Interest rates are very low right now.
Unless you bought or refinanced in 2012 or 2013, odds are your rate is higher than what you could get today, assuming no changes to your credit or income that might negatively impact your profile as a borrower. With 30-year fixed mortgage rates currently averaging around 3.50%, it might make sense for homeowners to consider refinancing. Depending on several factors, such as your current interest rate and age of your existing mortgage, refinancing could mean a lower monthly payment and big savings over the life of the loan.
When you refinance a mortgage, you get a new loan and use the proceeds to pay off your existing mortgage. The principal is typically your current outstanding mortgage balance and the loan will be re-amortized over a new period, perhaps 30 years.
Mortgage rates are influenced by many different factors including demand from homebuyers and homeowners for new loans, current economic conditions, inflation, and demand from investors to buy mortgage loan debt. Demand for loans generally increases when rates are low, as cheap financing pushes more buyers to opt for a mortgage instead of paying cash and existing homeowners are eager to refinance.
Borrowers have the option to do a 1) rate-and-term refinance or 2) cash-out refinance. A rate-and-term refinance changes the interest rate, the term, or both of an existing mortgage without advancing new money. Rate-and-term refinancing activity is driven primarily by a drop in market interest rates, while cash-out refinance activity is driven by increasing home values.
The potential benefits of rate-and-term refinancing include securing a lower interest rate and a more favorable term on the mortgage; the principal balance remains the same. Such refinancing could lower your monthly payments or potentially set a new schedule to pay off the mortgage more quickly. There are several ways to exercise a rate-and-term option. Below is an example of a rate and term refinance.
| Current Mortgage Scenario | New Mortgage Scenario |
|---|---|
| Property Value: $500,000 | Property Value: $500,000 |
| Loan Term: 30 years | New Loan Term: 15 years |
| Remaining Balance on Loan: $300,000 | New loan: $300,000 |
| # of years remaining: 15 years | New Interest Rate: 3% |
| Current Interest Rate: 5% | New P&I: $2,071.74 |
| P&I: $2,684.11 |
Monthly Savings: $612.37 |
Cash-out refinancing takes equity from your home for you to use. It works best when the overall value of the property has increased because of rising real estate values. However, cash-out refinancing can also be done if you are well along in the mortgage and have paid in a significant part of its equity. A cash-out refinancing increases the principal owed on your mortgage. Below is an example of a cash-out refinance.
| Current Mortgage Scenario | New Cash-Out Mortgage Scenario |
|---|---|
| Original Purchase Price: $400,000 | Property Value: $500,000 |
| Original Loan Amount: $300,000 | New Loan Term: 30 year |
| Current Property Value: $500,000 | New loan: $400,000 |
| Current Interest Rate: 5% | New Interest Rate: 4% |
| Loan Term: 30 years | New P&I: $1,909.66 |
| Remaining Balance on Loan: $150,000 |
Monthly Difference: $299.20 |
| # of years remaining: 15 years |
Cash Out: $250,000 |
| P&I: $1,610.46 |
Now may be a great time to refinance your mortgage and enjoy the flexibility of lower monthly payments. Although refinancing may seem like a hassle, depending on your current situation, it could (literally) end up paying off for years to come.
