We’ve written extensively about the current mortgage boom Americans are taking advantage of in record numbers.
Here at Quicken Loans, interest in refinancing is at levels we haven’t seen in years.
But there are still lots of people wondering if they should refinance their home mortgage now, or wait. They aren’t sure if it’s financially responsible and reasonable for them to do so, and are waiting to see if mortgage rates drop further.
Should you refinance their home mortgage now or wait?
That’s a question best answered by a mortgage professional who can make a financial assessment and informed recommendations. An honest and well-trained mortgage expert can answer all questions with the exception of one: Will mortgage rates drop or rise?
Sorry, but unless someone has a crystal ball or ESP (not usually part of mortgage training), they can’t predict the future. But they can make suggestions based on today. And today’s mortgage rates are VERY low, so refinancing a mortgage now can make a lot of financial sense.
That said, there are some very common reasons to refinance a home mortgage. Here are the top five.
The top 5 reasons to refinance your home mortgage
In no particular order of importance, here are the top reasons you could benefit from a mortgage refinance.
- Refinance to get a lower mortgage rate – Seems pretty obvious, but just in case it’s not, a lower mortgage rate means a lower mortgage payment. Just lowering it .5% can mean hundreds of dollars a month for some people. For example, a $350,000 mortgage going from 6% to 5.5% will see an average payment drop from $2,098 to $1,987. That’s money people can keep for themselves. The important thing to consider when waiting for a lower rate, is how much money is being spent while waiting? If you can save $200 a month by refinancing today and waits six months, will you make up the $1,200 you’ve given your mortgage company by waiting? Even if mortgage rates do drop further, how much did you spend waiting?
- Refinance to consolidate debt and improve credit – One of the most popular reasons to refinance is to consolidate debt, which will actually improve your credit score over time. Here’s how it works. If you have credit card debt or other debt that has much higher interest rates than current mortgage rates, you can substantially lower the amount of interest you’ll pay on that debt by refinancing and consolidating all debt to the lower mortgage interest rate. This will potentially reduce the total amount of future debt and allow you to pay your debt down faster. The faster debt is paid down, the less debt you have and the higher your credit score will rise. The higher the credit score, the better interest rates you can qualify for. This is one of the great benefits of refinancing a home mortgage to consolidate debt. You get a lower payment today and a better credit score in the future.
- Refinance to get out of an ARM – If you have an ARM, you probably got it because it had a very low mortgage rate. Very low mortgage rates were the number one reason ARMs were so attractive for the last decade or so. Sometimes they even surpassed 30-year fixed mortgages in national popularity. ARMs are actually a very useful tool for money management, and you might be surprised to know that many, if not most, financial professionals and money experts actually have ARMs for their home mortgages.
The key to using an ARM for successful money management is knowing when to refinance out of the ARM. It can be complicated, but the general rule of thumb is to refinance just before your mortgage rate adjusts upward. If your rate is going to adjust up, the time to refinance is now. With 30-year fixed rates at their lowest level in 40 years, refinancing from an ARM that is adjusting to a low 30-year fixed rate make a lot of sense. Again, you should talk with a mortgage professional who can advise the best time to take action. Remember, just because your ARM is adjusting doesn’t mean it’s adjusting up. It can also adjust down, in which case you would probably want to leave it alone.
- Borrow money at the lowest interest rate possible – If you want to borrow money and have the proper amount of home equity built up, borrowing money via a cash-out refinance is still one of the most popular reasons to refinance. Simple math reveals the popularity of cash-out refinancing. Using your home’s equity, you can borrow money at a much lower rate than other methods (credit cards for example), and possibly even qualify for a tax deduction (your tax advisor can confirm this). Like we said, pretty simple math – you borrow the money you want at a lower rate and possibly qualify for a tax deduction.
- Use investment property to take advantage of markets – If you are a property investor, right now is almost a perfect storm. Not only can you take advantage of the lowest mortgage rates in decades, you can also enjoy real estate prices that are the lowest in decades. As an investor, this means that you can buy more real estate for your dollar than in the past, and borrow the money for your wise investments at a very low interest rate. A very popular strategy for investors is to refinance their existing properties (both to get a lower mortgage rate and to raise money to buy more property), and then aquire more properties. In some areas, property and real estate are selling for discounts of around 90% compared to what they were appraised for or sold for just a few years ago. Like we said, it’s almost a perfect storm for property investors.
Whatever the reason, refinancing a home mortgage may be a good idea
Whether or not you take advantage of historically low mortgage rates on 30-year fixed-rate mortgages or take advantage of the best buyer’s market in a generation is up to you. The reasons to do so are clear and simple. If you’re not sure if you should or can take advantage of current markets, you should talk to a mortgage professional. Don’t wait and miss out on a great opportunity!
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