The refinancing debate is a hot topic in the current economic landscape. Which side is right? The bottom line is this: refinancing can save you a boatload of money.
Think about it like this: Greg has a 30-year loan with a 6% interest rate — not the worst rate in history, but according to Bankrate.com’s current market trend data, he could refinance for around 4%. Say the mortgage is for $250,000 with the recommended 20% downpayment of $50,000. The difference of 30 years with 6% and 30 years with 4% is nearly $90,000.
While Greg can’t retroactively apply this rate to his whole loan, it’s a pretty good demonstration of why it would be worth it for him to refinance for the last 20 years of the loan rather than let bygones be bygones.
On the fence about refinancing?
Here are 5 reasons to say yes:
1: To take advantage of historically low rates. Interest rates lowered in response to the 2008 Housing Crisis as an attempt at damage control. The damage from that crisis is largely done already, but the benefits for homeowners and those seeking to buy a home are still very present. Low rates mean a lower monthly payment and lower overall expenditures on your mortgage – especially for long-term mortgages – but this will not last forever.
There have been several indications that interest rates are about to increase, and the window to take advantage of these rates is quickly closing. Real estate classically goes through highs and lows, and the market rarely stays stagnant for long. It has been a buyer’s (or refinancer’s) market for quite some time now, but the market is shifting once again in favor of the banks and skyrocketing interest rates are on the horizon.
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2: To capitalize on your improved economic situation (income, equity, etc.) If you purchased your home and took out your current mortgage while in an economic situation less fruitful than the one you’re in now, you can use that to get a better deal on top of already low interest rates. Better credit, more income, an improved financial portfolio – all of these things can help drive your refinanced rate down even further and land you some pretty dramatic savings.
3: To consolidate debt and improve your overall finances. Car payments, student loans, your kids’ student loans, credit cards – some streams of debt (even debt that is positive to your credit) are costlier than others in the long run due to their increased interest rate. Refinancing your home with a lower rate can improve your overall financial situation by decreasing the cumulative interest you’re paying per month.
If you refinance your mortgage and get a 2-4% decrease in your interest rate, that could dramatically alter your long-term costs. If your financial situation is already top-tier, improved rates and consolidation can simply help you put some more money in your pocket, rather than in the pockets of the bank.
4: To help recover losses from the Housing Crisis. If the 2008 Crisis hit you hard and you were saddled with an extremely inflated mortgage rate in a seller’s market, refinancing can help you drive down your mortgage’s interest rate and help you on the road to recovering from years of high interest payments.
5: To decrease the burden of a big purchase or continuing your education. Whether you’re shooting for a kitchen remodel, going back to school for a career change or saving up for that drop-top Camaro you’ve wanted since you were 16, refinancing can help you shift your finances in order to accommodate a large purchase.
Lower interest rates will drive down your monthly costs as well as your long-term costs to accommodate a flexible budget change.With current market conditions, the benefits of refinancing far outweigh any hassles or risks involved. If you’re making more money, have fewer debts and have a better overall financial portfolio than when you initially got the mortgage, you’ll have to jump through considerably fewer hoops for a great rate.
The Case Against Refinancing
There are many nuances to navigating the tumultuous sea of real estate, and refinancing isn’t always the right answer, even with historic rates. There are a few sets of circumstances where refinancing isn’t the best route, and could end up costing you more in the long run.
Here are 5 reasons to say no:
1: You don’t plan on living in your home for a long time. If you’ve just purchased your house a few years ago and you’re certain it will be your family home for years and years to come, refinancing can be a no-brainer. However, if career opportunities are popping up elsewhere or you’ve been discussing a change of scenery with your spouse, a refinance can either make you feel trapped in your home or add on extra expenses if you should decide to sell.
2: Your home has dropped in value. There are plenty of fees associated with owning a home, and refinancing a home that has depreciated in value can add on additional fees such as private mortgage insurance.
3: Your financial situation has changed for the worse. Just because rates are historically low doesn’t mean that banks are tossing out high-dollar loans at mind-numbingly low rates left and right. If you got a decent rate when you purchased your home and now have lower income or a lower credit score, refinancing can either saddle you with a lower rate with many added years (increasing your overall cost), or with an interest rate decrease that isn’t worth the fees and hassle associated with refinancing your home.
4. You want to pay off your loan early. While refinancing can be a lucrative option, it can often add a chunk of time onto your loan. If you’re trying to consolidate your debt and get your home paid for, adding five extra years onto your mortgage, even with its decreased rate, isn’t an effective way to go about doing that.
5. Variable rate loans aren’t low forever. Refinancing isn’t black and white, and there are several different types of loans available. Variable rate loans can be extremely attractive during a refinance because the low rate is often guaranteed for a certain amount of time. However, once that low-interest period is over and the rate fluctuates with the market, things could change. Because the low-interest market is most likely transitioning to a high-interest market, a variable rate could end up costing you significantly more than a fixed rate mortgage.
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If you don’t fall into one of the five categories of ill-advised refinancing, now is the time to take the plunge and go after that great mortgage rate. According to a survey conducted by Bank of America, 68 percent of global fund managers expect interest rates to rise in the relative short term.
If the majority of the world’s global fund managers expect rates to go up, you can expect that it will only be a matter of time before these average 4% 30-year fixed rate loans start to creep back up. Once interest rates go up and the market shifts, getting a great rate on a refinance won’t be so easily accomplished.