These New Refinancing Options Are Saving Homeowners Thousands
Over the past six months, the one thing that has stayed true is the mortgage rates. We are seeing near historic lows in North America. And whether you are a condo or homeowner, now is the time to consider refinancing. Doing so could save you thousands of dollars over your term.
These rates are not going to last forever. As more states reopen and the economy gets back up and running, interest rates are going to go up sooner than you think.
The Current Real Estate Situation
If you are a homeowner, you should already be paying attention to the real estate market. As of August 2021, the Federal Reserve Bank of St. Louis put the median home sales price at $374,900 in the United States. That is a $50,000 increase from 2020. Furthermore, this increase means that mortgage payments now equal 29.5 percent of the U.S. median income.
Those are crazy numbers, which further show that the price of homeownership continues to skyrocket. However, if you are already in the market and not looking to move, the number you need to be tracking is the current mortgage interest rate.
During the current worldwide situation, this number has been at record lows and could be a tool to save you thousands of dollars over the long term by refinancing your mortgage.
2018 vs. 2021 Mortgage Rates
To show you the difference three years make, let’s take a look at 15-year mortgage rates in 2018 and 2021.
If you had signed a 15-year fixed mortgage in 2018, you were lucky to find a four percent interest rate. Today, you will find a 15-year fixed interest rate of 2.28 percent. That is a difference of 1.72 percent.
To showcase the difference 1.72 percent has over that term, let’s do some quick math.
Mortgage Cost: $300,000
Mortgage Term: 15 years fixed
Payment A: Four percent interest rate equals $2,219.06 per month
Payment B: 2.28 percent interest rate equals $1,969.45 per month
The cost-saving with the 2021 interest rate is $249.61 per month or $2,995.32 per year. Put another way, you could be saving $44,929.80 over the lifetime of the loan.
There are several refinancing options that you may see from your specific lender. To help with the decision-making process, here are some of the most common options you will see across the country.
A 15-year mortgage is a popular option for young professionals and those looking to retire early without the pain of a mortgage payment. Unlike the traditional 30-year mortgage, a 15-year mortgage reduces the payoff term by half. Although this means you will have increased payments, save money in the long term by paying down your principal faster.
If you can afford it, a 15-year mortgage is a great tool to ensure you can access home equity or enjoy a mortgage-free retirement.
Cash-Out Refinance Loans
A cash-out refinance loan replaces your current mortgage with a higher mortgage to provide you with the difference between the two mortgages in cash. This cash influx can be used to:
- Pay off debt;
- Fund home improvements, or;
- Even finance a second home or investment property.
Homeowners can borrow up to 125 percent of your home’s equity. Moreover, some borrowers can enjoy tax deductions on their loan payments.
While a cash-out refinance loan is not an ideal solution for everyone, it does provide you with a better solution than other credit or loan options you may have access to.
VA Home Loans
To be eligible for a VA Home Loan, you or your spouse must meet specific criteria to be considered eligible. Although it does vary on if you are still an active member, when you served, and the type of loan you are applying for through Veteran Affairs. For active members of the military, you need to have done 90 continuous days. While the most common group of homeowners looking for a VA loan, those who served between August 2, 1990 and the present, must have served:
- 24 consecutive months;
- At least 90 days of active duty, or;
- Less than 90 days if discharged for a disability developed during one’s time in the service.
For members of the National Guard and Reserve, they must have served six years and be one of the following:
- Honorably discharged;
- Transferred to the Standby Reserve, or;
- Continuing to serve.
To learn all about the different criteria, Veteran Affairs has a thorough table on their website.
For refinancing, VA loans come in three distinct types:
- Cash-Out Refinance Loan: Offers a cash influx to cover expenses, pay down debt or anything else. This option will increase the mortgage amount up to the Fannie Mac/Freddie Mac loan limit by using your existing home equity.
- Native American Direct Loan (NADL): Allows Native Americans or those married to a Native American to receive a loan to buy, build, or improve a home on federal trust land. Veterans can also use the loan to refinance an existing NADL and reduce the interest rate.
- Interest Rate Reduction Refinance Loan: Allows veterans to lower your rate and monthly payments while paying down your existing loan.
There is a fourth type of VA loan, the VA purchase loan. This loan allows veterans who qualify to purchase a home, condo, or manufactured lot or make improvements to a home to make it more energy efficient. However, this option does not offer refinancing. Instead, it is used only for purchase.
FHA loans are a popular option for those looking to break into the housing market.
These loans are a great when you’re looking to refinance, as the FHA can help you get better rates and a lower monthly mortgage payment. Plus, you can skip the appraisal costs if you already have an FHA loan, as no appraisal is necessary.
A mortgage refinance is not for everyone, but it could save you thousands of dollars in the long term, depending on your situation. It is best to review your current mortgage and set up a chat with a lender or mortgage broker to go over your options.
With the record low rates, a check-in about a mortgage refinance might be the best move for your financial future. However, you should hurry because mortgage rates will soon rise.