Not every eye-popping low rate you see represents automatic savings for you. If you're looking to refinance, here's how to get the best deal.
Interest rates on mortgages have hit a record low of near 3%. Both Bank of America Countrywide and Quicken Loans have reported a record number of refinancing applications. However, many Americans still don’t understand the full benefits of refinancing their mortgage.
- Reduce Your Interest Rate
One of the biggest benefits of refinancing your mortgage (after interest rates drop) is to cut your mortgage’s interest rate. For example, if you bought your home during a period of higher interest rates – or your credit wasn’t good enough at the time to get you a lower rate – you can save money each month by refinancing your mortgage. Furthermore, you will reduce the total amount of interest that you must pay over the remaining life of your mortgage.
- Trade an Adjustable Rate with a Fixed Rate
Many borrowers with subprime credit end up taking out adjustable rate mortgages. Unfortunately, when interest rates rise, the monthly bill on an adjustable rate mortgage increases. Oftentimes, borrowers have difficulty repaying their mortgage after it gets more expensive. Therefore, another benefit of refinancing your mortgage is that you can replace an adjustable rate with a fixed rate. That way your monthly bill won’t fluctuate with changes in interest rates.
- Eliminate Private Mortgage Insurance
If you took out a conventional home loan with less than a 20% down payment, then you (likely) have private mortgage insurance (PMI). Refinancing your mortgage to a lower interest rate will often eliminate your PMI. If you are currently paying for PMI, talk to a lender to see if you can eliminate it by refinancing.
- Pay Off All Your Debt Faster
Many borrowers can pay off their mortgage faster after refinancing. For example, when you pay less each month in interest, a greater share of your repayment goes toward paying down the principal. Depending on the amount you owe and reduction in interest rates, refinancing can cut years off your mortgage. Furthermore, if you have high-interest debt – such as from credit cards – you can apply for a cash-out refinancing. Cash-out refinancing allows you to borrow against the equity in your home with a lower interest rate, and then use the proceeds of that loan to pay off high-interest debt. Just make sure that you can manage high-interest debt in the future, so you don’t end up in the same spot again.
In short, if you are considering a refinance, make sure that you evaluate all of the benefits. First, if you refinance your mortgage to a lower interest rate, you will save on your monthly bill. Furthermore, you will pay less interest over the remainder of your mortgage. If you have an adjustable rate mortgage, you can (often) get a fixed rate by refinancing. You might be able to eliminate PMI depending on the lender. Lastly, you can use a lower mortgage rate to pay off your home faster. If you carry a lot of high-interest debt, consider using a cash-out refinancing to pay off that debt.