Why Refinance?
In 2020, you might be considering refinancing your mortgage. Did you know that this year, interest rates are near record-setting lows? The decision to refinance a mortgage is one to take seriously. Refinancing can either save you money or cost you in the long run. It’s important to look at all of your options so you make the right decision for yourself financially. Refinancing your mortgage means that you will pay off your existing loan and replace it with a new one. People consider refinancing because of the benefits it could bring, like:
Lowering your interest rate
Consolidate high-interest debt
Get rid of private mortgage insurance
Moving to a fixed rate
Reducing loan terms
To discover if mortgage refinance is right for you, consider the reasons above. Now, let’s break those reasons down and see just why they might be the reasons you decide to refinance today.
If you have a short-term loan, banks will lower or raise these loans to help them remain stable with the economy. For long-term rates, interest is determined by the demand for 10 or 30-year US Treasury notes. For example: low demand for long-term notes equals higher rates and vice-versa. Higher demand amounts to lower rates. If you have a fixed-rate mortgage, it normally falls under a long-term rate, which means it’s generally lower than most.
The needs of banks are also responsible for affecting interest rates along with the market and the borrower. Investopedia explains this by saying, “someone with a lower credit score may be at a higher risk of default, so they pay a higher interest rate.”
Getting a lower interest rate is one of the top reasons why people decide to refinance their mortgages. Along with saving money, lowering your interest rate also increases the rate you build up equity in your home. This in turn will help decrease your monthly payments.
Lending Studios Tip: only refinance if you can reduce your interest rate by 1-2% minimum. This will give you enough savings to make the financing worth it in the long run.
Consolidating debt means you roll all of your debts into a single payment with a lower interest rate. Not only can this reduce your total debt, but in some instances you can also pay it off faster.
An option within this is to use home equity to consolidate your debts. However, NerdWallet says this can be risky, so it’s not a decision to take lightly. So what’s the risk? When you look into your home equity for this cause, you are using your home as collateral. If you can’t pay, you lose your home. However, interest rates on home equity loans are usually lower. Also, this interest paid could be tax-deductible.
Home equity loans are a second mortgage based on your home’s value. You’ll get a lump sum of money, which you can use to pay off your debt. This will come with a fixed monthly repayment schedule. Consolidating debts can make your payments easier each month by only having to worry about one overall payment, which is quick and convenient.
