Refinancing can have other financial benefits besides lowering rates. Locking in rates can protect you from higher rates, saving you money on future interest costs. You can also change your ARM for better caps to prevent huge monthly increases. Consolidating your bills with your equity saves on credit card rates while providing a tax advantage.
Protection From Future Rate Hikes
An adjustable-rate mortgage (ARM) provides the lowest rates for home buyers, but these rates can increase. Depending on market rates and loan caps, monthly payments can jump a couple hundred dollars a month. And in today’s environment, where rates are rising, an ARM may not be an ideal mortgage. You can get a 5-year ARM with a 3.24% interest rate according to Bank Rate.
For those planning to stay in their home for more than five years, it is good to refinance to a 30-year fixed-rate mortgage if rates look likely to rise, as they are now. Fixed-rate mortgages offer security from future payment hikes at slightly higher rates than ARMs. According to Bank Rate a 30-year fixed-rate mortgage is around 4.25%.
Trading-In for Better Caps
Many ARMs offer initial low set rates that can change after a couple of years. Jumps in payments can be surprising, especially if you have less than good caps. Caps set limits on how much and how often your payments can increase.
Refinancing your ARM can help you negotiate lower caps. You can also find an ARM with set rates for several years, like your original mortgage. Though I still do not advise any ARM mortgages due to interest rate uncertainty, a 5, 7, or 10-year ARM may be appropriate if you plan to stay in the home around one of the terms as refinancing can be costly, well as the uncertainty of rising rates.
Helping To Pay Off Your Loan
Early payment of your home loan saves on interest costs. Refinancing for a shorter term may answer those who need a structured approach to make larger payments.
For instance, exchanging your 30-year mortgage for a 15-year mortgage can reduce your interest costs by almost half, even at the same rate. Even with the origination costs, early payment will still save you money. Here is a post on the advantages of a 30-year mortgage. The result and benefits may surprise you.
Taking The Tax Advantage
Mortgage interest is tax-deductible, unlike interest on other bills. Cashing out part of your equity to pay off bills can give you a financial edge to get ahead. Be sure to make refinancing part of your larger financial goals to enjoy the full benefits. Though there are advantages to accessing your equity in a refinance, it is not always wise to do so as now unrelated debt could jeopardize your house if you end up in a situation where the mortgage is no longer affordable due to the excess equity being taken out in this scenario.
Investigating Lenders
Investigate lenders before you sign a contract to ensure you get the best financial offers. Ask about their APR to get a true understanding of the loan costs. Many financial companies post this information online, or you can request near instant quotes. To see some of the more competitive lenders, the terms, rates, and APR, you can also visit Bank Rate.
If you have questions about your mortgage and if you should or should not refinance, seek advice from a fee-only Registered Financial Consultant (RFC). If you are in or near the Metro-Nashville area or middle Tennessee, feel free to contact me for assistance.
