Mortgage Refinancing at super low interest rates?

Mortgage refinancing rates continue to be low due to the indirect impact of the Federal Reserve’s low interest rate policy. This year, the mortgage low interest rate record continues to break, reaching 2.88% for 30-year fixed interest rates and 2.44% for 15-year fixed interest rates (early August 2020). That’s why the real estate market is surprisingly lively in Corona, and depending on the location, there seems to be some competitive properties with multiple offers. Similarly, refinancing is also active, and it seems that many consumers are trying to secure low interest rate loans on this occasion. Refinancing can help improve your household budget in many ways if you use it wisely. Let’s see how it is used today.

First of all, from the mechanism of mortgages

Monthly payments for fixed rate mortgages are always constant. For example, in the case of a 30-year fixed interest rate mortgage, the monthly payment for 30 years is fixed, but the loan principal is calculated so that it can be fully repaid in exactly 30 years.

The following is a simple diagram of the relationship between monthly payments, interest rates, and repayment periods.

Monthly payment amount (large) = loan borrowing (large) x interest rate (large) x repayment period (small)

The larger the loan, the larger the interest rate, and the shorter the repayment period, the larger the monthly payment.

When refinancing due to a lower interest rate, the “interest rate” part above will be lower, so if other factors are constant, the monthly payment amount will be smaller. In some cases, the monthly payment amount may change by changing the “loan borrowing (that is, the loan balance at that time) or the” repayment period “. After all, the four elements are related, so it would be nice if you could imagine adjusting the other elements by focusing on the most important element at that time.

There are various ways to use refinancing, such as: Each of the four elements is different in which one to focus on.

Reduce monthly repayments

By lowering the interest rate in the above formula, you can reduce the monthly payment. It is an effective method when you want to reduce your monthly payment obligation because double income has become single income, your income has decreased, or your child will have to pay money. The focus is on lowering monthly payments.

One thing to note is that if you pay a 30-year fixed rate mortgage of 3.75% for 5 years and then lower it to 2.75% because the interest rate has dropped, the monthly payment will certainly decrease, but only 30. Reassembling with an annual fixed rate loan will start repayment for another 30 years from this point. Normally, the repayment will be completed in 25 years, but it will be returned to the repayment in 30 years.

For example, if you made a 30-year 3.75% mortgage monthly payment 5 years ago for $ 1,575 and your loan balance is $ 305,000, switching to a 30-year 2.75% mortgage will reduce your monthly repayment obligation to $ 1,225. A $ 350 payment reduction. However, what was paid off in 2045 has been extended to 2050. In other words, in the above formula, the monthly repayment amount has decreased due to the double effect that the interest rate has decreased and the repayment period has increased.

This is an effective measure even if the period is extended, if the focus is to reduce the monthly payment for the time being, such as when the income has decreased. Also, if you don’t live in the house all the time and plan to sell it in 15 years, the amount you sell at that point (the market price at that time minus the loan balance) is just a little different. It may not be a problem.

On the other hand, if you live in this house for a long time, it can be a big problem when you pay off. For example, if you retire at the age of 67 and want to pay off your house completely at that point, it may be inconvenient to pay off in 2050, with a new 30-year repayment.

In that case, it may be possible to have a fixed 2.75% mortgage for 25 years instead of 30 years (interest rates may vary slightly, please consult your loan officer for term adjustments). In that case, the monthly repayment amount will increase slightly to $ 1,407. This is the case of the above formula, where the interest rate was lowered and the latter factor was kept constant. This will only reduce the repayment amount by about $ 168, so I think it is necessary to think a little about how effective it will be in improving household finances. Refinancing also costs closing costs, so you need to consider the balance with them.

Or, if it is difficult to make money anyway, set a fixed interest rate for 30 years and reduce the monthly repayment amount as much as possible to overcome the current predicament, and after 5 years and 10 years, there will be room for the household budget. If you do, you can pay off in less than 30 years by continuing to pay the principal. You will be searching for the optimal solution while balancing the current state of your household with your future plans.

