To refinance mortgages are to pay off the existing loans by getting new ones to replace them. As homeowners, we could refinance our mortgages to save money. However, refinancing a mortgage should correctly be done at the right time. This article discusses when it is considered a good time for us to refinance the mortgages.
Typically, the interest rate plays a large role in how much money we should pay for the mortgages monthly and how much the total money we should pay over the life of the loans. The lower rate we could get on the loans, the less monthly payment we have to pay for the loans. The most common reason to refinance mortgages is to lower the interest rate on our existing loans. As a whole, if we could decrease the interest rate for the loan by 2% or more, it is considered the time to refinance the mortgage.
Generally, the interest rate that we pay on our loans bases on two factors. One of them is the prime rate; the other is our credit scores. The prime rate is influenced typically by the market and determined by the Federal Reserve referred to the lowest interest rate that money lends commercially; it is the base of the interest rate on our mortgages. Nevertheless, there is a percentage of the interest rate on our mortgages based on our borrowing history. Therefore, the higher our credit scores are, the lower that percentage goes.
It stands to reason that if our credit scores were not good when we got the mortgages, the interest rate on our loan could be high. However, if we have taken action over time to improve our credit score, we are qualified for a lower rate. Therefore, to refinance our mortgages provides us a chance to access better interest rates to reduce the monthly payments as well as the total payments on the loans.
Usually, the reason why an Adjustable-Rate Mortgage (ARM) is attractive for homeowners is that it has an initial low fixed interest rate period. In this initial period, the interest rate is lower than what the homeowners could find in the real fixed-rate options in the market. However, once the initial period has over, the interest rate will begin to be adjusted at regular intervals.
When our ARMs are going to adjust, the interest rate on our loan should go with the current interest rate offered in the market with the percentage decided by our credit scores. Thus, it is considered a good time for us to refinance the mortgages either for a more stable fixed-rate mortgage or another ARM.
As a homeowner, when we need money for a big-spending in life, we could go refinancing mortgages for cash-out. We could borrow more money than we currently owe on our home, and the difference between them gives us the funds to spend on what we want. The reason for cash-out refinancing is that it comes with a lower interest rate than a credit card debt or personal loan, and we could use it to pay for big-ticket items.
Due to more expenses or less income, if we need to pay less on our mortgages, refinancing could help us get some money back, given that in today’s marketplace, the interest rate is at its historic low.