The era of historically low mortgage interest rates may be coming to an end, but it doesn't appear to be winding up anytime soon. As of this writing, interest rates on a 30-year fixed mortgage have once again dropped to 4%, despite the Federal Reserve's interest rate increases.
Low rates present an excellent opportunity to refinance your home – but even if interest rates are rising, you may still have a valid reason to refinance. Consider these five reasons why a refi may be right for you regardless of economic conditions.
1. Lowering Your Payment – Having trouble meeting your monthly payment? If you can acquire an interest rate that is sufficiently lower than your current rate, you can lower your monthly payment through refinancing. Online calculators can help you determine the break-even point; the time at which the savings realized equals all the costs associated with the mortgage.
Consider how long you plan to stay in the home, as that can influence your decision. If you are likely to sell the home before the break-even point, refinancing may not be your best option.
Even if you can't get a better interest rate, you can still lower your payments with a refi by extending your loan term. Since extending your loan term will cost you more in interest over the life of the loan, you should only consider extending terms in the context of a long-term financial plan. It's not wise to focus on lowering payments only to accumulate more debt in the future.
2. Improving Qualifications – How good was your credit when you bought your home? It's possible that your credit has improved considerably since you acquired your mortgage – especially if you have made all your mortgage payments on time and in full, and have shown responsibility with other lines of credit. Because you've demonstrated lower risk to a lender, you may qualify for a better interest rate through your sound financial habits. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
3. Switching to a Fixed Rate – Adjustable-rate mortgages are great in the short term, but when the adjustment period kicks in, your rate could quickly surpass the fixed rates of the day. Currently, interest rate changes have been slow, but when interest rates are rising more rapidly, a timely refi can save thousands of dollars in interest over the life of a loan.
4. Removing Private Mortgage Insurance (PMI) – Generally, PMI is required with a down payment of less than 20%. In some cases, the monthly PMI payment can be removed after you reach a certain equity level, but if your loan does not allow PMI cancellation, consider refinancing as an option. A slightly higher refinancing rate can still save you money in the long run if you can remove a significant PMI payment in the process.
5. Cashing Out – A "cash-out" refinancing essentially extends your borrowing to more than you owe on your home, with the difference being available to you in cash. You can use that money for any purpose, but you should have a good reason for going further into debt, especially at a higher interest rate. One good reason may be to apply the cash toward paying down a higher-interest debt such as credit cards. In that case, you've traded longer-term lower interest mortgage debt for short-term high interest debt.
Don't just assume that refinancing is out of the question because interest rates are rising. The value of refinancing is relative. Can you get a better interest rate than the one you have now, or can you meet some other financial objective? There's no way to tell until you fully investigate your options – and a little bit of research can save you a lot of money. MoneyTips is happy to help you get free refinance quotes from top lenders.