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In June 2021, refinance rates are still near record lows. So if you’re considering a refi on your mortgage this could be the perfect time to do it. But what do you have to keep in mind?
Though mortgage rates are slowly starting to inch upwards again, interest rates are still miles below where they’ve been in the past. 2021 might be the best time for a mortgage refinance, saving you money over the long haul on pesky interest payments of the past.
Why Should I Refinance My Mortgage?
According to FRED Economic Data, 30-year fixed-rate mortgage averages are hovering on the 3 percent mark. If you took out your home loan in the past decade, a refinance can essentially split your interest payments in half, saving you money on monthly payments and over the life of your loan.
Warning: As the economy recovers from Covid-19, refinance rates might see a steady increase. Take advantage of the near-rock-bottom rates by refinancing soon.
How Does It Work?
A refinance essentially replaces your current mortgage by having another loan pay off your outstanding mortgage debt, thereby replacing the previous interest rate and terms with a new loan.
If you’ve already paid off half of your (let’s say) $300,000 mortgage, your new loan would likely just need to cover the outstanding $150,000 or so, depending on the kind of mortgage refinance option you choose. This will then make it easier to pay off the loan over time, and you can take advantage of new, lower refinance rates compared to when you first took out the loan.
Option 1: Rate And Term Refinance
This option lets you change the interest rate or term (or both) of your current mortgage without you spending more out of pocket. The rate-and-term refinance is also known as the “no cash-out refinance.”
Rate-and-term refinances are mostly a response to lowering interest rates, which means this one is likely the one you’d choose as banks continue to offer great refinance rates. The rate and term will be determined by the current national average, as well as your credit score. If your score has gone up since you first took out your mortgage, the mortgage refinance could do wonders for your finances.
Option 2: Cash-Out Refinance
This option is key if the value of your home has increased. As the seller’s market continues to improve, this option is becoming a lot more enticing. The cash-out refinance lets you swap an old mortgage for a new one with a larger amount than owed on the original loan. There will be extra cash after the original mortgage is paid, which is accessible to the borrower.
The cash-out refinance may require you to pay a higher interest rate, and the lender can decide how much cash you can receive after the original mortgage is paid, based on bank standards, the value of your property, and your credit score.
The cash-out refinance option can be especially enticing for those with outstanding debts, investment opportunities, or a significant purchase to consider, such as home improvements. Borrowers are paid in cash, which can be very helpful in times of financial stress. With interest rates as low as they are, the time might be now to consider a mortgage refinance.
Time To Compare
Once you’ve decided that you are going to refinance your mortgage, there are a few steps to achieve the best financial outcome.
Goals? Know them!
- If all you need to do is streamline your finances and have a lower monthly payment (at the cost of up-front hassle and some additional fees), then a rate-and-term refinance is likely your best bet.
- If you need extra cash or have an exceptional investment opportunity, you may want to consider the cash-out refinance. The cash option can help fund your retirement or a lucrative investment. If you’re smart, you can pay off your new interest payments with healthy investments with your cash-out refinance.
Find The Best Home For Your Mortgage
Though average rates may be low, some lenders will have higher rates or will have variable interest rates depending on your credit score. Fees are another important factor in deciding where to refinance. Shop around the make sure your next mortgage is coming from the right place.
Customer service is another important aspect of finding the right lender. Check online and make sure other lenders have written rave reviews. If not, you may need to take your refinancing somewhere else.
Do The Math
Use a refinance calculator to find out what the best rates and terms would be for your specific financial situation. Don’t overpay, and certainly don’t pay longer than you need to. If you can switch to a shorter-term mortgage with a higher monthly payment, you’ll save more over time.
Credit Karma Home or other mortgage refinance calculators can quickly compare rates, terms, and fees involved with each option. Use this to fully understand where your money is going, and whether it’s even worth it to refinance.
Choose Your Terms
Once you know whether refinancing your mortgage is the best option for you, you’ll need to understand the terms of your refinance and lock down the best refinance rates.
A fixed-rate is like the name suggests. The refinance rates won’t change throughout the life of the loan. Once it’s locked down, the interest won’t increase (or decrease). Your monthly payments will essentially stay the same, though the amount of principal and interest paid each month will vary. This makes long-term budgeting simple and possible.
Adjustable-rate mortgages are variable, in which the initial interest rate is set below the market rate, but rises over time. If the ARM is long enough, the interest rate will surpass the going rate for fixed-rate loans. Meaning, you need to identify the perfect length of your mortgage loan to prevent the interest rate in the ARM from raising above the fixed-rate for too long.
You’ll want to calculate which refinance rates are right for you, depending on your loan length and the current market. If interest rates are already low, you may want to stick with a fixed-rate mortgage and ride it all the way through.
Loan Length is important because it will need to work with your financial situation. Most mortgages come in a 10-year, 15-year, or 30-year term length, meaning you’ll have less or more time to pay off the mortgage depending on which one you decide to do.
A smaller length of time, say a 10-year or 15-year mortgage will cost you more each pay period but will save you money in the long run because you will pay less interest over time. A higher loan amount will have you paying higher refinance rates but will require smaller payments per month.
Make sure to do your research and determine if you can afford a 10-year or 15-year mortgage. If not, you may need to do a 30-year mortgage.