Whenever mortgage interest rates take a plunge, most homeowners could be asking themselves if they would benefit from refinancing their current mortgage. Like taking out a mortgage to buy a home, there are also significant fees associated when refinancing a mortgage. When refinancing a mortgage, homeowners need to determine their financial goals so that they could figure out if they would benefit from the process. As a rule-of-thumb, refinancing could make sense if it will improve the homeowners’ finances along the way.
Important: Homeowners are advised to immediately get in touch with their mortgage servicer if they experience difficulty in making mortgage payments because of COVID-19.
Mortgage refinancing in the time of COVID-19
Shopping for a lender to refinance a mortgage could be tempting for some homeowners as mortgage rates became competitive when the new coronavirus disease of 2019 (COVID-19) affected the world. While many people have delayed their home shopping activities amid competitive rates, homeowners could take advantage of it. Because of the increasing refinancing demands, lenders decided to increase interest rates but when the U.S. Federal Reserve pledged to provide support to the mortgage market, some lenders have started offering competitive rates again. Mortgage refinancing in this time of COVID-19 could be a challenge for most homeowners as millions of Americans have filed for unemployment claims.
Homeowners should note that they need to prepare for the costs when refinancing a mortgage. Below are some of the reasons why mortgage refinancing could be beneficial:
Secure competitive rates
Mortgage interest rates could have changed since homeowners took a loan to buy their homes. Loan advisors would generally recommend refinancing if the goal is to secure much competitive interest rates. Eligible homeowners who would shop for a few mortgage lenders could choose the best offer and eventually help reduce their monthly payments which could mean additional monthly savings for the family.
Eliminate mortgage insurance
Most homeowners who took advantage of mortgage programs that offer a low down payment like FHA (Federal Housing Administration) loans are required to have a mortgage insurance premium or MIP. Lenders require MIP to lessen their risk when lending to borrowers with less than average credit score and those who could not put a 20 percent down. Homeowners who took an FHA loan and put a 3.5 percent down payment could eliminate MIP if they will refinance to a conventional loan. A homeowner may qualify to refinance out of FHA loan and eliminate MIP if home equity reaches at least 20 percent.
Shorten the mortgage term
Homeowners could refinance their mortgage if they want to reduce the number of years they need to repay their mortgage. This could be an option for homeowners who were able to improve their income or have significantly reduced their expenses. Homeowners could refinance a 30-year fixed rate mortgage and turn it to a 20- or 15-year and could even secure a much competitive interest rate compared with other borrowers. However, homeowners who would choose this path should know that their monthly payments will significantly increase and they must ensure that they’re comfortable enough in making such increased payments.
Cash-out home equity
Homeowners who have built enough equity over the years of mortgage repayment could refinance their mortgage and borrow against their home equity. To become eligible for a cash-out refinance, borrowers should have a loan-to-value (LTV) of at least 80 percent especially when they took out an FHA loan, meaning their home equity has already reached 20 percent. This could be an option for homeowners who want to augment their finances. For those who are not eligible for a cash-out refinance, getting a Home Equity Line of Credit or HELOC could be an option. HELOCs could be risky if homeowners could not properly manage their finances. Moreover, lenders could require HELOC borrowers to pay recurring fees and the interest rates are often variable, meaning they could change from time to time.
Shift to a fixed-rate
Some homeowners took out an adjustable-rate mortgage or ARM to buy their homes because they expect to relocate to another place after a few years. This is because for a period of time, ARMs start with a low interest rate but then changes (often increases) over the life of the loan. However, if they’ve changed plans and decided to stay in their current home until retirement, getting stuck with an ARM is not a good idea and refinancing their mortgage to a fixed-rate mortgage could be a viable option.
What homeowners should expect when refinancing a mortgage
The refinancing process is like taking out a mortgage to buy a home, the only difference is that no property will be turned over to the borrower. On average, a typical refinancing process could last for a few weeks or more than a month and borrowers need to prepare their financial documents. Lenders basically will look for the borrowers’ current pay stubs or W2 forms, credit report, tax returns, debt statements, and asset statements. An appraisal is also needed when refinancing a loan.
Consult with a skilled loan advisor
Refinancing could help you improve your finances in the long run once you’ve determined your financial goals. However, if you want to better understand your options as a borrower, speaking with an experienced loan advisor is also beneficial. Get in touch with an RPM Mortgage loan advisor today to learn more about your refinancing options.