How Soon Should You Refinance A Mortgage?

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The Federal Savings Bank informs readers on current options for refinancing given today's historically low interest rates.

VA and FHA home loans at The Federal Savings Bank

The Federal Savings Bank

Interest rates, currently around 4.375% on a 30 year loan, are trending at nearly half as much as their historical average. This environment is practically begging individuals to refinance or buy a home.

With mortgage rates at record lows over the past year, The Federal Savings Bank has found that many homeowners have taken the opportunity to capitalize on the best refinance mortgage rates since the recession. The housing crisis caused a large portion of homeowners to lose equity in their properties, meaning they ended up owing more in a mortgage than their home was worth. At a time like that, refinancing is a great option for a lower monthly payment. For first-time homebuyers, the question of how soon you should refinance a mortgage is a little different.

Historically Low Rates
Mortgage rates are historic lows. According to Freddie Mac, the average rate on a 30-year fixed loan since 1971 is 8.57%. Thus, interest rates, currently around 4.375% on a 30 year loan, are trending at nearly half as much as their historical average. This environment is practically begging individuals to refinance or buy a home.

Refinance options
When it comes to refinancing, there are several options, although most homeowners swap to a fixed-rate. A fixed-rate mortgage is one that never changes its terms, which can be beneficial for those who plan to stay in their home for a long time. Adjustable-rate mortgages have variable interest that usually begins with a low introductory rate. After a period of time, usually three to five years, the introductory rate expires and the interest will be determined by market conditions. If mortgage rates rise after your introductory rate expires, your mortgage payment will most likely increase. Homeowners may choose to switch from adjustable-rate mortgages to a fixed option to avoid paying higher interest later.

Some loan terms may have prepayment penalties built into the mortgage that will incur fees if you try to refinance before a certain period of time has passed. For this reason, some borrowers wait until the terms have expired before refinancing in order to reap all the financial benefits that changing your loan can entail. Homeowners usually choose to refinance their home when there are major changes in the economy or their employment situation. Conversely, options available for refinancing depend on economic factors and lending practices. Since the recession, more homeowners have refinanced as a means of taking advantage of lower interest rates.

VA home loan refinance
For veterans, the process of mortgage refinancing is a little different, as your duty might qualify you for other cash-out options in order to make home improvements or accommodate disabilities. By refinancing through the VA, veterans can also lower their monthly payments.

Interest rates and equity
The amount that a borrower pays each month on their mortgage can be significantly impacted by just a few percentage points, depending on the size of the loan. As a result, more homeowners apply for a mortgage refinance when rates are low. When home values rise, the loan to the value ratio of the property decreases, so you might be able to get better terms with a lower payment. The opposite is true too, however. When property values decline, it can be harder to refinance because the LTV has risen.

Lower mortgage rates do not always mean that homeowners will be able to save money. For instance, borrowers who are already well into a loan period and choose to refinance may end up paying more interest in the beginning few years of their new loan. It simply depends on the difference in interest and the length of the loan.
Timing

For homeowners with new loans, it may be a while before you apply to refinance. Refinance options make the most sense for those who plan to stay in their home for many years, as the fees and charges involved with refinancing might sometimes outweigh the financial gains in the short term.

Contact the Federal Savings Bank, a veteran owned bank, to discuss mortgage refinance.

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