Low

Mortgage interest rates are likely on the rise, so if you’re thinking about refinancing or buying a home, now may be a good time. Below are some helpful tips to keep in mind as you shop for a mortgage:1

Paying Attention to Interest Rates

Even a small movement in mortgage rates can have a significant effect on what you’re paying. A recent article on Yahoo Finance gave the following example:

Let’s say that you’re borrowing $300,000 at an average rate of 4.3 percent on a 30-year fixed-rate loan. A half percent increase in interest can cost you approximately $89 more per month. If the rate goes up a full percent, your payment can go up by about $181 per month, or $65,160 over the life of a 30-year loan. Of course the amount you save will vary depending on your loan terms, but this example gives you an idea of the impact a rate increase can have on your finances.

Does Refinancing Make Sense

Refinancing to a lower rate gives you a lower monthly payment, thus increasing your cash flow. However, the article recommends taking advantage of this strategy only if you plan to stay in the home long enough to save more from the lower rate than you paid in refinancing fees. You can calculate your break-even point by dividing your total refinance costs by your monthly savings. This will give you the number of months required to break even.

Eliminating Mortgage Insurance

Lenders usually require you to buy mortgage insurance if your down payment is less than 20 percent of the purchase price. This can typically cost anywhere from 0.5 to 1 percent of your loan’s value.  According to the article, this can add approximately $40 to $83 a month to your payment for every $100,000 of your mortgage. The article states that “With FHA mortgages and some conventional loans, you have to pay mortgage insurance for the life of the loan – refinancing is the only way out. However, if you have 20 percent equity in your home when you refinance – whether through your payments or from appreciation of your home’s value – you won’t need mortgage insurance.” Your lender can tell you whether your principal payments have exceeded this threshold. To determine your home’s current value, you can research similar listings that sold in the area, use real-estate websites, and/or check your county tax assessor’s valuation.

Paying Down Your Home Faster
Consider refinancing while rates are still low and pay off your loan faster. While doing so might increase your monthly payment a little, the advantage is that it will save you a substantial amount of money in the long run.

Short-Term Adjustable Mortgage Options

While there is comfort in knowing your fixed rate won’t fluctuate, an adjustable rate mortgage can also be a good choice under certain circumstances. For example, if you sell your home before the loan’s introductory low-interest rate period ends. Adjustable rate mortgages (ARM) can be attractive because their initial rates are often lower, but they can also be more risky. After the fixed-rate period ends, the rate can adjust monthly, semi-annually, or annually. Once that rate goes up, your mortgage payments could quickly become more expensive. 

Accessing Home Equity

Home values have been steadily rising over the last several years, resulting in an increase in home equity. If you’re interested in accessing your home equity, you have a few options, such as:  a cash-out refinance, a home equity line of credit, or a reverse mortgage.

A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan (FHA). A reverse mortgage enables seniors 62 or older to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 A HECM for Purchase may also be an option for seniors that want to downsize to a smaller home.

If you’d like to learn more about accessing your home equity through a reverse mortgage, please use our Reverse Mortgage Calculator or call us at 800.218.1415.

 

1 How to Refinance Your Home Before It’s Too Late – finance.yahoo.com, by Marilyn Lewis, 3/21/17, http://finance.yahoo.com/news/why-look-refinancing-home-now-161501770.html?&tc=eml.

2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.

3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.