The refinance boom of the recent past was driven by the desire to tap into home equity, resulting in homeowners carrying a larger mortgage balance. But according to Bloomberg, many homeowners want to build equity rather than spend it – and are actually bringing cash to their closing instead of doing a traditional cash-out refinance.
What’s behind this trend? A likely possibility is that slow economic recovery and shaky job growth has people in a security-seeking frame of mind. Homeowners are lowering the overall interest paid on their loan by refinancing to record low mortgage rates, and even cutting their loan term. While this may mean that their monthly payment is higher than before, or that they may have to bring cash to closing, it saves them thousands in interest payments and builds equity faster.
How To Build Home Equity
Refinancing is a great option for homeowners if they plan on staying at their home for a while and have home equity.
What if a homeowner doesn’t have equity (e.g. the home is underwater)? As mentioned above, some homeowners are actually bringing cash to their loan closing. For instance, you could use personal funds to meet the loan-to-value requirements to refinance your home.
This trend of cash-in refinances is reinforced by recent data that shows cash-in refinancing has reached it’s highest level since records were kept by Freddie Mac in 1985. This means that more people are choosing to put money into their home refinance and save thousands of dollars over the life of their mortgage loan.
Three More Options To Reduce The Total Interest Paid On Your Mortgage
What if you don’t want to get a 15-year loan but still want to decrease your term and the total amount of interest you pay over the life of your loan? There are several options:
- Pay off your mortgage faster by making bi-monthly payments. Regardless of your mortgage loan term, making bi-monthly payments will shorten the time it takes you to pay it off.
- Talk with you mortgage lender to figure out how you can shorten the term of your loan by paying a little extra each month. For example, paying an extra $150 per month on a $150,000, 30-year mortgage could save you over $38,000 in interest and 10 years on your loan (using a 4.375% interest rate as of 6/22/11).
- Get a loan that lets you choose the term of the loan. For instance, the YOURgage lets you choose a loan term between 8-30 years at a fixed rate. Let’s say that you want to ensure that by the time your kids start college, you want to have your mortgage paid off, you could get a custom term loan, like the YOURgage, in order to reach this goal (e.g. 13 year loan).
What If You Are Thinking About Buying A Home?
Even if you’re not a homeowner yet, and you’re thinking about buying a home, you can still choose a shorter-term loan for your home purchase and save money by reducing the total interest paid.
For example, if you get a $150,000, 30-year mortgage at 4.565% APR (rate as of 6/22/11), you would be spending $119, 613 in interest only over the life of the loan. If you were to choose the same loan with a 15-year term at 4.022% APR, the total interest amount paid would be approximately $49,323 — giving you a savings of more than $70,000!
Whether you’re refinancing or purchasing a home, the home loan process can be overwhelming. Please let us know if you have any questions or contact one of our Home Loan Experts to get more information about refinancing, home buying and all of our loan products.