Is Refinancing The Only Viable Tool For Managing Your Mortgage Rates?
As every homeowner can tell you, saving some cash on the monthly mortgage rates would certainly make their lives easier. To achieve this objective, most of them look into refinancing as the primary option. While refinancing is a great financial tool in this sense, keep in mind that it also comes with quite a number of options that are worth exploring. Let's evaluate some of the opportunities you can take advantage of when taking a loan for refinancing purposes.
Top refinancing options to account for
Taking out a new loan to replace the current one is usually a long and complex process. From deciding what type of loan works best, finding a lender and qualifying to taking care of the paperwork and monitoring the process until it's complete, this is undoubtedly a lengthy process. Considering the time and effort you're willing to invest in this process, wouldn't it be a pity if you didn't explore the opportunities the brand new loan comes with? Here are some of the options checking out.
Trading the adjustable rate for a fixed one
More often than not, borrowers initially opt in for the adjustable rates because this is the only way they can get lower the mortgage rates. Without denying the convenience of this option in the beginning, keep in mind that refinancing gives you the chance to further lower the rates via a fixed-rate mortgage. For starters, because they're fixed payments, it means you don't have to worry about the fluctuations associated with the ARM. In addition, the loan is considered a lot safer and the most viable option for homeowners who intend to hang onto their property for many years to come.
On the other hand, if you make the switch don't forget to keep an eye on the market. In case you didn't know, several banks in Canada have decided to increase their fixed five-year mortgage rates by 25 basis points. According to banks' representatives, the decision comes as a result of an increase in the bond yields, a cost that lenders can't really offset without altering the rates available for consumers.
Increasing or shortening the term of the loan
Granted, refinancing alone is bound to lower the amount of your monthly mortgage rates by a great margin. However, did you know that shortening or lengthening the term's duration can have an equally beneficial effect on your rates? If you opt to increase the duration, then your monthly rates will be lower, while providing you with more time to repay the loan. The downside of this option is that in the end you will spend more money on interest rates.
The shorter terms on the other hand don't just lower your rates, but are also a lot better if you're interested in building equity at a faster pace. It goes without saying that you can't rush this decision and that you will first have to determine whether you can actually afford to pay the new monthly premiums. As a rule of thumb, you should contrast the benefits of the shorter loan against straight savings. If the mortgage rates are higher than the after tax rate you can earn from savings, then this decision makes sense.
Exploring the possibility to include home equity
Whenever you are paying off your mortgage balance, you are practically building equity in your home. Equity in this case refers to the difference between the sum of cash you owe as mortgage and the current value of your home on the market. In the event when you selected a cash-out type of mortgage - you refinanced for a greater amount than the actual value of your home - then you will be happy to learn you can access this equity as cash payments.
The payments resulted from home equity can provide you with liquidity for improvements or starting a college fund, for instance. Alternatively, you can use it to consolidate debt, as this option is guaranteed to lower your monthly mortgage rates. While consolidating debt is a smart decision in most cases, unfortunately it also tends to bring a dose of financial imprudence with it. In fact, many people struggling with high interest rates and debts will go back to their old poor spending habits as soon as the refinancing allows them too.
Making the right decision
Even though refinancing brings dozens of benefits for homeowners, take not that this financial tool is not for everyone, and especially not recommended for people with credit card debt. At the same time, it's critical to establish whether you are due for pre-payment penalties when taking out a loan or fees for breaking the current loan terms. To determine if this is the right solution for you, it would be wise to use a calculator, preferably one that permits you to fill in as much pertinent information as possible.