Why refinance your mortgage? Refinancing in Fremont
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. This allows a homeowner to borrow funds at a more favorable interest rate, repay the funds over a different length of time or withdraw from or add to your home equity.
Depending on your financial circumstances or current interest rates, there are several ways refinancing could be beneficial to you. Here are the common reasons to refinance:
- Reduce monthly payment
- Reduce total interest paid
- Shorten the length of the loan
- Change rate type (for example, from adjustable rate to fixed rate)
When To Refinance Mortgage?
The current mortgage market is about as favorable to homeowners as it’s ever been as a result of the Covid 19 pandemic. And while it’s unclear exactly how long these conditions will last, here are three reasons why now may be the best time to act.
Lower Interest Rates on Refinance Mortgage
One of the best reasons to refinance is to lower the interest rate on your existing loan. Reducing your interest rate not only helps you save money, but it also increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. Interest rates have been largely moving in a downward trend for the better part of 2020 since the start of the pandemic and they have now reached historic lows.
While it’s impossible to predict exactly when interest rates will rise again, the one thing that’s certain is that they won’t remain this low forever. So if you’re currently paying a higher interest rate on your mortgage than what’s available today, now’s the time to take a look at whether you can lock in a lower rate with a refinance.
Convert to an ARM or Fixed-Rate Mortgage
While adjustable-rate mortgages (ARM) often start out offering lower rates than fixed-rate mortgages, periodic adjustments can result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to fixed-rate mortgage results in a lower interest rate and eliminates concern over future interest rate hikes. Conversely, converting from a fixed-rate loan to an ARM—which often has a lower monthly payment than a fixed-term mortgage—can be a sound financial strategy if interest rates are falling, especially for homeowners who do not play to stay in their homes for more than a few years.
As of today, the current market rates on fixed-rate mortgages have been dropping, while rates on ARMs are increasing. In some cases, the interest rates on ARMs are actually higher right now than fixed-rate mortgages. And if you already have an adjustable-rate mortgage, you have an opportunity to avoid worrying about future adjustments by locking in a low fixed rate now with a refinance.
The adverse market fee
In August, the Federal Housing Finance Agency announced that a new “adverse market” fee would be added to all refinances involving Fannie Mae and Freddie Mac. The fee is equivalent to 0.5% of the new loan amount, which adds a significant cost to refinancing, though loans with balances under $125,000 are exempt. Since about half of the mortgage loans originated in the United States are eventually bought by either Fannie Mae or Freddie Mac, this fee has the potential to affect a lot of borrowers.
With that in mind, the window of time between now and when the fee goes into effect is quickly closing. So if you want to avoid paying more for your refinance, you’ll need to get the process started as soon as possible.
Bottom line on when to refinance mortgage
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan, or helps you build equity more quickly. When used carefully, it can also be a valuable tool for bringing debt under control. Before you refinance, take a careful look at your financial situation and ask yourself: How long do I plan to continue living in the house? How much money will I save by refinancing?
Reach out to our team of brokers and shoot away from your question on refinancing your property.