Mortgage Rates are Dropping: Should You Refinance a Home?

Home mortgage rates are at a two-year low point. For many people, this is a good reason to apply for a home loan and buy a new house. But what if you don’t want to move? Can you also benefit from low mortgage rates? The short answer is yes.

Applying to refinance a home is one of the best ways to snag a lower rate, especially if you purchased your house when mortgage rates were higher.

Before you proceed with an application, though, make sure you understand how refinancing works.

 

What is a Mortgage Refinance?

Mortgage refinancing is the process of replacing an existing mortgage with a new one. And since you’re getting rid of your old loan, refinancing opens the door to better terms and a lower mortgage rate.

Refinancing, however, isn’t as simple as calling your lender and asking for a better rate and terms. You do have to go through the application process again and must meet the income and credit requirements of a loan program to qualify.

 

Why Refinance a Home?

One of the biggest reasons to refinance a home is to take advantage of a lower mortgage rate. This often creates a lower monthly payment. And in most cases, your new loan balance will be smaller than your original, resulting in additional savings.

Let’s say you had an original mortgage balance of $250,000 and an interest rate of 5%. This is a monthly payment of about $1,342*.

Now, let’s say you have a current mortgage balance of $175,000 and can qualify for an interest rate of 3.70%. By refinancing your mortgage, your monthly payment could decrease to $805*.

Imagine what you could do with this extra money in your pocket. Build your emergency fund, increase retirement contributions, make home improvements, or even enjoy more experiences with your family.

But while getting a lower mortgage rate is one reason to refinance, it’s not the only reason. Maybe you have an FHA home loan and you’re stuck with mortgage insurance for life. Refinancing to a conventional home loan (once you have a loan-to-value ratio of 80%) can alleviate mortgage insurance, further lowering your monthly payment.

Or maybe you want to pull cash from your equity. Keep in mind that a cash-out refinance does increase your mortgage balance. But if you’re able to qualify for a lower rate, you might be able to borrow from your equity and keep your monthly payment roughly the same.

Unfortunately, a new mortgage involves closing costs. The good news is that you might be able to wrap these expenses into the mortgage balance, reducing your out-of-pocket contribution. Even so, only refinance if you’ll live in the property long enough to breakeven—or long enough for the monthly savings to offset closing costs.

So if refinancing reduces your mortgage payment by $400 a month, and you paid $6,000 in closing costs, you should live in the house for at least another 15 months.

The loan experts at FirstBank Mortgage can make the process of getting a home loan easy. Give us a call to see how much you can save by refinancing and taking advantage of falling mortgage rates.

*Monthly payment figures are based on a Conventional Loan, 30-year fixed-rate and 720 credit score. 3.857% APR. The original home value is $250,000 and the refinanced loan amount is $175,000. Payment example excludes taxes, insurance, and PMI.

Sources:
https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/
https://www.marketwatch.com/story/mortgage-rates-hold-at-two-year-lows-giving-borrowers-another-shot-at-the-action-2019-06-13

Disclosure: Application is required and is subject to underwriting. Not all applicants are approved. Full documentation & property insurance required. Loan secured by a lien against your property. Fees & charges apply and may vary by product and state. Terms, conditions & restrictions apply, so call for details. FirstBank Mortgage provides a variety of loan products with different rates, payments and fees. All loans are subject to credit approval. Products and services offered by FirstBank. FirstBank Mortgage  is a division of FirstBank.

 

 

 

 

 

 

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