This post was created as a paid partnership with Fannie Mae.
Throughout the past year, interest rates have been dropping. In fact, mortgage interest rates have hovered around 3% for the last year, which is historically low and could possibly make right now a great time to refinance your existing mortgage!
Refinancing your mortgage may help you lower your monthly mortgage payment. And there are refinancing options available to many homeowners who might have previously disregarded these opportunities!
Let’s take a closer look at the ins and outs of refinancing so that you can decide if this is the right decision for your future.
What is refinancing?
Before we dive into the potential benefits of refinancing your mortgage, let’s uncover exactly what refinancing means. When you refinance, you take out a new loan to pay off your current outstanding mortgage balance.
Essentially, you have the opportunity to replace your existing mortgage with a mortgage that offers a better interest rate. Homeowners that choose to refinance may be able to save thousands over the course of their loan with the help of a lower interest rate.
You should refinance now!
Refinancing may offer a way to improve your financial situation dramatically. With mortgage interest rates currently at historic lows, refinancing at a lower interest rate may help decrease monthly payments, which could increase monthly savings an average of $100 to $250 a month, according to the Federal Housing Finance Agency.
It’s possible to save money on your loan by refinancing. Talk about goals! Here are reasons why you should explore refinancing options now:
Your monthly payments may be lowered
Refinancing at a lower interest rate may potentially decrease your monthly payments. That’s right! You could build more wiggle room into your mortgage budget by taking the time to finance.
Let’s take a look at an example. Consider a homeowner that took out a 30-year fixed-rate mortgage of $150,000 at a 4.5% interest rate in 2018. Their monthly mortgage payment will be $760.
In the past two years, they’ve lowered their outstanding mortgage balance to $135,000. And with interest rates at historic lows, the homeowner decides to refinance their outstanding balance of $135,000 into a 30-year mortgage with a fixed rate of 3.0%. With that, they are able to reduce their monthly mortgage payment to $569 per month.
Although the exact amount of savings will depend on your unique mortgage details, any monthly savings could make a big difference in your budget. Imagine what you could do with the savings. You might be able to save for retirement or take that vacation you’ve been dreaming of!
It is however important to keep in mind that even with a lower rate, the total amount of interest over the life of the loan could still increase.
Want to see how much you could save each month? Take advantage of the free refinance calculator offered through Fannie Mae.
The total amount you pay in interest may be reduced
Not only can a refinance help you find new space in your monthly budget, but also reduce the total amount you pay in interest over the lifetime of your loan. Depending on your current situation, you may be able to save tens of thousands of dollars over the course of your mortgage through a refinance.
Let’s consider an example to illustrate how much you could really save. Remember the homeowner from above that took out a 30-year fixed-rate mortgage of $150,000 at a 4.5% interest rate in 2018. Without making any changes to their mortgage, they would have to pay $123,610 over the lifetime of the loan.
Luckily, a refinance may help them cut down on those costs. The homeowner decides to refinance their outstanding mortgage balance of $135,000 into a 30-year mortgage with a fixed rate of 3.0%. With that change, they’ll pay $69,900 in interest payments over the life of their new loan. The change will save this homeowner thousands of dollars!
You can build equity faster
Although a lower interest rate is a key factor when choosing to refinance, it is not the only reason. Refinancing may also help you build equity faster.
You can pursue this benefit by choosing a shorter loan term when you refinance. With a shorter loan term, you may not be able to save as much on your monthly payments. But you can build up the equity in your home at a faster pace.
Here’s an example. Let’s say you have $100,000 outstanding on a 30-year mortgage with a fixed rate of 4.5%. Right now, your monthly mortgage payments are $507. But it will take you 30 years to pay off the loan.
If you chose to refinance the outstanding balance of $100,000 into a 15-year mortgage with a fixed rate of 4.5%. The monthly payment would increase to $765 per month. But you’d be able to eliminate the mortgage in 15 years.
Depending on your financial goals, this could be a great reason to choose a refinance.
You can stabilize your finances
Last but not least, a refinance may help you make your monthly housing payments more affordable. This is especially true if you currently have an adjustable-rate mortgage. By choosing to refinance into a long-term mortgage with a low fixed rate, you’ll lock in regular monthly mortgage payments.
With a stable mortgage payment, it may be easier to build a budget that works for you. Plus, you won’t have to worry about being unable to afford your mortgage payment due to rising interest rates.
Should you refinance?
As you explore your refinancing options, it is a good idea to ask yourself a series of questions before diving in.
How long will it take for you to recover the money you invest in refinancing costs?
You may not want to refinance if the closing costs of the refinance will not outweigh the savings you could tap into.
How long do you plan to stay in your home?
If you aren’t planning to stay for several years, then you might not enjoy the full benefits of a refinance. Take some time to run the numbers for yourself.
Are you refinancing to decrease your monthly payments?
It is entirely possible to reduce your monthly mortgage payment with a refinance. Consider how much you’d like to save each month and shop around for the best refinance rates available.
Is your goal to decrease the amount of interest paid over the life of your mortgage?
If you want to reduce your interest payments, then refinancing can help. However, you may want to choose a shorter mortgage term to further reduce the amount of interest paid.
Are you hoping to ensure your mortgage payments don’t change over time?
If you are looking to lock in a mortgage rate that will provide stability for your financing, then now is a great time to refinance. With low interest rates, you can ensure affordable payments for years to come.
Not sure you qualify for a refinance?
Refinancing options are available to many homeowners who might have previously disregarded refinance opportunities given high closing costs, high levels of debt relative to income, or poor credit scores.
Of course, the unique details of your mortgage will determine how much you are able to save. Take some time to explore your refinancing options and contact a mortgage lender of your choosing to discuss your refinance options.
The bottom line
A refinance may help you reach your financial goals. Whether you want to lower your monthly payment or reduce the interest costs associated with your mortgage, refinancing could be the solution you are looking for. Ready to learn more? Take advantage of the free resources offered by Fannie Mae.