Refinancing your mortgages when the interest rates drop down is a great idea to revise your mortgage payments. The interest rates dropped down as low as 2.65% lowest in 2020.However, these rates will recover soon. While there is always going to be a change in your current mortgage interest rates, you should consider the current interest rates you pay for your property. Our experts at Bellwether AM can always help you out with this.
However, there is always a chance that your older interest rates may be higher than the current rates offered in the market. For example, people with an improved credit score can help change the length of their loans, and maximize their loan payment. While it is a good approach, it only applies to short-term goals. However, there are other special refinancing programs, which are incredibly beneficial. For additional insights and resources, homeowners may review market value of the house on completion before making final decisions.
Should You Consider Refinancing Your Mortgage?
The answer to this question is quite subjective as every mortgage borrower needs to assess their requirements. There are a few factors that you should consider about your mortgage payment.
We are going to mention some questions you should ask yourself or your professional asset manager before refinancing your mortgage. Let us begin.
What is the Interest Rate Difference You Can Get?
Understanding the right percentage drop for refinancing your mortgage amount can help you determine if you should go for it. You should determine your savings out of this refinance for your current mortgage payment.
For example, an interest rate reduction of 1% matters more if you have a heftier loan. However, it will not matter much if you have a smaller loan like $100,000. You can use the following factors to determine your current mortgage payment:
- Down payment
- Home price
- Homeowners insurance
- Interest rate
- Loan term
- Property taxes
How long do you have to keep the Mortgage?
If you have bought a house recently, then you will pay a closing cost on your property on your refinance. However, you will most likely face a financial loss or maybe a breakeven (if you are lucky) in a situation like this. This is because the remaining mortgage price is not greater than the closing costs.
Moreover, if you add the closing cost to your mortgage and do not pay them upfront, it will add to your interest. Therefore, you need to find a way to get a break-even out of this situation.
Can You Refinance Into a Shorter Term?
The number of years left on your mortgage agreement also matters. For example, you aren’t going to save money if you have 20 years left on your mortgage plan and choose another 30-year refinance interest.
Instead, you should check if you can afford to make that 20-year mortgage into a 15-year plan. This way, you will save more in the long run with faster payments and lower interest rates at the same time.Doing this will also help you save money in the long run.
Pros and Cons of Refinancing your Mortgage
- Better Loan
- Increased long term worth
- Increased Short Term cash flow
- Higher payments on closing costs
- Losing equity
- Negative impact on long-term net worth.
- Overpaying interest to avoid closing costs
While this may sound a lot more technical than you first thought, know that there are several advantages to this strategy if you play your cards right. Following are some things you can stand to gain through these mortgage refinances.
Homeowners’ financial conditions tend to change over time. This means that some borrowers may have better financial status than they first had when they took the loan, allowing them to change the terms of the mortgage agreement, and reset the terms of payment in a way that suits them.
You can use this opportunity to revise your interest rates and provide better loan management. This will help you pay off the mortgage debt faster and increase your financial security in the long and short term. This way, you can also reduce the chances of losing your home, if you fall short on payments.
Increased Long Term Net Worth
You can spend less on interest payments with the revised mortgage plans. You can put that extra money away for your savings fund or invest it in a profitable opportunity. Alternatively, you can set the money for a long-term goal and maintain a better net worth.
Increased Short Term Cash Flow
Savings on interest rates provide you with in-hand cash that you can work with on a monthly basis. Additionally, this extra money also reduces the daily financial burden on you and creates more opportunities.
Higher Closing Costs
Several lenders may add inflated charges into your agreement and trap you financially. This will also increase the mortgage amount you need to pay. Unfortunately, they do not disclose this info until the borrower agrees to the agreement terms.
Higher Payment for No Closing Costs
People who do not want closing costs on their heads add them to their mortgage amount. While this sounds smart, it increases the interest amount you will pay on each payment. Therefore, it is best to pay it upfront to keep your interest rates minimal.
The amount you payout of the loan is your equity and is yours, and keeps increasing until you pay off the debt completely. However, refinancing your loan could chip out your equity percentage. Borrowers may even need to pay as much as 50 years of payments due to one poor financial decision.
Negative Impact on Net Worth
If you want to save money as a short term goal, a smaller monthly payment does not necessarily mean long-term savings. Therefore, decide carefully.
Refinancing your mortgage provides borrowers with higher net worth, short-term cash flow, better loans, and several other perks. However, it negatively impacts the long-term net worth, causes equity loss, and may result in higher payments on no closing costs.
Therefore, you should consult experts like Bellwether AM to help you with asset management and loan management. This way, you can take the best action and save money in the long run.