Mortgage Refinance: Ripe Occasions for Refinancing

By on | Home & Mortgage Refinance Information.

Heraclitus once wrote that “all is flux; nothing stays still”. In the home ownership arena, this change takes the form of mortgage refinancing. Studies show that the average American enters into a mortgage refinance almost every five years. Mortgage refinancing is defined as the process of taking out a new secured loan to pay off an existing loan that is secured by the same property or assets.

It allows borrowers to adjust the terms of their mortgage to suit their personal circumstances and lifestyle. A mortgage refinance opens the door to substantial long-term loan savings and more financial breathing room in the form of a monthly spending surplus. Most commonly, a refinance is performed by way of a second home loan. To assess the utility and benefit of mortgage refinancing, homeowners may utilize an online loan calculator. Financial experts consider a home refinance to be an advisable course of action under certain circumstances outlined below and for the following reasons:

1. Opportunity to save thousands of dollars
By refinancing to a mortgage featuring quicker repayment options, a lower rate of interest, or lower fees, borrowers pay considerably less money over the term of the loan.

2. Lower refinance mortgage rate on an FRM
Borrowers with an adjustable rate mortgage (ARM) that are about to enter the adjustable rate phase may refinance to a fixed rate mortgage (FRM) and avail themselves of stable rates of interest before the rates rise again. By refinancing to an FRM, homeowners can benefit from lower costs and steady monthly payments, thus saving thousands of dollars over the term of the mortgage. To determine whether mortgage refinancing is appropriate for them, borrowers should be informed about

a.) the ARM’s current rate

b.) the time period preceding the subsequent rate adjustment on an ARM

c.) the ARM’s present fully-indexed rate (FIR)

d.) the FRM’s rate and other terms in the market

The FIR represents the most up-to-date value of the ARM’s interest rate index, in addition to the margin. It constitutes the most accurate forecast of future ARM rate changes. If the FRM rate is lower than the ARM rate and the FIR, homeowners would benefit from refinancing immediately. If the ARM rate is higher and the FIR is less than the FRM rate, homeowners would gain from refinancing the ARM immediately.

3. Duration of home ownership
Another element that borrowers must consider before refinancing a mortgage is the length of time that they plan to live in the home. Refinancing out of an ARM is not recommended for homeowners who expect to live in the home only 3 to 5 years. In such a case, it is advised that they refinance to a 3 or 5-year ARM, which carries a lower rate than a conventional FRM. This would allow borrowers to avail themselves of the lower rate and avoid a rate adjustment since their home would be sold prior to the termination of the fixed-rate term. On the other hand, homeowners who plan to stay on the property for more than seven years would benefit from refinancing to a FRM.

4. Lower monthly payment
Refinancing involves exchanging a higher interest rate for a lower rate of interest, which in turn translates into a reduced monthly payment. Refinancing is an optimal choice if interest rates have fallen since the homeowner obtained the mortgage. As a general rule, borrowers should consider refinancing when existing mortgage rates are at least 1 percentage point less than what they are currently paying. Even with a mere interest rate fall of 1/2 to 3/4 of a percentage point, homeowners’ monthly payments markedly decrease and savings are generated over the course of a few years. Homeowners should compare the potential interest rate savings to the refinance fees to be paid.

5. Shorter loan term
Borrowers may refinance for the purpose of reducing the length of their mortgage, which would produce significant savings in interest. For instance, they may seek to modify their loan term from a 30 to a 15-year period.

6. Debt consolidation
Homeowners may combine high-interest consumer debt and loans into a new loan boasting a low down payment and interest rate. The new home equity loan is backed by collateral- the home.

7. Cash-out refinance
Another situation in which mortgage refinancing proves to be useful is where homeowners need a lump sum of cash to finance major expenditures such as home renovations, a college education, and a new car. By refinancing their mortgage, borrowers can tap into their home equity and draw on the funds for the aforementioned purposes.