Why refinance?

Well, for starters, you can obtain a lower interest rate by choosing a program at a better rate than you currently have. You can lower your payment by stretching out your current balance over a new 30-year term. This means it will take longer for you to pay off your loan, but your monthly payment will drop.

But interest rates are rising. Is it too late to refinance?

In the big scheme of things, interest rates haven’t risen. Not really.

Certainly, the overall trend has been upward, but zigzagging means the rise is probably smaller than the occasional headline that’s caught your eye might suggest. So, according to Freddie Mac, the average rate for a 30-year, fixed-rate mortgage (FRM) was 4.53 percent in July 2018. It had been 4.20 in December 2016. That’s not a huge jump.

Yes, today’s mortgage rates are higher than the all-time record low (3.45 percent) seen in April 2013, but few homeowners were lucky enough to actually get that rate. And recent increases haven’t been as massive as many believe.

You probably qualify and don’t know it

Homeowners don’t try to refinance usually for two reasons: their home is “underwater” — meaning their mortgage balance is higher than the current market value of the property that secures it, and they have poor credit.

Yes, those issues will disqualify you from a cash-out refinance. But the good news is, there are programs that exist to help homeowners refinance to a lower rate when they’re in either or both of those situations.

Mortgages backed by the Federal Housing Administration, Veterans Administration, and U.S. Department of Agriculture (FHA loans, VA loans and USDA loans) have streamline refinancing programs that don’t require credit checks or home appraisals.

Should you refinance for lower payments?

If you refinance at a lower rate, you’ll usually end up with a smaller payment. There are exceptions, but in most cases that’s true.

In fact, you can usually refinance for lower payments even if you get a higher rate to reset the clock on your mortgage.

Take this example. Suppose that you’ve been making payments on your 30-year FRM for 15 years. If you refinance to a new 30-year FRM, you’ll be spreading your original repayment over 45 years (15 already and 30 more to come) instead of 30 years. And the more payments you make to clear a particular debt, the smaller each needs to be.

But this comes with a huge disadvantage. Even if you manage to refinance to a lower rate, you’ll end up paying significantly more interest in the end. Because borrowing a large sum over 45 years costs more than over 30 years, regardless of moderate variations in rates.

Refinance to cut your interest rate and borrowing costs

There’s an easy way to get a lower rate and slash your total cost of borrowing, but it’s the opposite of a refinance for lower payments, because you’re actually refinancing for higher payments.

If you cut the time your mortgage has left to run, you get two advantages: the shorter term will typically earn you a significantly lower mortgage rate than you could get on a 30-year mortgage, and you’ll pay a whole lot less for your loan overall, simply because you’re borrowing for a shorter period

You’re still resetting your mortgage clock, but you’re doing so for a shorter period than the term left to run on your existing mortgage—and fewer payments mean bigger payments.

Or refinance to cut your rate and payments

Mortgage experts have been predicting sharp increases in mortgage rates for roughly a decade, but those rises either didn’t materialize at all or turned out to be much gentler than expected.

If those predictions have put you off taking on an adjustable-rate mortgage (ARM) in the past, you might feel as though you made a poor choice. Because, at least for their initial, fixed-rate period, ARMs come with considerably lower rates than equivalent FRMs—and many with ARMs actually saw their rates go down when the economy softened.

Here’s how ARMs work: you get an introductory period in which the interest rate should be lower than that of a 30-year fixed-rate loan. This period can range from three to ten years, with the most common loan being a 5/1 ARM, fixed for five years.

After that initial period ends, ARM rates change with economic conditions, and your rate can reset once or twice a year, depending on the terms of your mortgage. But ARM rates overall have only edged up slightly over the last 10 years, and homeowners with ARMs are currently sitting pretty.

Because most Americans move more frequently than once every ten years, a lot of homeowners would be considerably better off with one of these.

Today’s ARMs come with less risk than they once did. Prepayment penalties are rare, and ARMs have caps on how much an interest rate can change at any one adjustment, and how high the rate can go over the lifetime of the loan.

Lenders calculate ARM rates by adding a margin (which covers their costs and profit) to a published financial index, like the LIBOR or the CMT. Look up your index to discover where your loan would be if the introductory period ended today. Tip: The index plus margin is also called your “fully-indexed rate.”

As long as you move on from your loan before the introductory period ends, the index and margin don;t matter. It makes sense, however, to understand the potential challenges that could arise if you decide to keep your loan longer.

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