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Friday 07/28/2017 Mortgage Rates

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Why You Should Refinance

This article details the different methods of refinancing and how you can harness financial stability from them. Refinancing is simply the replacement of one mortgage plan with another to diminish higher rates, stringent loan obligations, and lender regulations. Different elements influence the success of a refi deal, such as the risk involved, the borrower's credit-worthiness, the borrower's ability to pay off their debt, and the lender's terms and conditions.

Refinancing schemes are for the financially adept at understanding the concepts and accounting terminology to paint a picture of what to expect from a financial goal. If you find the concepts difficult to understand, consult with or hire a professional broker for you to take advantage of the opportunities a refi has to offer.

The name of the game is affordability. This is done by a combination of, and not necessarily by all of, the following: 

  • Raising the loan-to-value ratio
  • Reducing monthly payments by lowering interest costs
  • Switching from a fixed-rate loan to an adjustable-rate loan, or vice versa
  • Increasing your home equity
  • Prolonging or shortening the life of the loan
  • Lowering the debt owed
  • Eliminating the need for private mortgage insurance

Raising Your Home Equity for Better Refinancing Options

When committed to a mortgage plan, home equity represents a fraction of your home's appraised value. A home appraisal is the unbiased value of your home as it factors in the property's location, market, its condition, and its age. The greater the sum of monthly installments allocated towards the mortgage, the more equity your home has and, thus, the more value it holds. This makes equity integral to the loan-to-value (LTV) ratio and how you approach refinancing.

Shortening the gap between the mortgage loan and the home's appraised value by increasing your home equity will give you the affordable mortgage plan of your dreams. A professional appraiser - hired by you or your lender - can estimate the new appraised value of the property.

Lowering Your LTV for Better Refinancing Options

The lower your LTV ratio, the better your mortgage deal will be. The LTV rests on two variables: the appraised value of the property and the size of the loan given. Remodeling your kitchen, for instance, raises the market value of your home exceedingly well which, in turn, raises your home's appraised value. Once you've done all you can to increase your home's value, this will then alter the LTV ratio to your advantage and improve your home equity.

Lowering your LTV will also eliminate the need to purchase private mortgage insurance on behalf of the lender. The lender reserves the right for private mortgage insurance (PMI) if your LTV ratio is too high, however, under the Homeowners Protection Act, the lender is supposed to do away with PMI if your LTV is 78% or lower.

Refinancing to a Fixed-Rate Mortgage

Switching from one mortgage plan to another can also mean the interchanging between adjustable rates and fixed rates. A fixed rate can be the easiest to plan a budget because the monthly payments owed do not change, whether in the beginning, during, or at the end of the loan's life. Interest rates might fluctuate within a fixed range and the monthly payments may differ by tiny fractions but the monthly payments remain the same for the life of the loan.

For some homeowners, this is more financially stable because it enables a degree of control in predicting and planning effectively for the future. The major drawback with fixed-rate mortgages, however, is that when the interest rates are low for everybody else, your interest rates remain fixed no matter the economic climate. Fixed-rate mortgages, in this way, are preferred by homeowners that aren't planning to move for many years to come.

Refinancing to an Adjustable-Rate Mortgage

Initially, the rates for adjustable-rate mortgages start at about the same level as that of a fixed-rate loan for a set period of time, usually within the first five years. Over time, the interest rates will vary gradually according to the current economic situation. Compared with fixed-rate mortgages, this can be unpredictable as extreme fluctuations are possible and you could incur damages if high inflation rates persist from one year to the next. This is why two or three months prior to the new year your mortgage servicer will send you an estimate of your upcoming payments to give you a heads up if you wish to budget or switch to a different mortgage.

Adjustable-rate mortgages are more compatible with homeowners that are planning to move in for a few years because, once their mortgage servicer notifies them of unmanageable high rates, they can simply refinance, relocate and exchange their old home's equity with the new.

Cash-Out Refinancing

Lowering your interest rates primarily depends on how less of a liability your mortgage is in the eyes of your lender. A larger down payment, higher home equity, and greater monthly installments are the three deciding factors for risk management.

An effective method that puts all three into motion is cash-out refinancing, which enables you to draw cash converted from your home equity to improve your outstanding balance with your lender. This will shorten the life of your loan, minimize interest rates, and reduce the principal loan owed to the lender.

Click here to learn more about cash-out refinance.

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