30-Year Refinance Conundrum

Interest rates make the world go round. And so does debt. Thus, it’s no shock that so many people contemplate refinancing their mortgages. A mortgage is, for most people, one of the largest chunks of debt they’ll ever take onto their credit, save perhaps student loan debt. It’s not just the debt that bothers most folks. It’s the fact that paying down the principal on your mortgage can feel like trying to sprint up the side of Mt. Everest in beach clothing. It’s daunting and if you purchased a house and were locked into a high interest rate or, due to credit issues, were forced into an adjustable rate mortgage, paying off loans under those circumstances can feel like more of a climb than you thought it would.

Refinancing

Refinancing is an option that lots of people eventually turn to when they’re in the middle of a 30-year mortgage. It allows you to pay off the existing mortgage and replace it with a new and all-around better mortgage.

Refinancing is attractive for multiple reasons. You can use the money from your house to finance another large purchase, access the funds for a financial emergency, consolidate debt or just reinvent that home equity and bring down your monthly payment. It’s an excellent option for homeowners to gain access to funds that were previously locked up as home equity and do what they see fit with them depending on the direction they see their financial future going.

What Does Refinancing Entail?

Refinancing your loan is a little different process than what you went through when you initially bought your home. First, you’ll have to get an appraisal of the house. Then, there will be a title search that you’ll need to pay for as well as application fees for refinancing. Indeed, refinancing ends up costing around 2-5% of the loan’s principal.

Once these steps have been completed, you’ll be able to start evaluating what sort of refinancing terms you’d like. For example, you’ll be able to pick the duration of the mortgage and you’ll be able to get a different interest rate. This can make your home loan more affordable on a monthly and long-term basis.

Why Refinance?

Most homeowners tend to refinance for a lower interest rate. Let’s say you locked in your mortgage when you bought your house at 5% interest. It’s not a good idea to continue paying that if interest rates drop closer to 2% or something similar. In fact, if you can reduce your interest rate by at least 2% points, refinancing is a great idea for you. Some lenders even recommend 1% savings as a good enough reason to refinance. And, indeed, if you’re paying 1% extra in interest on a 30-year mortgage, that sum adds up incredibly fast. For that reason, it’s widely considered to be a great idea to refinance simply to take advantage of much better interest rates. However, there are other benefits to refinancing, too.

In fact, you could switch to a fixed rate mortgage to protect your home loan from ever-fluctuating interest rates. You could refinance to shorten the term of your mortgage and pay less interest in the long run. Or, you could decide to refinance to bring down your monthly mortgage payment.

Refinancing a 30-Year Loan

• Lower Interest Rates: A 30-year refi is an excellent way to retarget your loan and your financial plan. Obviously, with lower interest rates comes a lower monthly payment, but most importantly, it means the total cost you spend on your house is much less than it would be if you were to keep your current mortgage as it is. If you’re currently sitting at 5.6% and have the opportunity to lower it to nearly 2%, then you’ll end up paying 3.6% less on a monthly and long-term basis for your entire home. That means that the final price you pay for your home at the end of the day is much closer to the price you first saw on the listing of the house. Trust us, it’ll feel much better to pay closer to $450,000 for your house over the course of your mortgage rather than $600,000.
• Convert to a Fixed Rate: Sometimes, ARMs, or adjustable rate mortgages, sound real good when you’re first sitting down with a lender and buying a house. They often offer lower rates than fixed rate mortgages do at first, but they include periodic adjustments over time that result in rate increases that are often much higher than the average fixed rate mortgage is. If you grabbed an ARM when you first purchased your house, you’re not alone, but it’s probably time to upgrade to a fixed rate mortgage instead. You’ll save a huge sum of money on interest costs alone and eliminate the stress associated with surprise rate increases that might come down the line.
• Tap Into Your Equity: It’s no secret that mortgages and houses cost a lot of money. You accumulate equity in your home over a large amount of time and, suddenly, the equity is a much larger sum of money than you might have expected. While this is always a pleasant surprise, many people’s initial response is to want to be able to access that equity. You can do this through refinancing with a new 30-year mortgage. This is a great way to access the money you need to pay for a major home remodel that you’re looking forward to, a child’s college education, expensive medical bills and more. After all, if you were to leverage the equity from your house to pay for a remodel, you’d be using it to add value to the home, all while decreasing the rate on your mortgage and therefore decreasing your monthly payments. This is an excellent way of using the equity in your home to improve your financial future.
• Consolidate Your Debt: Many homeowners find refinancing their home with a 30-year refinance plan to be a great way to consolidate debt. Even just at a glance, replacing a high interest rate with lower-interest debt is always a good decision. Therefore, if you were to use the equity from your home to pay down other debts that are much higher interest and therefore limit your debts to only your mortgage, you’ll be saving money in the long term. This is a good way to pay off things like credit card debt, student loans and other large, high-interest loans that are hanging over your head.
• Lower Monthly Payments: Predicting where you and your family will be financially in the future is always a gamble. Sometimes, it’s a gamble that just doesn’t work out. Even the most secure career can crumble and leave a family without the funds they need to lead the lifestyle they’re used to. A great way to make your housing more affordable is to refinance with a 30-year mortgage and access a lower interest rate.