All individuals desire to be homeowners. It is a nice feeling living in your own home and this is the reason why people go for mortgages. In fact, a recent study established that one of the main reasons why most Americans borrow is to become homeowners. However, this is a critical decision you really need to be careful about. At all time, ensure you are dealing with licensed lenders and you can get more information about from best money lender Singapore and compare their rates online by visiting this site
Mortgages are often required to be paid for a period of up to 30 years, though some lenders offer terms exceeding this timeframe.
You will be required to make an initial deposit and monthly payments throughout the mortgage life. For this reason, it is vital to ensure that you can make the payments before signing the agreement. Remember you risk losing your home if you fail on payments. This is undesirable and you should never let it happen.
It is essential to compare loans online before making an application. Mortgage lenders have different terms and it is good to look for one perfectly match your conditions. The interest rates charged may be fixed or adjustable. How does this affect you? Well, this is the backbone of our discussion today. When home finance Loan rates decrease dramatically, should you refinance? To effectively respond to this question, let us when it is sensible to refinance your home loan.
SHOULD YOU REFINANCE?
What does it mean to refinance a mortgage? Refinancing means settling the current loan and substitute it with another one.
The decision to refinance if motivated by many factors. The common ones include:
- a) Debt consolidation
- b) To finance a huge purchase through home equity
- c) To adjust the type of rate
- d) To lessen the term of the home loan
We will look at each of these motives. Importantly, refinancing comes with costs. In fact, it can cost 3-6% of the principal amount. For this reason, it is very important to determine if refinancing is a good decision. Let us break down the discussion into the abovementioned motives.
Refinancing to Obtain a Lower Rate
Refinancing to lower the rate charged on your current loan is one of the best decisions you can make. In general, it is wise to refinance if the move will be lessening the interest rate on the mortgage by 2% and above.
Some finance experts say even a 1% decrease is good enough to stimulate refinancing. Lessening the rate of interest helps you to save funds and that is really important. There are yet more benefits you can enjoy through this move. With a lower rate, you can upsurge the rate you are building equity in the asset and can cut the size of your payments.
Let us take a practical example here. Assume you have a mortgage of $100,000 payable within 30 years with an interest of 9%. If you do the math, you will discover the mortgage has a total interest of $804.62. In case the rate of interest is lowered to 4.5%, the total interest payment will be $506.69. Indisputably, you would have saved a lot of money. And now back to the question we raised at the outset – if Home Finance Loan Rates Decrease Dramatically – Should You Refinance? The answer is yes! Why? You can save a lot of money by doing that.
Refinancing to Convert To an either Adjustable or Fixed Rate
Generally, adjustable-rate mortgages often have lower rates compared to fixed rates. Nevertheless, with periodic adjustments, it is possible to end up with a higher rate compared to a fixed-rate mortgage. In this case, changing to a fixed-rate lessens the interest rate and relieves you from the stress that comes with volatile rates.
By the same token, changing to adjustable rates is an effective and beneficial strategy where the interest rates decline.
If the rates keep decreasing, the regular adjustments may lead to lesser rates and smaller instalments, invalidating the need to refinance whenever the rates fall. Nonetheless, it would be ridiculous to do this in case the rates are increasing.
If you do not intend to live in your home for long, changing to ARM, which in many cases has lower payments, is a nice move to ponder on. If the rates are decreasing, you can lessen the interest rate on your home loan. However, you will not be plagued with worries concerning higher rates in the future since you are not going to occupy the home longer.
Refinancing to shorten the Term of the Loan
The fall in interest rates provides you with a chance to refinance the current loan to a different one which has a shorter term. It is as simple as that but it is one of the major reasons why you should consider refinancing. Shortening the term of the loan can save you a lot of money. Remember mortgages are long-term and the burden is often heavier ion the upper part of the repayment period.
Refinancing with an Aim of Consolidating Debt or Tapping Equity
It is always possible for homeowners to access the equity in the asset to fund huge costs. For instance, the cost may include home remodeling or financing college education if a child.
The fact that refinancing adds value is enough to justify their refinancing decision. Besides, the mortgage interests are always tax-deductible, yet increasing the term of the mortgage might not be a wise decision.
What is more, homeowners refinance to with a view of consolidating debt. Generally, substituting a debt with high interest with the one with lower interest is a fantastic idea. Nevertheless, financial prudence is not guaranteed in this move. Consider this option if you are quite sure you cannot overspend refinancing get rid of the debt.
It is a good idea to refinance when the interest rates on home loans are significantly decreasing. This is a move that can save you a lot of money. However, we have also considered other circumstances under which refinancing can be a fantastic idea. Be very careful with the decisions you make to ensure there is financial prudence in each one of them. Thank you.
NB: This article is a guest post from Loan Advisor Singapore.