I want to get a lot of cash

Refinancing is a new way to borrow more than your current loan balance. It is also called cash-out refinancing because it reaps (cash out) some extra cash in addition to the current loan balance.

Monthly payment amount (large) = loan borrowing (large) x interest rate (large) x repayment period (small)

Of the formulas, loan borrowing goes up. If interest rates are low enough, you may be able to cash out without increasing your monthly payments.

The 30-year 3.75% mortgage monthly payment given above was $ 1,542 and the current loan balance was $ 305,000. Suppose you need cash and want to cash out $ 30,000. In this case, you will have a $ 335,000 mortgage for refinancing. With a 30-year 2.75% mortgage, your monthly payment will be $ 1,368. The repayment deadline is another 30 years, but now you can get $ 30,000 and save $ 207 on your monthly payments.

The extension of the repayment deadline is the same as mentioned above, but it is an effective method if you are currently in trouble with cash flow and need to get a large amount of cash anyway. And, as above, the extended deadline can be rewound by paying an extra principal when the household budget is free.

There is a limit to the amount you can cash out, and you cannot cash out unless you have sufficient equity (market value-loan balance) in your home.

There is a home equity loan as a way to get a lot of cash. Instead of refinancing your mortgage, you only borrow what you need with your home equity as collateral. The application procedure may be less troublesome than forming a mortgage, but the interest rate is high and it seems that it is currently in the 5% range. If you need a lot of cash now, but you expect to be able to repay it fairly quickly after borrowing, you should use an equity loan instead of mortgage refinancing, which is difficult to apply and costs a lot for closing. Is also good. If you repay relatively quickly, you don’t have to worry as much as the amount of interest that will take years, even if the interest rate is a little high.

Shorten loan repayment period

Monthly payment amount (large) = loan borrowing (large) x interest rate (large) x repayment period (small)

There is also a method of keeping the payment amount and loan borrowing as they are and using the lower interest rate to shorten the repayment period. Consider again the 3.75% 30-year mortgage of the current $ 305,000 balance given above. The current monthly repayment amount was $ 1,575. If you keep this repayment amount and refinance it to a 2.75% loan, you can reduce the remaining 25 years to just over 21 years.

21 years is halfway, so if you change to a 20-year loan at a good point, for example, it will be a little more than the current repayment amount, but it will be over $ 1,600, and it will be paid off in 20 years, which is 5 years shorter than now. The total interest will be reduced by about $ 22,000.

This method is especially useful if you plan to live in the house for a long time. Especially if you continue to live in the house after retirement, you can take full advantage of the interest reduction period. On the other hand, if you plan to move in 5 years, you will have to terminate the loan (repay it by selling the property) before you can fully utilize the low interest period of the reorganized loan. If you sell in 5 years, the total interest reduction by refinancing will be over $ 4,000, so considering the closing cost of refinancing, you should not refinance. Refinancing should be done in conjunction with a long-term plan.

Eliminate FHA Mortgage Insurance

If your deposit is small, you will be required to take out Mortgage Insurance, and Mortgage Insurance Premium will be added to your monthly repayment amount. Normally, in the case of Conventional Loan (hereinafter referred to as a so-called ordinary mortgage without the backup of a government agency such as FHA), when the equity reaches 20%, insurance becomes unnecessary and the insurance premium disappears. On the other hand, in the case of FHA loans for low- and middle-income earners (backed up by the government agency Federal Housing Administration), this mortgage insurance will not disappear even if the equity reaches 20%, and it will not disappear for a long time (down payment of 10% or more). If it is, it can be canceled as appropriate after 11 years. If it is 10% or less, the entire loan period. Information as of January 2020) You need to continue paying.

If you have an FHA and your equity grows steadily to over 20% and you can get a Conventional Loan, you can eliminate mortgage insurance by refinancing and lower your interest rate to get your monthly repayment. Great reduction can be achieved.

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